The New York Times picks up on a story that’s been going on for a long time in America health care.  What’s happening is that the increase in real wages has all been sucked up by the added cost of health care benefits.  Back at at IFTF were used to have a chart which showed that real wages have gone up something around 2% from the late 70s to the mid-90s whereas health-care benefits had gone up something like 100%.The major difference now is that because the costs of health care are so much higher, the impact on wages particularly at the low end of the spectrum is much greater.  Funnily enough last week I got a notice in the mail from my health insurance company telling me that my rates would increase 20%. While I had the rep on the phone I asked when the other big rate increases would come based on my getting older.  She told me that essentially every five years, so when I turned 45, 50, 55 and 60, I would see a big bump.  My new rate is $120 a month for a $2500 deductible. If I was aged over 55, it would be something like $350, and if I was 60 and waiting for Medicare it would be nearer $500.  So even with a high deductible plan, we talking $6,000 in premiums annually for an individual policy.  When you consider that the average household income is less than $60,000, it goes to show that even at today’s rates the poorer half of the leading edge of the baby boom is going to have real trouble paying for a high deductible policy — and of course by the time you run the clock forward at the increases we’re seen, it will be even worse in five years time.

The Times story also picks up on the fact that productivity has increased but wages have not. Even when you count total compensation including health-care benefits they still haven’t kept up and more of the share of revenues is going to  profit. I cannot exactly claim to be a big fan of Tom Friedman.  After all he is the guy who justified the war in Iraq on the grounds that we were bringing democracy to the Middle East and frankly he reminds me of as a 19th century colonialist justifying the British Empire by saying that we are civilizing the native.  However, for better or for worse, he is the guy who’s popularized the notion of the earth being flat, and it is the downward pressure on wages and brought by the introduction of the Indian and Chinese labor force to the American economy that is causing the inability of American workers to grab their fair share of the increase in profitability.

But while health care benefits are keenly sought by employees, at some point they’ll realize that they don’t get the benefit of them directly, and that the ever upward spiral in health care costs is harmful to them. Of course the same issue is going on with the employers, and both sides have problems understanding what’s going on, or at least in coming to the obvious solution. Malcolm Gladwell has a New Yorker article looking a little at the history of this. It’s not particularly stellar, but it does have one great paragraph which explains why American business will fight every supplier to the last nickel but will let itself get raped year after year by health care, and not do the politically obvious thing need to stop it:

Under the circumstances, one of the great mysteries of
contemporary American politics is why Wagoner isn’t the nation’s
leading proponent of universal health care and expanded social welfare.
That’s the only way out of G.M.’s dilemma. But, from Wagoner’s
reticence on the issue, you’d think that it was still 1950, or that
Wagoner believes he’s the Prime Minister of Ireland. “One thing I’ve
learned is that corporate America has got much more class solidarity
than we do—meaning union people,” the U.S.W.’s Ron Bloom says. “They
really are afraid of getting thrown out of their country clubs, even
though their objective ought to be maximizing value for their
shareholders.”

CODA: The cynic in me sees the export of health care services to India and China as freeing up more of the total revenue available for wages and profits. I wonder which one for those will get the lion’s share

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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.