Previously we discussed what inflation is, and whether fiscal policy can cause inflation. We looked at the Bennett hypothesis, which lays out the case (as yet unproven) that federal policy might be causing inflation in the education sector.
The federal government borrows 43% of what it spends, and it spent some 1.2 trillion on healthcare in 2019. CMS estimates the total market for healthcare was 3.8 trillion that year. So over 13% of all healthcare dollars come from federal borrowing. Is this inflationary?
It could be, just depends on where the government gets the money. Who is buying those bonds?
- If your grandma buys a bond from the government, there is no net inflation (as I’ve defined it, in terms of an increase in the supply of money). Grandma can’t use her $100 at the same time the government does.
- If the Chinese government buys the bonds, that is inflationary. But because of the way the Chinese government converts dollars to yuan, the inflation shows up in China, not the US.
- If the Fed buys the bonds, it is most definitely inflationary. The Fed doesn’t have to spend money to buy bonds, it creates its own money out of nothing.
So the answer is, “it depends.” Depends on whether the Fed is monetizing the debt — which the Fed disputes — or more precisely, the circumstances under which it finds itself boxed into a corner where it can’t unwind its positions. I would submit that it will be until we start seeing growth in the real economy. The Scandinavian experience shows us that you have to pay the medical bills with something; in those countries, a booming private sector is funding the healthcare bill. Until then, as long as we keep running up the credit card, I think federal spending will drive inflation showing up first in healthcare, and then later elsewhere in the economy.
That said, it seems that public-private partnerships, like we see with home mortgages and education loans, is where we see the most potential for inflation resulting from fiscal policy. Seems reasonable to conclude that traditional government financing is considerably less inflationary, and the contribution to rising healthcare costs is disputable.
That’s for a strict definition of inflation. Now, if we look at the colloquial definition — in the sense of “rising prices” — things become a bit more clear. Here, we say that prices will rise if you throw a bunch of dollars at a fixed supply of goods and services.
The government is definitely doing that, primarily by making up your mind for you, on where you spend your money. You might have spent your money on something else, or not spent it all, yet the government says you need to spend it on gender reassignment services, chiropractors, second opinions and tort lawyers. Not to mention doctors, nurses, hospitals, and drugs. In addition, the government specifies how much you’re paying for those things. Sometimes it pays retail, sometimes it pays wholesale, and sometimes it doesn’t put up enough money to buy the service at all. No wonder things are such a mess.
In a real economy, such price increases more or less take care of themselves. New providers will enter the fray and bid down prices. Technology can make the industry more efficient. Consumers might find alternatives to rare and expensive services. Unfortunately the government has a tendency to prevent all those things from occurring. On the federal level, certificate-of-needs requirements limits the number of hospitals in a market. Regulations limit how many drug manufacturers can be licensed. Licensing and regulation ossifies computer technology that (believe it or not) reduces productivity. On the state level, medical boards limit the number of doctors and nurses. It cartelizes some lines of business (eg trauma, neonatal care).
There are several reasons why we might not feel we are getting our money’s worth out of our healthcare dollar:
- The government has a tendency to throw dollars at healthcare, while at the same time limiting the supply.
- The government can’t quite seem to get the price right. Sometimes it pays too much for services, which is a waste. And sometimes too little, meaning we can’t get the services we want.
- The government keeps borrowing money to pay for healthcare, which is at least potentially inflationary.
Personally I feel the biggest problem, system-wide, is government restrictions on services. Limits on overall supply, and limits on innovation. The second biggest problem is price-fixing, a problem private insurance partially inherits from government policy. Right now, my feeling is, inflation is a minor factor.
If the Bernie Bros get their way, it’ll be another story. Imposing the wasteful Medicare price-fixing scheme system-wide, financing the whole thing via MMT-style money printing, while at the same time crushing the private sector, does not strike me as a formula for success.
A shout out to the Bob Murphy podcast. MMT discussed in detail here, also see Bob’s response here detailing the circumstances under which Federal borrowing is, and is not inflationary.