Memo to White House Speechwriters

Feel free to insert this into President Obama's next speech:

"There has been a lot of talk lately about taxing Cadillac health plans. Well, I have thought about this idea, and I have talked with my economic advisers, and we have decided that it indeed makes a lot of sense.

"Now some of you may wonder whether endorsing this proposal breaks my pledge not to raise taxes on the middle class. After all, you don't need to be rich to drive a Cadillac, and you don't need to be rich to have a Cadillac health plan. So, hereafter, I will refer to them as Rolls Royce health plans.

"Seriously, though: Yes, it is a tax increase on the middle class. When I said during the campaign that I would raise taxes only on the rich, I meant it. Or at least I wanted to mean it. But my damn economic advisers keep bugging me about the laws of arithmetic. And, you know, they are right. I am more interested in expanding entitlements than reining them in, so I don't have much choice but to raise taxes on the vast majority of Americans. If you think this Cadillac tax is the end of it, you just wait.

"I also know that this tax offends some of my supporters in the union movement, who now enjoy the benefits of Cadillac health plans. But how much do you guys expect from me? I have already thrown you the bone of a completely unjustifiable tariff on Chinese tires, risking a trade war in the midst of a global economic downturn. You guys should be happy with that. Will you please get off my case?

"Finally, I need to make an apology. No, not to Europe for Bush-era foreign policy this time. But to Senator McCain. During the campaign, I lambasted you for proposing to tax health insurance benefits. I knew at the time that your goals were laudable--to finance tax credits for lower income families and to rein in tax incentives for excessive insurance. And indeed your proposal was not very different from the tax on Cadillac plans that is now being considered in Congress and that I will gladly sign into law. But the issue offered just too good of a sound bite to give up. Now that I am safely in the White House, however, I am man enough to admit that Senator McCain was right all along, and I was wrong. Gosh, it feels good to get that off my chest."

Economics Teaching Conference

Click here if you might be interested in attending an economics teaching conference in Savannah, GA, on November 5-6. I am one of the keynote speakers, along with Alan Blinder and Bob Hall.

A Painless Way to Learn Economics

Recommended: The Cartoon Introduction to Economics

Update: In the few hours after posting this link, the book's sales rank at Amazon rose from about 330,000 to about 3,000. More evidence of the power of the blogosphere.

FYI, here is a clip of the author:

Intergenerational Redistribution

Leavitt, Hubbard, and Hennessy say that the pending healthcare reform benefits the old at the expense of the young.

Update: A blog reader in the administration emails me the following comment on this op-ed:

A reader of the Leavitt-Hubbard-Hennessy op-ed might have thought that everyone - regardless of age - would be paying the same premiums under health reform. That is not the case. The Senate Finance Committee's mark allows insurance companies to charge up to four times the premium to an older person than a younger person (see page 2 of the Chairman's modification [to be found here]). Moreover, even this would not apply to the vast majority of Americans because it is limited to the individual market, not employer insurance. The House has a similar proposal but limits the premium for older people to twice that of younger people (page 21 of their bill).

A Bug, Not a Feature

In discussing climate change legislation over at his blog, Paul Krugman says something that I believe to be correct, but he does not fully draw out the logical implications of what he says. Here what Paul writes:

And the burden on households from cap and trade depends on what’s done with the rents. In the original Obama plan, the rents would be used to pay for middle-class tax cuts; in Waxman-Markey, many of the permits are initially granted to utilities — but since these utilities’ profits are regulated, many of the rents would end up being passed on to consumers through lower prices.

In my view, that is a bug, not a feature, of the Waxman-Markey bill. From the standpoint of economic efficiency, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions regarding energy consumption. Consumers should be compensated for paying these higher prices via cuts in income or payroll taxes. Those tax cuts would be financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax).

To promote an efficient allocation of scarce resources, relative prices should reflect true social costs. Shielding consumers via the regulatory process, rather than through tax cuts, fails to achieve that goal and, as a result, makes environmental protection more costly than it needs to be.

Back from the Brink

The latest speech from the CEA Chair.

Status Quo We Can't Believe In

Cogan, Hubbard, and Kessler on the health "reform" plan:

According to provisions in both House and Senate bills, mandated plans must have low copayments and provide coverage of health-care services that is at least equal in scope to a typical, current employer-sponsored plan. But these are the very flaws that are responsible for high and rising health-care costs, flaws that stem directly from the misguided tax exclusion for and the extensive state regulation of health insurance. By locking in these flaws, the mandates will inhibit precisely the innovation needed to reform U.S. health care....Comprehensive, low-deductible, low-copayment insurance has brought us to where we are today. The administration's plan to expand and lock-in this flawed paradigm will ultimately defeat the goal of making health services more affordable for everyone.

Nobel Predictions

From Thomson Reuters.

Posner on Keynes

The great law-and-economics guru has become a Keynesian.

