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Back To School, Business Week


There’s been a lot of fuss in the last week about the BusinessWeek article that suggested that all employment growth in America in the last few years had come in the health care sector. Well that’s not too surprising. The money pouring into health care has been going up at more than 10% a year since 2000 while the rest of the economy has been relatively stagnant (at least compared to historical growth rates). The non-employment sector of the economy (i.e. corporate profits) has been growing much faster than the labor sector. Health care, though, is a labor intensive business – you need those nurses, techs, and even doctors to look after patients. And of course it’s sending employment overseas that’s been responsible for much of the profit increase for other businesses, which at the end of last year were the highest they’ve been as a share of the overall economy since the late 1960s.

In the world of the chattering classes a debate has – almost unbelievably – developed about whether the growth of health care employment is a good thing, or not.

Now call me naive but I grew up in the days when economists believed that there were things that got produced that increased value (largely stuff that helped make other stuff) and things that didn’t but were necessary services that kept society going. For example on the “increasing value” side – suspend disbelief and anything you know about American auto companies for a moment – we make car plants that make cars. The car plant adds to productive capacity for cars, and the cars help us get around and do other things that make it easier to be productive, such as go to work. Then there are things we have to do to benefit society but that aren’t productive in and of themselves. For instance we build schools to teach English Literature. We could argue that we need both sides of the equation, but the point is that the productive part of the economy (the cars) largely pays for the unproductive part (the English lit class).

Many activities are somewhere in the middle, but health care has always been on the English Lit side of the equation. When you’re making cars there’s usually a finite amount you can sell and the old capitalist supply and demand rules tend to work out how many get made and sold. But determining what the most efficient amount of English Lit to produce is so hard that we usually turn that over to the government which allocates a certain budget for it. If you are a very clever English lit producer, you get your English lit categorized as being vital for national security, and then we end up with way more of it than we need. Don’t believe me? The extension of science training in high school in the 1950s was passed as part of the National Defense Education Act, and of course the people who make things like nuclear missiles know this trick very well. So we end up with way more of those things than we need, even if we’re never going to use them.

Health care walks, talks and quacks like that English Lit class. And most of the growth in health care spending around the world is funded either out of taxation, or out of corporate budgets (which act like private tax funds and whose largesse is spent equally carelessly). In fact if you are a health care services or product supplier, you’re better off with a mixed system of public and private funders. Government purchasers are, in fact, a damn site more aggressive in knocking down what they pay for health care – better than private concerns. Which is the main reason why health care in the US, which has such a system, is so much more costly than that anywhere else.

So how come the discussion is suddenly about more health care spending being a good and necessary thing? A new barrage of economic studies are coming out telling us that because health care spending – suspend disbelief again – theoretically adds to life expectancy, it is like car plants not like English lit. Most of this emanates from a Harvard economist called David Cutler, who really ought to know better. Cutler recently published an article in the venerable New England Journal of Medicine recently which essentially said that “buying” an extra year of life cost what he perceived to be a “reasonable” amount. But at $145,000 a year for a person over 65 years of age, that’s a expansive definition of “reasonable.” In fairness he did note that the cost of buying an extra year of life expectancy had gone up very fast in the past two decades. So the return on our most recent “investment” wasn’t as great as it was in the 60s and 70s. But this meme has now been taken up by various gullible New York Times reporters who are starting to talk about health care being the new engine that drives the economy.

The problem with this logic is of course two-fold. What health care essentially “produces” is increased years at the end of life and therefore more elderly people who, while they may contribute fantastically to the social and spiritual life of the nation, do not help out the economy much. They tend not to work, pay taxes and all that. In other words they require more people to do that to support them. While this is a good thing (Hi Dad!), it cannot be explained away as an increase of productive capacity. The boom in health care employment is a case of adding English lit teachers not car workers to the national payroll, and so the car workers have to fork over an increasing amount of their income to fund the English lit teaching. At some point we can’t afford any more English lit.

The second part of the problem, as eloquently pointed out in a letter responding to yet another dumb article in the Times, is that – to continue the analogy – while we’re buying a lot more English lit teaching than any other country, we’re actually getting relatively poorer understanding of Shakespeare and Dickens from the students. In other words we’re getting worse health measures than many countries paying massively less for their health care. So while we may be (debatably) rich enough to pay the amount we’re paying, we’re not getting much of a decent return for it.

Which leads the cynics among us to suspect that this is not a case of the American people reading Culter’s studies, realizing that health care is a bargain and therefore happily shifting their spending habits towards paying more for it–which in turn increases employment opportunities in health care. Instead it’s closer to the case of an industry politically capturing the public (and private) payers and forcing the taxpayer to keep funding more every year.

Share  Posted by Matt Holt at 10:25 AM | Permalink

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