I urge you to read the interesting, graphics-rich post at Business Insider on spending, deficits, and growth. Rather than analyzing the post in detail I encourage you to read it in full. Here’s the quick summary:
Pain is entirely the wrong way to think about closing the deficit. If it’s important to make it go away, we need to find a way of doing the exact opposite, putting people to work and making the economy grow.
I think that we can all agree that putting people to work and making the economy grow are by far the best way to reduce the deficit. Here’s where I disagree:
As the economist James Galbraith explained in an interview with Business Insider, there’s an inherent contradiction to these charts in that they assume that medical costs will grow and inflate like crazy, and yet actual GDP growth will remain stable. If medical costs boom as the CBO (and others) expect, it’s likely that GDP and especially nominal GDP will be higher than people expect, meaning the ratios won’t be as dramatic as people expected.
I think that’s completely wrong and, quite to the contrary, I think that healthcare is different from other sectors of the economy. One of the more significant ways in which healthcare is different is that growth in the healthcare sector comes at the expense of growth in other sectors. Its relationship to low GDP growth in the non-healthcare economy and income inequality are causal.
Rather than doing extensive research of my own to prove this I’ll just point to a few key facts. First, employment, a reasonable first order approximation for growth in a sector, has grown monotonically over the period of the last twenty-five years. It has grown independently of the business cycle, in recessions and in recoveries. Second, total employment has been more or less flat over the last fifteen years. Noisy but flat. You can either take the position that employment is not even a first order approximation of growth or that the healthcare sector is growing at the expense of other sectors. I do the latter.
Another observation supporting my claim is that the government is responsible for between 60% and 70% of all healthcare spending. In an environment in which 25% (or more) of that spending is borrowed, that means that healthcare spending is increasing the national debt load. Debt overhang has been demonstrated to result in slower growth than would otherwise be the case.
So, no, I don’t think that a healthcare sector growing rapidly necessarily means an overall economy that’s growing. Quite to the contrary I think that for a healthy, growing economy we need a smaller healthcare sector. Just as we need a smaller financial sector and a smaller education sector.
One more way in which the healthcare sector is different from other sectors. The healthcare sector grows as care increases; economic welfare, i.e. happiness, grows as health increases. Is the national health really increasing that quickly? By what measure? As has been pointed out about healthcare, outputs per input has been decreasing for decades in the sector.