Which part of North America makes the most cars? If you answered Michigan, you would have been right for 100 years. But you would not be right anymore. Last year the Canadian province of Ontario surpassed Michigan in car production.
Of course, most of the cars made in Ontario are manufactured by America's Big Three -- General Motors, Ford and Daimler-Chrysler. These companies are shifting production out of the United States for one overwhelming reason: massive health-care costs. An American worker costs them more than $6,500 in health care per year. In Canada, which has a government-funded and -run health-care system, the cost to the employer per worker is just $800.
While the Big Three are an unusual case, they highlight what might turn out to be the most significant threat to the competitiveness of American firms in an increasingly global economy: our out-of-control health system.
This year GM will pay about $5.2 billion in medical and insurance bills for its active and retired workers. That adds $1,500 to the cost of every GM car. For Toyota, whose products are manufactured in many countries abroad, these costs add just $186 per car.
All large American companies to some degree have GM's health-care problem -- accentuated greatly for the carmakers because of their older and highly unionized work force. For historical reasons, American companies pay the bulk of the medical costs of their workers (and often their retirees). And these costs have been rising across the United States at five times the rate of inflation for five years. It's GM's problem today. It will be GE's problem tomorrow.
One answer is for companies to stop paying for their workers' health care. But that doesn't really tackle rising medical costs. The trustees of Social Security and Medicare just reported that by 2030, one third of all wage increases would go to fund these two programs. And as Robert J. Samuelson points out, that doesn't even include the costs of Medicaid.
There are only two major areas of the American economy where costs have risen for decades at three to four times the rate of inflation: health care and education. (Think of college-tuition bills.) In both cases the consumer does not pay the full cost, and government, the ultimate funder, has little power to negotiate costs or ration benefits. (In education, government funding comes in the form of tax exemptions, grants and low-interest loans.)
If people paid for more of their health care themselves, they would use it more rationally, which disciplines costs. But it wouldn't really solve the problem, because despite the mythology, American health care is not a free market. It is dominated by government funding, through Medicaid and Medicare.
The big difference between our system and that of other countries is that in America, the government cannot (often by law) exercise its clout as a buyer to drive down costs. So the individual doesn't have the incentive to control costs (why should he, someone else is paying?), and the government doesn't have the means to do so. This is a recipe for waste and overuse. In 2003, the New England Journal of Medicine published a study that showed that America's sprawling health-care system spends $209 billion more in administrative costs than does Canada's single-payer program.
The most recent steps to change things have made the situation much, much worse. The Medicare prescription-drug benefit, passed in 2003, took the fastest-growing segment of the U.S. population (the elderly) and gave them a free ride on the fastest-growing item on medical bills (prescription drugs). The result is going to be a fiscal black hole, estimated to be a bigger drain on the federal Treasury than the entire Social Security program.
President Bush is said to be a man who favors bold, visionary policies over small, symbolic ones. But to spend all his political capital in the pursuit of personal accounts in Social Security at this moment is to rearrange the deck chairs on the Titanic while the iceberg looms ever larger.