Long-Run Growth and Welfare Effects of Rising US Public Health Expenditure

Abstract

The continuing increase of the US public health spending would inevitably lead to a reduction in productive government spending, higher taxes, or both. If the government enacts any of the policies, to what extent would the rising health care spending affect the long-run economic growth and welfare? Using an endogenous growth model where investment in education is the driving force of growth, our quantitative analysis shows that if health is a consumption good, such policies will reduce long-run growth and welfare. To finance public health spending at 20 percent of gross domestic product (GDP), a policy that simultaneously reduces productive government spending and raises tax rates could decrease the long-run growth by 0.7 percentage points and welfare by 14 percent. When health is both consumption and productive good, this policy reduces long-run growth and welfare modestly.