Is There A Silver Lining in Uncontrolled Spending?

Medicaid is on a course to crowd out every other function of state government over the course of the next few decades.  However, Families USA claims to have discovered an upside to that bleak news.  Medicaid spending, the group says, creates jobs.  By their reasoning, a law diverting the entire GDP of the United States to the Medicaid program would leave the U.S. awash in jobs.  By contrast, the group claims the Bush administration’s efforts to rein-in Medicaid spending will leave tens of thousands of people unemployed.  In an apparent nationwide media blitz, Families USA delivers the news state-by-state, even providing a clickable map linked to a Medicaid-cuts-and-job-loss calculator. Its numbers are being reported as fact in newspapers:

  • Proposed cuts in Medicaid will cost 11,700 jobs in North Carolina. [link]
  • They will eventually eliminate 25,000 jobs in New York.
  • The job loss for Michigan will total 15,300.
  • Colorado will lose 3,500. [link]

Among the many problems with these claims, four jump out immediately: 

  1. In order to spend a dollar, you must first collect a dollar in taxes.  As Ben Zycher and others have noted, the social cost of collecting $1.00 in taxes is at least $1.24.  [See Health Alert summary.]  Roughly speaking, for every four jobs created by spending, five jobs (or their equivalent) will be lost by the taxes needed to finance that spending.
  2. As it turns out, the Bush Administration has not proposed any Medicaid budget cuts!  Its 2009 budget proposal increases Medicaid spending by $12 billion to $13 billion over expected spending in 2008.  What the Bush Administration is proposing is a slightly smaller budget increase – about 7.1 percent rather than 7.4 percent.  (See the 2009 budget numbers here on page 68.) 
  3. Ignoring where the money comes from, if a 0.3% cut leads to a loss of X jobs, the administration’s 7.1% proposed increase must lead to a gain of about 24X jobs.  Now that we’ve cleared that up, we await Families USA’s state-by-state praise for the Bush administration’s job creation proposal. 
  4. Remembering where the money comes from, Sherry Glied finds that expansion of health care spending for the poor often comes at the expense of other services (food, housing, education) they may value more [see the Health Alert summary here]. 

Comments (4)

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  1. Donald E. Sprague says:

    The government reducing spending, that must be a first. I’d say that it is about time.

  2. Uwe E. Reinhardt says:

    You make a valid point, but there are actually two distinct questions here:


    Certainly not necessarily when an actual proposed budget falls short of an expected (hoped for) budget, the usual Washington usage of the word “cut.” I would define a budget cut as a real cut when a proposed money budget for year 2 buys fewer real health care resources per eligible Medicaid beneficiary (ideally risk adjusted) than in Year 1. Would you agree with that as a sensible definition?


    The answer to this question is more complicated.

    Under full employment, added public health spending will merely help reallocate existing jobs from one activity to another. Whether that is socially desirable depends on what these activities are. If the reallocation is from gold courses to health care for hitherto underserved populations, then some (although not all) Americans might consider that a desirable reallocation.

    If there is unemployment, then there is likely to be a more linear association between added public health spending and added jobs. President Bush recently remarked that the heavy added defense spending under his Administration created jobs at home. Fair enough, given that we were in recession most of the time. But someone should remind him that in Econ 10 at Yale it was taught that this applies to all public spending, health included.

    Indeed, President Bush has almost always defended his tax cuts or -rebates with appeal to Keynesian demand-side economics, that is, with the mantra that tax cuts put money in people’s pockets that they can spend and thus create jobs. But the added disposable income from tax cuts can leak into imports or off-shore mutual funds, in which case they do not create jobs in America but abroad. (E.G. to the extent that the recent tax rebates were spent in WalMart, they probably supported for the most part added jobs in China). On the other hand, since all health spending is pretty much home produced, added Medicaid spending would create jobs in America without any leakage abroad in the first round.

    Thus, I do like the map and its embedded algorithm that is supplied by Families USA.

  3. Linda Gorman says:

    If a cut occurs every time fewer health resources are available per Medicaid eligible in year two, then every time Medicaid corruption increases or a state passes prescription drug restrictions or increases regulations without increasing spending on actual health care or expands the eligible population with the wink, wink, nod nudge of letting community health centers give presumptive eligibility to pregnant illegals or free “ambulance” service instead of taxis, then by this definition Medicaid suffers a cut. In fact, like everything else, Medicaid has to live within a budget and with the fact that it may not be the most important program in the budget.

    Even with unemployment, in order to spend on public health to employ people one first has to take money from productive people and send it to the possibly less productive uses envisioned by those who direct Medicaid (like ambulances as taxis in New York City). Taking that money may also reduce jobs–not a good thing if unemployment is a problem. Which brings up the standard and by no means settled debate about whether Keynesian fiscal policy actually works as advertised.

    Tax cuts leave more money in the hands of productive citizens who may make more productive use of it than government. Jobs abroad may create jobs in the US if income gains result in higher demand for US exports.

  4. Matthias Muenzer says:

    The calculator posted by Families USA is very inspiring. One million dollar less in spending amounts to 29 million lost the economy?
    This shows an easy, unparalleled and unused road to riches for the whole country. Imagine spending more and more on Medicaid, imagine doubling the spending! Billions and billions added to the economy! Unemployment completely erased! We have to import new workers, salaries will go up!
    Turn it the argument around, treat “added exepenses” the same way and it becomes clear that the math does not work….
    The families USA website is simply a propaganda website and should be regarded and treated as such