Sunday, September 17, 2006

What's Really Propping Up the Economy and the Monster at Our Door

The September 26, 2006, Business Week cover story is entitled:"What's Really Propping Up The Economy."

Among the assertions in the article:

"Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago."

"The U.S. unemployment rate is 4.7%, compared with 8.2% and 8.9%, respectively, in Germany and France. But the health-care systems of those two countries added very few jobs from 1997 to 2004, according to new data from the Organization for Economic Cooperation & Development, while U.S. hospitals and physician offices never stopped growing. Take away health-care hiring in the U.S., and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher."

"Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing "

"Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured."

"Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health care jobs."

"There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy. One solution would be to make health care less labor-intensive by investing a lot more in information technology. 'Low productivity in health is mostly a product of low investment,' says Harvard University economist Dale Jorgenson."

This concern is echoed by Robert J. Samuelson in the September 18, 2006 Newsweek in an article entitled "The Monster at Our Door." Describing Medicaid, he states:

If "monster" seems like rhetorical overkill, then recall what the aging baby boom does to government. Federal spending on the elderly is plausibly projected to double from 2000 to 2030 as a share of national income. About three quarters of that increase will be health spending—mostly Medicare, but also Medicaid (70 percent of Medicaid spending goes to the old and disabled). The rise in health spending exceeds all of today's discretionary domestic spending on schools, the FBI, the environment and much more.
Now, uncontrolled health spending will dominate the federal budget and pose ugly choices: (a) raise taxes sharply, (b) gut other programs and (c) run ever-larger—and more dangerous—deficits.

Some economists believe that we've gotten our money's worth from higher health spending. Since 1960, life expectancy at birth has risen from about 70 to 77. Harvard health economist David Cutler attributes about half the increases to medical advances—new drugs, surgeries and therapies. (Candidates for the other half: less smoking, less punishing jobs, fewer accidents.) Academic studies suggest that people value an extra year of life at about $100,000, says Cutler. That's how much they'd pay—in theory—to live a year longer. On average, the extra health spending needed to increase life expectancy a year has cost less than $100,000 per person. Therefore, we've gotten value for money.

By this logic, higher health spending is nonthreatening. In a recent paper, economists Robert Hall of Stanford and Charles Jones of the University of California, Berkeley, suggest that health spending may reach 30 percent of national income by 2050, up from 16 percent today and 5 percent in 1950. But they are unperturbed, because as Americans get richer, they prefer more health spending—longer and better lives—to a "third car [or] yet another television."

We should overhaul Medicare, but just how is unclear. To know, we need to answer three questions: (1) How much health spending can the economy absorb without having higher taxes or depressed wages reduce economic growth? (2) Who should pay for Medicare—that is, should older people pay more (lessening the burden on the young)? And (3) how can we pay physicians in hospitals for better outcomes and not just for more tests, hospitalizations and visits? These questions apply to any system we might adopt—from a government-run "single payer" system to more "consumer driven" health care.