Real Life Experiment (Updated)

There’s an article that I found interesting that I wanted to bring to your attention, Forecasting the Cost of U.S. Healthcare by Nobel Prize-winning economist Robert Fogel. The article is just full of interesting tidbits of information. Among them Dr. Fogel argues a point I’ve discussed here, that healthcare is a luxury good:

The main factor is that the long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent. This is not a new trend. Between 1875 and 1995, the share of family income spent on food, clothing, and shelter declined from 87 percent to just 30 percent, despite the fact that we eat more food, own more clothes, and have better and larger homes today than we had in 1875. All of this has been made possible by the growth in the productivity of traditional commodities. In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.12

I genuinely think that this is a post hoc propter hoc argument. However, we’re in the middle of a vast real life experiment that would serve to prove or disprove Dr. Fogel’s assertion if it were subject to proof. By the end of the year a GDP decline of 1.2% wouldn’t be completely unexpected. If his assertion is true in the short term we should expect a nearly 2% decline in healthcare spending nationally. I’m willing to bet a bright, shiny new dime that won’t be the case.

Perhaps the key factor is “long-term”. I would remind Dr. Fogel that in the long run we are all dead. Why should there be a difference between the long-term and short-term income elasticity of the demand? I think contrariwise that the demand for healthcare is downwards inelastic and that can’t be explained solely on the basis of demand but can only be understood by taking absence of a market and, particularly, the supply bottlenecks in healthcare into account.

But by all means read the article. I hope you’ll find it as interesting as I did.

Update

Arnold Kling touches upon a point I’d intended to make in the body of my post:

I just want to raise a Stein’s Law [ed. anything that can’t be sustained won’t be] point. Once health care gets to 70 percent of GDP, then it is going to get rather difficult to increase spending on health care by 1.6 percent for every 1 percent increase in GDP.

If the growth in healthcare spending as a proportion of our economy sucks that available investment capital from the remainder of the economy, as I think it’s doing, that doesn’t bode well for economic growth going forward and all of those millions of unemployed people may stay that way for quite a while.

12 comments… add one
  • Sam Link

    If the growth in healthcare spending as a proportion of our economy sucks that available investment capital from the remainder of the economy, as I think it’s doing

    This assumes we won’t get new, cool, technologies from all this spending, or that losing our hi tech health care exports won’t hurt us more in the long run. We spend a ton of money on defense, but we also got gps and the internet from that which have created huge consumer markets outside of the intended area. Not that streamlining the costs isn’t a bad idea – I’d much rather the money go straight to the researchers than the bureaucrats 3rd yacht. But as I’ve mentioned before, at this scale, a bureaucracy of some form is necessary.

  • Drew Link

    I’ll read the full article when I can, but it seems to me an obvious (although admittedly kneejerk) reaction is that the 1.6 to 1 correlation is faulty by definition. The vast majority of health care expenditures are insulated from the consumer through government or employer insurance/maintenance programs.

    That’s a lot different than the income elasticity of buying the proverbial eggs, milk and a loaf of bread.

  • Sam:

    or that losing our hi tech health care exports won’t hurt us more in the long run.

    Total U. S. medical exports: $31 billion (less than 1% of healthcare sector)

    Medical exports will never be what it should be for us. Most of the world just knocks it off. Pirated producted manufactured in China or India dwarfs our exports.

    And you’ve just repeated the broken window fallacy.

    Drew:

    That’s one of the many bits of evidence supporting post hoc propter hoc

  • By the end of the year a GDP decline of 1.2% wouldn’t be completely unexpected. If his assertion is true in the short term we should expect a nearly 2% decline in healthcare spending nationally.

    You’d want to use income, not GDP which incorporates more than just income, but the basics of the experiment would still be the same. If income declines by 1.2% as well, then we’d expect a 2% decline in health care spending.

