Health care is killing the American worker

In the "everything is connected" category, I was reading Michael Santoli's column in Barron's this week and he brought up something interesting:

"There may be no position of more comprehensive agreement than that the U.S. consumer is shot -- earning less, spending less, saving more, repayng debt. How many times have we seen the same numbers trotted out, about how consumer spending jumped from a long-term average of below 65% of gross domestic product to a recent 70%, and must fall back; how household debt soared from 64% of GDP in 1995 to 100% of GDP, and must retrench; or how the savings rate that used to average 7% to 11% before 1992 has just lately popped from zero to 6.9%?

It's all true, and should be expected to restrain spending and economic activity over time. But the nuances within the numbers -- and the unknowable trajectory and degree of adjustment -- helpfully complicate the picture.

The consumer as 70% of GDP needs a footnote. Almost all the growth in personal consumption as a share of the economy has been health-care spending -- even though government covers half of health expenditures. As strategists at Citi and Barclays have noted, personal spending ex-health-care as a share of GDP has been flat for decades. This suggests there may not be too much frivolous shopping to cut out."

I'll admit expecting consumer spending as a percent of GDP to fall has been one of my core economic theses. So I pulled the numbers myself. And lo and behold, the economists at Citi and Barclays are mostly right.

If you exclude medical care, personal consumption as a percent of GDP is only slightly above where it has been since the early 1960s and is below where it was in the 1950s. Half of medical care expenses are paid for by the government and close to half are paid for by employer-based insurance. Please note that these statistics are for medical services. Drugs and medical devices are classified as goods.

This chart really emphasizes my point:

Another statistic that's often bandied about is how the median worker's inflation-adjusted wage has stagnated since the early 1970s. The stat is usually cited by the left as proof that greedy corporations have been raking in all the profits and holding down workers' pay or that all the economic benefits have been flowing to the rich. It turns out that what has actually been happening is that the rightful fruits of worker's productivity gains have been Hoovered up by the medical-industrial complex.

The Clinton era is hailed by the left as a time when more progressive taxation and such finally allowed the median worker's wage to rise after its long stagnation under Nixon, Reagan and Bush. It turns out, the 1990s was also the age of the hated HMO that "rationed" health care. Health care as a percent of GDP fell slightly from 1993 to 1999 and the average worker's wage surged.

Source: Minneapolis Fed

The following calculation, which includes benefits, shows that American wages have actually risen quite a bit since the early 1980s.

In other words, HMOs created the great Clinton-era wage boom.

Not to pick only on the left. The right (or at least the Wall Street Journal editorial page) is constantly raising the bugaboo of "health care rationing" as the threat of Obama's proposed health care reform. Of course health care needs to be rationed. What else doesn't get rationed in some form? The big question is how to ration health care. Is it done by insurance companies, like under the HMO model? Is it done by the government, like in Canada and Europe? Is it rationed by changing incentives for doctors and hospitals, like what was suggested in my previous health care post?

If health care doesn't get rationed in some form or another, Americans' standard of living (ex. health care) will stagnate. For a while Americans borrowed against their houses to pay for increases in their standard of living. That option is now gone.

Our expensive health care system is robbing American workers of the fruits of their labor. Bring down the cost of health care and more workers will be able to afford coverage. Bring down the cost of health care and more workers will receive pay raises. Bring down the cost of health care and the US can close its trade deficit. Bring down the cost of health care and reduce the future Medicare liability. Bring the cost of health care and reduce US indebtedness to the rest of the world.

I can imagine no more important issue facing voters today.

Comments

[JR]

Excellent post and good job of calling out both the left and the WSJ Op Ed pages (or Danniel Henninger). On a similar note: I wonder if real purchasing power average american worker is overstated by hedonic adjustments in CPI; 20 years ago no households needed to pay for broadband or wireless data plans etc.

[Tyler]

I use nominal GDP so hedonic adjustments aren't included.