The Myth: Rising health care costs are crippling American industry and making us less competitive.

Bad Policy Based on the Myth: I’m not really sure. This is repeated often as a motivation for healthcare reform. But most health care proposals won’t address this issue at all. Employer mandates will only make small businesses less competitive, not more. Without the forcible reduction of healthcare use, this a red herring.

The Reality: First, as Sally Pipes points out, healthcare spending is not exactly like flushing money down the toilet. It supports an entire industry.

Health care certainly plays a major role in the U.S. economy, and by almost any objective account a highly positive role. It employs 13 million Americans and accounts for one out of 10 jobs.

If you cut healthcare costs, those jobs will diminish. An economic argument can be made for that — healthcare costs are, in some ways, a broken window cost. Perhaps if that money were being used to boost exports, we’d be better off in terms of jobs and GDP.

But do we really want our government decreeing where Americans can work and what industries do and do not contribute to our economy and in what proportion?

But there’s more. It’s highly unlikely that controlling health care costs will make our businesses competitive at all for reasons Greg Mankiw notes:

Ultimately, what matters to firms is the compensation they pay workers. The composition of compensation between cash wages and fringe benefits like healthcare does not matter for the firms’ costs of production. In short run when cash wages are sticky, the cost of healthcare may affect competitiveness: Lower costs of fringe benefits would reduce compensation and thus reduce firms’ cost of production. But in the long run, compensation is set by supply and demand in labor markets. If more compensation is paid in the form of fringe benefits like healthcare, less is paid in the form of cash. And if less is paid in fringes, more is paid in wages.*

Let me put the point in the context of General Motors: If, for example, the U.S. taxpayer were to assume all the workers’ healthcare costs through a policy of national health insurance, GM would immediately become more competitive. Because cash wages would not be immediately renegotiated, compensation paid by the firm would fall, so costs would fall. But in the longer run, the workers via their union would most likely not be satisfied seeing GM pay lower compensation, so cash wages would start rising. (Those higher wages would help workers pay the higher taxes that would be needed to finance the national health insurance). GM would lose the competitive advantage it temporarily enjoyed.

Precisely. Again, you can make an argument here. Reducing healthcare costs might put more money into consumer pockets. But if these “savings” come with an overall reduction in healthcare results, that might not be a trade people are wiling to make. And even if it did make our economy more efficient to increase wages at the cost of healthcare, why should the government be making that decision? Has it shown the infinite wisdom to carefully balance the value of pocket money against healthcare?

The thing of it is, this argument — that businesses can’t compete because of healthcare costs — is usually used to justify socialized medicine. But socialized medicine has not made France or Germany more competitive (sustained double-digit unemployment rates). Why is this? Because, ultimately, those “free benefits” industry is getting for their employees will have to paid for by taxes.

I would add one more point. The rising cost of healthcare for private industry is creating one of the few negative pressures against healthcare costs. Firms that need to control expenses will push back in a myriad of inventive ways. Paying bonuses to employees for living healthy, purchasing insurance plans with high deductibles, finding better healthcare management, moving to HSAs — all these options are on the table.

If, on the other hand, government steps in, we will have a one size fits all solution imposed, not for financial reasons, but political ones. Having your healthcare controlled by your boss might be bad … but why is having it controlled by government better?