POLICY: You can be a Nobel laureate and still be very confused

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.

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6 replies »

  1. > but we’re really getting more because Starbucks
    > has got the government to subsidize our habits
    This is a distortion of demand, reducing the effective price. The only way I can think of to call healthcare “supply driven” has to do with physician induced demand, not with subsidies. I think anything paid for primarily with insurance will suffer a similar distortion of demand. Think of the damage to your car would would not fix unless you had already paid for insurance. Same idea in healthcare. I don’t think I’d spend $60/month to treat my very mild case of asthma without insurance, even if Advair were available. Of course, it probably wouldn’t cost that much if insurance did not usually cover it. This is all demand-side, not supply-side.
    If “health care” is what people want more of, how is it different to organize around producing that versus “railroads” when people wanted cheap beef? I think you are stuck thinking “health care” is not something that people want because you only get it when you have a disease. But except for preventive care, “health care” is not an economic bad, it is a Normal Good.

  2. Healthguru,
    I don’t think Matt trashed free markets. He trashed the idea that healthcare in America functions like a free market, and thus that higher spending indicates higher value. The massive volumes of research from Wennberg and others make a strong case that areas that use more services (on a risk-adjusted basis) DO NOT get better health as a result. In other words, higher cost is not associated with better value, or even equal value. There are all kinds of reasons for this and I won’t hash them out again. But the basic point is that you can only claim that spending more is a good thing if we get more for it than we would by not spending that extra money (or rather, more than we would by spending it on something else, like Frappucinos or vacations in Hawaii).

  3. HealthGuru–I have a long history of “confusion” over Mark Pauly’s research/opinions, as a quick search of his name on the blog will show. And Pauly is about the only mainstream Health Academic who sides with the free market think-tank crowd in his work and his committee appearances (other than Reggie, about whom there is even more to be found on the blog)
    Tom/Matt S–putting aside the fact that we’ll all get richer as health care consultants working in the field if more money goes into it, I guess my two points are
    a) if it’s just more consumption, it’s not “rational market” consumption because it’s a supply driven industry. It’s like we’re getting more frappuchinos, and we may want more, but we’re really getting more because Starbucks has got the government to subsidize our habits, and also has huge moral suasion over whether we drink them.
    b) health care being like “railways” is code for saying that its an infrastructure that drives the economy because it allows other economic activity to happen. This argument goes way beyond the “just more consumption” argument–it implies that more health care spending will produce more productivity and ecnonmic activity. Frankly I think that’s just BS….but I’ll await the Nobel Laureate or your explanations….

  4. I have to say that Tom’s analysis is dead-on. I think the title should be more along the lines of
    “You can be a Nobel laureate and still be very confusING” or “…misleading.” The economy will become more healthcare-driven.
    And some of this will be a better investment that most people would think, and continue to drive some interesting innovations. It’s hard to articulate this effectively, but such effects will ripple out into the economy and create additional value. The ROI for such activities is still in good shape, even outside of the argument for a healthcare driven economy.
    And the US is positioned well for a lot of this. I’d even say the US is really, really well positioned, provided we 1) stop electing faith-over-science kooks and 2) get more of our children to study math and science. But that’s another bag of cats.
    And there’s another reason to be happy, folks. For most of us reading / posting on this blog, we can expect our skills to be more dear over time. As Fogel points out, there’s much room for growth.

  5. > Cutler seems to think that we’re spending
    > money on health care because we want to.
    But Matthew, “we” do want to. Just because our feasible choice set is kinda crappy (your money or your life, and you may not get to keep that either) does not mean we don’t want to spend the money to get more life/health/freedom from pain.
    Yes, we all understand much spending on medical goods and services is wasted in this respect, often because it isn’t “your” money that gets spent, its someone else’s. Which leads to your entirely correct comments about flat-of-the-curve (and note that the “curve” is the Utility Curve) medicine. If we want something approximating Pareto efficiency and better distributive justice, we need better contracts at least.
    As for whether “we” can afford it: the only reason whatever for “production” is to permit “consumption”. Although consumption is constrained by production, production is not privileged over consumption.
    The main thing that “drives” the economy is what it is we want to consume. For most of history, we have wanted to consume more food and comfort. Now we have in the USA produced (arguably) too much of both. At the very least, we have reached the flat of the curve. If “we” decide to consume more health care, then the production side of the economy will organize itself around that. I think this is what Fogel means by “the driving force in the economy”.
    You are right that “health care” does not greatly impact production. So if production is our concern, we simply shoot anyone who produces less than he consumes. Fortunately for would-be wonks like me not to mention my dear mother, our concern is not production. The economy exists to serve man, not man the economy.

  6. Matthew,
    Neither of the terms “Mark Pauly” or “free market” appear or were referenced in the Times article you quote. What’s the justification for thrashing them in your commentary?