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Health care policy can be tricky to navigate. One reason stems from the difficulty of measuring its intangibles — differences in the quality of life, for example, or the social value of extending life for a few days. A new report from Canada’s Fraser Institute has does the hard work of putting a number on a related intangible concept: economic freedom.
Assessing data on 42 variables (i.e. trade barriers, property rights, etc.) across 144 countries, the report’s authors discover the United States’ score has plummeted over the last decade. While 2nd only to Hong Kong in 2000, we dropped all the way to 18th in the latest report. (You can access the full data set at FreeTheWorld.com.) In contrast, our neighbor to the north, Canada, ranks 5th worldwide in economic freedom.
None of the measured variables in the freedom index relate to health care per se. However, the news release emphasizes that “much of this decline is a result of high spending on the part of the U.S. government.” Indeed, I have calculated that if government’s share of consumption spending and government transfers and subsidies as a percent of GDP (two of the components that make up the index’s size of government variable) had remained at their 2000 level, the U.S. freedom index ranking would have been 12th instead of 18th in 2010.
So what does this have to do with health care? As explained in earlier posts, health entitlements have been a significant factor in the explosion in the size of government over the past few decades. Specifically, between 1966 and 2007, the entire increase in the size of government relative to the economy can be attributed to growth in tax-financed health spending (predominantly Medicare and Medicaid). Thus, while we cannot say that tax-paid health spending is the sole factor responsible for the decline in freedom, it assuredly was an important contributor.
More worrisome (and apologies if it sounds like I’m beating a dead horse, but this should worry all voters this election), under current policy, the CBO’s latest spending projections estimate the federal government will increase in size by 48 percent relative to the economy over the next 75 years. Every penny of the projected increase in the size of the federal government can be attributed to growth in federally funded health care entitlements (i.e., Medicare, Medicaid, and exchange subsidies). This does not bode well for America’s economic freedom ranking in the decades ahead.
Not only is how we finance health care an important factor that influences our freedom ranking, but our freedom ranking is also tied to health outcomes of great importance. In fact, the relationship is quite dramatic. People living in the most economically free countries, for example, live 20 years longer than those in the least free.
Comparing Fraser’s rankings with data from the World Bank, you can see how greater economic freedom correlates with improvements in access to care in the number of doctors, nurses, midwives, and hospital beds per person. Children get a better start to life in more free countries as well. In the freest countries, more than 90 percent of infants receive basic vaccination. In the least free, a quarter of young children are unprotected against diseases like measles, diphtheria, and whooping cough.
So how do differences in economic freedom manage to produce such drastically different health outcomes?
The most important reason is the simple fact that economic freedom means wealth, and wealth means health. Scores of reports have established the link between economic freedom and economic growth. And the relationship between income and health outcomes is one of the oldest observed truths in the field. So it’s directly relevant to note that income per person is seven times higher in the freest countries than in the least. Income of the poorest 10 percent in the freest nations is 10 times higher than in the least.
But freedom also matters in ways that the EFW index does not directly measure.
The first relates to the role of innovation and competition. The U.S. is a world leader in pharmaceutical innovation, in part because we have wisely avoided the mistake of other nations of placing price controls on pharmaceuticals and have established strong protections for intellectual property through our patent system. However, our leadership position may not last as increasingly onerous burdens posed by regulation of new developments, like the FDA approval process, in conjunction with billions of dollars in new taxes imposed on pharmaceutical manufacturers and medical device makers threaten to stall innovation.
Economic freedom is not only about all the benefits that come from greater efficiency.
Freedom also means fairness, for both patients and providers of health care. So many of the distortions that plague our health care system and drive up costs-from the tax exclusion given to employer-provided health benefits to the hundreds of health insurance mandates imposed by federal and state policymakers-were supported by businesses that stood to benefit from decreased flexibility, competition, and choice. Here again, the Affordable Care Act threatens to take us further in the wrong direction by encouraging the development of hospital-centered accountable care organizations that may well morph to become local monopolies doing the bidding of Washington bureaucrats. Keeping all this in mind, America’s continuing slide in economic freedom is more than a little unsettling. It may be that reversing the decline by fighting overspending, overregulation, and cronyism is the best way to keep us healthy, wealthy, and free.
 “From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).” (p. vi)
 See slide 36.
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