Steve Case tells us that Obamacare will help start ups



Speaking at last night’s Pando Monthly in New York, Steve Case pointed out to us that Obamacare will increase the portability of health care and thus aid the start up economy. No longer will there be worries about being able to get health care if one steps outside the large company environment and into the small company one.

This is true, to an extent, and it will indeed aid the American economy. For, contrary to what we all believe, the US has a much lower business start up rate than most other developed economies. And yes, the usual reason given is indeed that the disaster which is the financing of US health care causes this.

The background to this story comes from near a decade ago. You can read this brief summary of the research or the entire paper from 2006. When the paper first came out I got very het up but Dean Baker was able to guide me through hte logic and persuade me that the analysis was correct. It is true that the US has a much smaller small business creation rate than most other comparable economies. Given that large companies are, on net and on average, job destroyers and small and new companies on net and on average job creators this is probably something that we’d like to change. It’s also true that serious innovation and productivity increases tend to come not from extant companies improving their practices, but as a result of exit from and entry to the market by companies.

So what we’re saying is that in the long run it os the turnover of companies, those new entrants into the production side of the economy, that really drives things forward, most especially rising productivity. And as Paul Krugman has been known to remark, productivity isn’t everything but in the long run it’s pretty much everything. Certainly it’s the most important determinant of average living standards and average wages. A change in a few percentage points of the part of the economy that goes to capital, or an increase in inequality of a few gini points over decades, has very much less effect than a consistent 2 or 3% rise in productivity each and every year has on living standards for Joe Sixpack.

So, if health care troubles, the non-portability of insurance, the difficulty of dealing with pre-existing conditions when changing insurance type, reduce the movement of people into the start up part of the economy this is probably something we’d like to fix for the sake of the good of the long term. And it’s true that Obamacare does do this to some extent. However, it’s also true that any rational overhaul of the US health care system would have done the same, anything from the Singapore style health care accounts with catastrophic insurance (a marvelous system which provides as good as US health care at 4% of GDP and something Brad Delong has been urging for a decade now) through to full blown government provision of the actual health care itself, like the NHS in my native UK (a less marvelous system that provides worse than US health care at perhaps 11% of GDP).

However, it’s important not to overstate the effect this is going to have on the part of the start up economy that we’re all interested in, the tech sector. For in this sector there’s no real shortage of finance: in fact, looking at some of the things that do get financed (I was recently pitched by a PR company on an app that gets kids to do their chores… seriously) we might believe that there’s an oversufficiency of capital flowing into the sector. With respect to this the point being that when discussing the first or subsequent rounds of VC money going into an idea there’s no real difficulty in adding 10 or 15% to the wage bill to cover the health care insurance needs of the people in the company. It’s a basic cost of doing business at this sort of level just as much as making provision for social security taxes on the wage bill is.

Where Obamacare will make a difference, as would almost any other possible change to US health care financing, is in those start ups that don’t get funded. Those that are bootstrapped in our own sector, for sure, but much more importantly in those other sectors of the economy that just don’t attract VC money. Everything from the ambitious mechanic deciding to start up his own garage servicing autos through to the mid-career professional who decides to go independent as a consultant rather than remain within the corporate monstrosity.

And this is absolutely an important change. The truth is that the US has a VC funded entrepreneurial or start up sector and culture in the tech sector very much larger than those in almost all other countries. The low level of new business creation is that the level in almost all other sectors of the economy is dismally low compared to even much more static economies like France or Germany. It’s not so much the tech sector that will benefit from this change (although I’m sure that some will) directly, it’s that we’ll benefit indirectly as the sluggish rate of new business creation in other parts of the economy rises.

Just to be clear here, I don’t think that Obamacare is a very good idea, I think there are other things that could have been done which would be very much more effective in solving the obvious and known problems with US health care financing. But honour compels that I point to the truth that Steve Case was outlining. Health care reform will reduce one of the known barriers to new firm creation in hte US and this should be beneficial to the economy over the long term. It’s just that the impact is likely to be in all of the sectors that don’t get VC funding, rather than in the tech sector where that’s common.

[Photo by Kirill Ginko for Pando]