    Drew,

    I’ll read the full article when I can, but it seems to me an obvious (although admittedly kneejerk) reaction is that the 1.6 to 1 correlation is faulty by definition. The vast majority of health care expenditures are insulated from the consumer through government or employer insurance/maintenance programs.

    Right, it goes back to something I’ve written before but liberals always poo-poo it (just wait they’ll likely poo-poo it here too), subsidize something and you get more of it. Nevermind that is the whole point of a subsidy, some moronic twit will likely show up and say I’m stupid because nobody wants to have a quadruple by-pass for sh*ts and giggles. As if that is the entire universe of health care procedures or that people sometimes don’t seek care due to costs. Chances are this moron will have stated elsewhere precisely that, that people forgoe treatment because of the ruinous costs.

  • steve Link

    “Right, it goes back to something I’ve written before but liberals always poo-poo it (just wait they’ll likely poo-poo it here too), subsidize something and you get more of it.”

    I read quite a few econ blogs, left,right, libertarian and do not recall any credible voice making that claim. Maybe among the nut cases….

    Quite a coincidece that my CABG patient today was given the choice of medical management or surgery. Mortality and lifestyle was expected to be the same, but CABG has superior results relieving the chest pain. He opted for surgery. Is this because he is on Medicare and thus insulted from the real costs? Maybe, but it also did not help that this very nice gentleman was about as smart as a box of rocks. My (Canadian trained) CT surgeon tried to talk him out of the surgery, he is on salary so he is motivated to work less, but no luck. Market reform will probably work better on Vulcans.

    Steve

  • PD Shaw Link

    I’m having trouble with the American web-site, so maybe I’ll get to read it later.

    I’ll second Drew’s previous recommendation of the “How American Health Killed My Father” article in the Atlantic. It paints a pretty broad picture of the state of the healthcare/insurance issues from a businessman’s perspective. Recommends:

    1. Ending employer-based system
    2. Creating catastrophic insurance program (deductible of at least $50,000) apparently run by federal government, with premiums based solely on age, and preferably mandatory.
    3. Mandatory Health Savings Accounts and contributions to them.
    4. Allow people to borrow on future HSA holdings to pay for medical costs that can’t be paid with the current HSA value.
    5. Government payments into the HSAs of lower-income people.
    6. Government vouchers for specific procedures we don’t want people to save by avoiding.
    7. Congressional mandates for disclosure of information and billing practices that would allow informed consumer choice.
    8. Slowly eliminate Medicare and Medicaid.

    http://www.theatlantic.com/doc/200909/health-care/6

  • I don’t think it’s possible to eliminate Medicare or Medicaid, practically let alone politically. The politics is obvious.

    However, I think there are practical reasons for them as well. The poor can’t pay the full freight of their own healthcare practically by definition. Unless the cost of healthcare drops drastically they couldn’t possibly save enough to pay, even for basics.

    Similarly, I honestly don’t believe that most people can save enough over a lifetime to pay for their healthcare over twenty or thirty years of after-work life.

    I suppose one could reasonably maintain that the idea of retirement is dated, should be tossed out, and people should work until they drop dead. More would need to change to make that possible than just abandoning Medicare. We’d need to change a mindset in both workers and employers that I just can’t imagine happening.

    However, I can think of a half dozen ways of managing them differently that would ensure they’d cost a lot less than they do now. Not that those ways would be popular.

  • Drew Link

    I’d comment again. But see, I’m looking at this horse laying in front of me. And its dead.

  • PD Shaw Link

    Dave, the author is proposing the federal government pay a poor person’s HSA contribution and catastrophic insurance premium, in lieu of the money going to Mediaid. Assuming adequate regulatory controls on the financial end, I think the question is whether poor people can make good healthcare decisions.

  • steve Link

    The Goldhill has many factual errors. Almost any physician or person working in health care can easily spot them. In spite of that, his conclusions are worth considering.

    Steve

  • Assuming adequate regulatory controls on the financial end, I think the question is whether poor people can make good healthcare decisions.

    Let’s assume the can is open….

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