The NY Times has a fairly jaw dropping article which basically says that whatever we spend on health care, it’s all good! It basically goes down the David Cutler/Mark Pauly line of “we wouldn’t spend all that money if the free market wasn’t working, and so the real outcome is the economically best outcome.” And it has this gem of a quote from a Nobel laureate, and this guy, unlike a rather more interesting Nobel laureate Kerry Mullis, is not copping to hallucinogenic drug use
By 2030, predicts Robert W. Fogel, a Nobel laureate at the University of Chicago Graduate School of Business, about 25 percent of the G.D.P. will be spent on health care, making it “the driving force in the economy,” just as railroads drove the economy at the start of the 20th century. Unless the current system is changed, most health care costs will continue to be paid by insurance, especially Medicare, which means that the taxpayers will foot the bill. But Dr. Fogel says he is not alarmed. Americans can afford it, he says, because the nation is so rich.
Now there is a huge difference between “we can afford it” and saying that it’s the driving force in the economy like “railways”. Thinking back to your high school economics class, you were taught that there were two types of economic activity—those that assisted in making stuff (usually called “manufacturing”) and those that didn’t directly assist in making stuff (“services”). Railways (and telecommunications and power and all the other utilities) are infrastructure that directly assist in the support of making stuff, usually by allowing producers to access new markets, and those markets to access new producers. That’s basically the logic whether it was railways opening Kansas wheat fields to East Coast markets, or the Internet allowing American software companies to access Indian programmers.
Health care, though, is a consumption good. Despite David Cutler’s best efforts it’s a total stretch to imply that the delivery of more health care results in more “health” — in fact the Wennberg group has pretty conclusively shown that the reverse is true (as Vic Fuchs showed over the years). Additionally “health care delivery” doesn’t have much to do with the improvements in health for the younger (productive) population overall that we care about—that’s down to better sewers, clean drinking water and immunizations. But beyond that it’s also a fallacy to suggest that greater “health” has the impact that railways or fiber-optics have. Better health for a start doesn’t directly impact production, and the marginal amount of better health we are creating via increased use of health care services is largely concentrated amongst those who have retired and are consuming society’s resources not adding to them.
So the extra spending on health care, as Fuchs points out in the article, is both discretionary and a redistribution of wealth from the young to the old (or actually to the industry that provides those services to the old):
Victor R. Fuchs, also an economist at Stanford, notes that buying health care is fundamentally different from buying a television or a car. “Most of it involves transfers from the young to the old,” he said. “Down the road, most medical care will be for people over age 65, and most of the payments will be from taxes on younger people.”
So if it’s discretionary, most health care spending is not for the equivalent of infrastructure or productive capacity, it’s for marginal consumption—meaning that health care is not like the railways, instead it’s just like the Frappachinos I told you all about last year.
But the best line is Cutler’s. When asked about more spending,
He added, “Are you willing to do that? Yes, it costs a lot, but we’re rich enough where the alternative use of the money isn’t as valuable.”
That one wins today’s Mark Pauly award for blind economic idiocy. Cutler seems to think that we’re spending money on health care because we want to. There’s clearly no chance that the actors in the system have somehow captured the body politic to ensure that ever growing health care spending is the result. No, no chance of that at all. After all health care is a pure free market Adam Smith would love–yes it is!
And then given the total lack of problems this nation and the world faces, spending our marginal resources on more flat of the curve medicine is by definition the best way to allocate resources. I for one can think of no better possible recipients for the money.