Health Spending Unscathed In Shrinking Economy
This morning’s terrible revision to first quarter GDP – from an initial estimate of 0.2 percent real growth to a real loss of 0.7 percent – confirms that health spending stands over our weak economy like a colossus.
In the initial estimate, personal consumption spending on health services increased by $23 billion (chained 2009 dollars). Today’s second estimate reports $24.2 billion (Table 3, line 17). So, we can be pretty confident that the folks at the Bureau of Economic Analysis who do this good work have mastered how to measure spending on health services.
This emphasizes how much of our prosperity is being devoured by a health system that is still driving everyone crazy, post-Obamacare. The real drop in GDP was a loss of $30.6 billion.
Quarter over quarter figures are seasonally adjusted, and some economists question the accuracy of those adjustments. Nevertheless, when the media cheer that personal consumption expenditure (PCE) is holding the economy up in the face of declining exports and business inventories, they gloss over the disproportionate role of health services in PCE.
That $24.2 billion in health services is the largest component of PCE, comprising just under half of the entire $52.5 billion – even more than housing and utilities.
I recently wrote that economic growth had added many jobs since the depths of the recession, and that this explains the restoration of health benefits better than Obamacare does. Nevertheless, we are devoting a shockingly increasing amount of our prosperity to this government-dominated sector of our society.
Technical note: When I discuss health services in these quarterly GDP releases, I mean only health services. I do not include purchases of medical equipment, or facilities construction. While I include Medicare and Medicaid, I do not include Veterans Health Administration or other government benefits. So, these dollar figures undercount the amount of our economy consumed by the government-health complex.
(See: Measuring the Economy: A Primer on the GDP and the National Income and Product Accounts, Bureau of Economic Analysis, October 2014, pages 5-2 and 5-3; Micah B. Hartman, et al., “A Reconciliation of Health Care Expenditures in the National Health Expenditures Accounts and in Gross Domestic Product,” Research Spotlight, Survey of Current Business, September 2010, pages 42-52.)
“This emphasizes how much of our prosperity is being devoured by a health system that is still driving everyone crazy, post-Obamacare.”
I’ve doee my share of complaining about high, and rising, health spending. But there is one aspect of it I have a hard time understanding,
If, say, GM announced that it had sold 24% more cars over thae last 12 months, wouldn’t that be good news? If retailers like Target, Costco, or Wal-mArt announced large increases in year over year sales revenues, wouldn’t that be good news?
So why does it feel like bad news when medical care spending increases year over year? Why are we told to worry about it as though it were a bad thing? D
Doesn’t medical spending happen in America, and then don’t thoses dollars enter our economy like any other? How then to explain why medical spending is considered of lesser worth – even evil- vs. spending in other sectors of the economy?
If we were free to spend our own money on medical care without government interference, I think I’d agree with you. However, there is too much bureaucracy. We could get more for less.
John,
Historically only a few sectors of the economy have a multiplier effect on the rest of the economy. The two best examples of this is housing construction and the growth of the Goods sector. Most economic recoveries have been led by one or both of these sectors. So when major companies in these sectors report increased sales, this is important economic news. The logic is that if GM, Target, Costco, and Wal-Mart are having good years then it is possible that there is a broad based expansion underway.
Historically health care spending had a weak correlation with Personal consumption expenditures(PCE) growth. Until 2014 the Goods sector had a strong correlation with PCE growth. In 2014 the positions changed. Health care spending became the leading contributor to PCE growth and the rest of the PCE sectors look like they were in a stalled economy. Based on this limited data you would have to conclude that increased health care spending does not have a multiplier effect on the economy.
Finally most of our increases in our standard of living can be attributed to innovation and productivity gains in the Goods sector. Health care has a poor record for innovation and productivity gains. The most interesting productivity gain that I have seen in health care was a county project to manage diabetes. It provided better care and lowered costs. If health care acted more like a business then they would adopt a more distributed decision-making organization structure to encourage this type of productivity gain. Health care is inherently a local service requiring local decisions. Instead the government and industry have embraced a more command and control organizational structure that generally gets its productivity gains from economies of scale. Since the Affordable Care Act has not generated any cost savings and has blown every budget, it looks like we got the worst of both worlds, increased centralization with no cost savings. We tried, we failed! It is both sad and exciting to think that if we want to increase our standard of living then it has become imperative that the health care industry innovate and focus on productivity gains. If we want to grow the economy then we have to be smarter about our down health care spending so the sectors that have a multiplier effect can grow.
“Based on this limited data you would have to conclude that increased health care spending does not have a multiplier effect on the economy.”
Good. Fine. But what does that mean? Can you translate from economist-speak to plain English?
We cannot afford higher premiums today
Median household annual income – $52,000
Average family group premium – $16,000
Don Levit
I am with John F on this one. Building a new hospital certainly creates jobs in the construction and medical equipment industry. Paying higher salaries to doctors and nurses surely creates some jobs in auto sales, home sales, food sales, et al.
I am not sophisticated in macro vs micro economics, so I am probably missing something.
If the government artificially adds costs to health care such that there is a greater demand for hospitals, the hospitals will expand, consuming labor and material.
Which means that labor and material is not available to build other things (or only available at higher wages and prices) that people would prefer to build more than hospitals.
Thanks John for an explanation that does not use the word “multiplier”.
I’m a divider, not a multiplier.
I’m not necessarily in agreement with john on this one. I don’t think construction and the investment contained therein is a zero sum game and that building a hospital comes at the expense of not building A retail mall or office park. Investment money flows to the highest rate of return and I don’t beleieve there is an opportunity cost in not building a retail mall instead of a hospital.
It may be negative sum game.
Here is another angle to consider.
Almost 100% of health care spending takes place in the USA and creates American jobs. (some drug companies are offshored, i do not know how many.)
So if the government spends $1 billion on health care, that creates jobs in the USA. If we give the $1 billion back to the taxpayers — which certainly sounds more just — some of the money will be spent on exports and foreign travel.
Check out Michael Mandel and others on the degree to which health care jobs are almost the only new high paying jobs for the last 20 yrs.