Is a mandate a tax?

There has been some blogosphere discussion of whether a health insurance mandate is or is not a tax, motivated largely by President Obama's recent assertion that "nobody considers that a tax increase." . (See, for example, Jeff Miron and Donald Marron.) The issue is largely semantic, but behind the sematics lies some interesting economics.

The best place to read about the topic is this old paper by Larry Summers. Larry says, "Essentially, mandated benefits are like public programs financed by benefit taxes." But there is much more to Larry's article than that. Please click through to the paper and read it for yourself.

More Competition

John Taylor is blogging. Jeff Miron is blogging again.

Is there a healthcare crisis?

Click here and here for contrarian views.

People Respond to (Perverse) Incentives

A great story about the deadweight loss of tariffs:

To Outfox the Chicken Tax, Ford Strips Its Own Vans

BALTIMORE -- Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

Why all the fuss and feathers? Blame the "chicken tax."

The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks.

The company's wiggle room comes from the process of defining a delivery van. Customs officials check a bunch of features to determine whether a vehicle's primary purpose might be to move people instead. Since cargo doesn't need seats with seat belts or to look out the window, those items are on the list. So Ford ships all its Transit Connects with both, calls them "wagons" instead of "commercial vans." Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands.

Nobel Prize Pool

Think you know who will win the Nobel Prize in Economics? Willing to put your money where your mouth is? Then click here.

If you are looking for some suggestions, click here for a list of the most cited economists. Note that 6 out of the top 10 have already won.

Book Review

A review of Robert Skidelsky's new book on Keynes by my favorite new Keynesian.

My Magic Pills

Click here to read my column in tomorrow's NY Times.

Addendum: In case you are curious, the $150,000 figure for statins comes from Abraham Verghese, Professor and Senior Associate Chair for the Theory and Practice of Medicine at Stanford University.

“People of the same trade...

...seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." -- Adam Smith

Levine on Macro

WashU economist David Levine writes an open letter to Paul Krugman.

Kocherlakota on Macro

University of Minnesota economist Narayana Kocherlakota reflects on the state of modern macroeconomics.

CBO on the Baucus Plan

The CBO blog on the health plan du jour:

the Chairman’s proposal would reduce the federal deficit by $16 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law, with a total effect during that decade that is in a broad range around one-half percent of GDP....

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented.

In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

Let me try to put CBO's point in a more familiar setting:

Your friend Joe, who says he wants to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.

"Ahem, Joe," you whisper, "Aren't there a lot of calories in that?"

"Yes," he says, "but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. The exercise will more than work off those extra calories."

"But that's what you said last week, when you asked for an extra piece of cake. And you never made it to the gym."

"Yes, I know," Joe replies ruefully, "but this time I really mean it....Can you please pass the pie?"

What economists believe

Click here to read the results of a new survey of AEA members. This updates previous survey results, summarized in Chapter 2 of my favorite textbook.

Note that 83 percent agree that "the United States should eliminate remaining tariffs and other barriers to trade." I presume that would apply to tariffs on Chinese tires.

Thanks to Tyler Cowen for the pointer.

Lehman and the Crisis

John Cochrane and Luigi Zingales opine.

Update: Phill Swagel, who was Assistant Secretary of the Treasury for Economic Policy at the time of the Lehman collapse, emails me the following commentary:

While I have a great deal of respect for John and Luigi, their oped in today's WSJ is misleading in important aspects. One example is this passage:

"It did not help that the TARP was such a transparently bad idea. The Fed and Treasury soon figured that out, settling on equity "injections" and a bank-debt guarantee instead. Floating a bad idea does not instill confidence."

The problem here is that it would have been impossible to start with capital injections -- a proposal for the government to buy 20 percent of the banking system would not have passed the House of Representatives. This was a hard constraint. John and Luigi might think that the initial TARP proposal was a bad idea -- that's a discussion I'd be glad to have -- but it is misleading to make this argument in comparison to an infeasible alternative. They should consider instead the choice between the TARP as originally envisioned to buy illiquid MBS and the (feasible) alternative of not having any TARP and thus not having the ability to switch to capital injections as financial market conditions deteriorated in the ensuing weeks.

This is all discussed on page 38 and following in the paper I wrote for Brookings in April. To find the discussion of this point in my paper, search for the phrase "politically oblivious."

Thanks, Phill.

Gordon on Macro

Bob Gordon surveys the state of macroeconomics.

Thanks to David Warsh for the pointer.

A Coming Trade War?

