Expanding Medicaid no economic cure-all

SUPPORTERS of Medicaid expansion sometimes claim associated government spending will boost economic growth. This was voiced at a recent gubernatorial forum. Yet that theory appears based more on wishful thinking than economic analysis.

If Oklahoma were to expand its Medicaid program and add hundreds of thousands of able-bodied adults to the rolls, as is allowed under the federal Affordable Care Act, the federal government would provide $900 million for the expansion. But Oklahoma state taxpayers would be required to pony up another $100 million.

Supporters argue that Medicaid expansion will generate enough economic activity to create more state tax collections that will effectively pay for the state’s share of expansion costs.

The theory that government spending automatically boosts economic activity is a recurring theme in U.S. politics, and was most recently the foundation of the Obama administration’s “stimulus” spending program during its first term. The lackluster economic recovery, which has only turned robust since Obama left office and federal fiscal policies were dramatically changed, is evidence that the spending-creates-prosperity theory doesn’t work.

Brian Riedl, a senior fellow at the conservative Manhattan Institute, highlighted in 2008 why the spending theory is flawed.

“Government spending fails to stimulate economic growth because every dollar Congress ‘injects’ into the economy must first be taxed or borrowed out of the economy,” Riedl wrote. “Thus, government spending ‘stimulus’ merely redistributes existing income, doing nothing to increase productivity or employment, and therefore nothing to create additional income. Even worse, many federal expenditures weaken the private sector by directing resources toward less productive uses and thus impede income growth.”

This doesn’t mean direct recipients of government cash see no benefit. It means that benefit is offset by the financial losses experienced elsewhere when the money is taken from other taxpayers.

Those who have looked at Medicaid expansion have noted this. In 2015, two University of Rhode Island professors, Liam C. Malloy and Shanna Pearson-Merkowitz, examined how Medicaid expansion could affect economic growth in that state. While they supported expansion, they tempered expectations. They found it was theoretically possible for Medicaid expansion to “help Rhode Island’s economy,” but that was true “only if the state controls costs.” That was a big caveat. The cost of health insurance coverage has steadily increased in the years since passage of the ACA and adoption of Medicaid expansion in many states.

Malloy and Pearson-Merkowitz wrote that “higher public spending, especially Medicaid spending per enrollee, is associated with slower job growth.” That’s because there is an inverse relationship between “Medicaid spending and spending on job growth investments such as education and infrastructure …”

They even caution that “to the extent that enlarging coverage increases government spending, the net effect on the economy may be negative.”

Put simply, the cost of Medicaid expansion comes with trade-offs that include slower job growth and reduced government spending on other priorities like schools. Policymakers who support Medicaid expansion need to be upfront in facing that reality.