Where Krugman Goes Wrong on Health Care
Health care spending is high in the U.S., but that's no fault of the private sector.

Paul Krugman needs to look at the facts before drawing his health care conclusions.Francisco Seco/AP Photo
New York Times blogger Paul Krugman, a former Enron consultant, is mad. He is mad because University of Chicago Professor Steve Levitt criticized the Affordable Care Act and suggested to British Prime Minister David Cameron that a fully nationalized system may not be the most efficient way to organize the health care market. Levitt’s professed belief in the principles of the free enterprise system is enough for Krugman to label him a “faith-based freak.” That is a harsh term.
Why is Krugman so convinced that market principles and the price system have no role to play in the health care sector? Because more of the health spending in the United States is private than in other countries, and total health spending in the United States as a percentage of gross domestic product is higher as well. That is it. As Krugman shows in a chart, there is no real relationship between the private share of health spending and the size of the health care spending in the full group of advanced economies.
One data point, that’s what Krugman sees as evidence that “strongly suggests that the proposition that health is an area where private markets work badly is borne out by experience,” and that’s what makes him refer to Levitt’s thinking as “free-market fundamentalism.”
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Of course, one data point in a cross-country collection of data points is not much. Fortunately, there are better ways to test how these things work. For example, the several states that form the United States have different health care systems, to some extent, yet are much more comparable otherwise than Canada and Greece. Professor Jeffrey Clemens of the University of California at San Diego has kindly provided me data on the share of private health spending and the shares of health care spending in the different states’ economies. His data are shown below, and they are fascinating.

Jeffrey Clemens/University of California at San Diego
As you can see, health spending as a share of state income is actually lower in states that rely more on the private sector in the provision of health care. How can that be? Clemens posits the following: “Both the U.S. public and private sectors seem to operate with significant inefficiencies. Some of my research suggests that in important instances the private sector follows the public sector's lead in this respect.” Indeed. The world appears to be more complicated than Krugman thinks. One might even conclude that he propagates government control fundamentalism, and that he titled his blog post “faith-based freak” as meta-commentary on his own state of mind.
Tags: economy, health care