In case you have not been following the headlines, here is a recap:

Obama to impose tariffs on Chinese tires: Obama imposes tariffs on China tires for 3 years, a decision that could anger Asian powerhouse

China Strikes Back on Trade: Beijing Threatens U.S. Chicken, Car Parts After Washington Slaps Stiff Tariffs on Tires

Stocks head lower on US-China trade concerns: Major indexes fall in early dealings amid concerns about US-China trade dispute

Tire Tariffs Are Cheered by Labor: Mr. Obama ordered the tire tariffs after the United States International Trade Commission, an independent government agency, determined that a more than tripling of Chinese tire imports had disrupted the $1.7 billion tire market....President George W. Bush had rejected four similar recommendations from the trade commission, angering organized labor

Flier on Health Reform

The dean of Harvard Medical School weighs in on the current debate. An excerpt:

there is our inefficient and inequitable system of tax-advantaged, employer-based health insurance. While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care, the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick.

This employer-based system arose not by thoughtful design but as an unforeseen result of price controls during World War II and subsequent tax policy. How this developed and persisted despite its unfairness and maladaptive consequences is a powerful illustration of the law of unintended consequences and the fact that government can take six decades or more to fix its obvious mistakes.

Where's the beef?

Jim Capretta on the President's healthcare speech:

The president has promised for months now that he would have a plan to “bend the cost-curve.” Indeed, even tonight, he spoke of the plans being worked on in Congress as if they would address the problem of rising costs and improve our long-term budget outlook.

It’s as if the president and his team haven’t read anything that the Congressional Budget Office (CBO) has said about the health care bills under consideration. The truth is that these bills would add an additional runaway health care entitlement to the ones already on the federal books. CBO has said that the House bill would set in motion new spending that would grow at about 8 percent rate per year, while the revenue to pay for it would increase only about 5 percent per year. You don’t have to be a financial genius to see a problem here.

Yes, indeed. That is why this passage in the President's speech had me scratching my head:

I will not sign a plan that adds one dime to our deficits -- either now or in the future.(Applause.) I will not sign it if it adds one dime to the deficit, now or in the future, period. And to prove that I'm serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don't materialize.

At first, it sounds like the President is threatening to veto the bills being considered in Congress because, according to CBO, they will add significantly to deficits in the out years. If true, that would be a big story. But the provision he mentions in the next sentence seems to suggest he is just passing the buck.

Translation: "I promise to fix the problem. And if I do not fix the problem now, I will fix it later, or some future president will, after I am long gone. I promise he will. Absolutely, positively, I am committed to that future president fixing the problem. You can count on it. Would I lie to you?"

A Victory for the Protectionists

Disappointing news:

Obama to impose tariffs on Chinese tires

President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

How Did Economists Get It So Wrong?

Barry Eichengreen's answer (from a few months back).

John Cochrane's answer (in response to Paul Krugman's).

Update: Martin Baily responds to Krugman.

France joins the Pigou Club

The BBC reports that France is set to impose a carbon tax. Unfortunately, there is no discussion in the story of cutting other taxes. The goal of Pigovian taxation is to switch toward more efficient taxes, not to raise the overall tax burden.

Update: The Post reports some good news: "the government expects to raise euro 3 billion, which will be entirely returned to households and businesses through a reduction in other taxes or repaid via a so-called 'Green Check,' Sarkozy said."

Judging Downturns II

In response to my previous post, an economist at a financial firm emails me the following analysis:

I am following the discussion on measuring the severity of recessions.

I prefer the unemployment rate for historical analysis. In olden days, it was likely better measured than real GDP. And before 1947, there is no quarterly real GDP. We have plenty of data on industrial production, but as the US becomes less of a manufacturing economy, its relevance is fading.

The point a reader raised about changing composition of the labor force is good. We can adjust for that. The CBO creates a quarterly estimate of NAIRU going back to 1947. The changing composition of the labor force is reflected in the estimate of NAIRU.

The first chart below compares the unemployment rate (quarterly average) with the CBO's NAIRU estimate.

The second chart shows the difference between the two series:


As of Q2:2009, the gap is just a touch lower than in Q4:1982. The gap is likely to expand for two or three more quarters, making it the worse gap of the post World War Two Period.

Another way to gauge the slack is to focus on a single demographc. Let's take married men, spouse present. They are the most stable segment of the labor forcce, and here is their unemployment rate:

It has been terrible this time, but not as bad as the early-1980s. Why this time seems worse is the unemployment rate for teenagers is a record high. I think we should give some blame to 3 consecutive annual hikes in the minimum wage.

A final way to compare the rise in the unemployment rate from bottom to top; the dates of the cycle in the unemployment rate need not coincide with NBER peaks and troughs. Here are my calculations for real GDP and the unemployment rate.

The rise in the unemployment rate in 1945 was much less than in the recent recession. But the rise in the unemployment rate in 1937-38 was much worse than the current recession.

If we combine the 1980 and 1981-82 recessions into one super-recession, the rise in the unemployment rate was 5.0 percentage points, slightly bigger than what we have seen so far.

Finally, critics like to make remarks that the US has artificially reduced its unemployment rate by putting people in jail, claiming that those people would otherwise be unemployed. First, there is no evidence they would be otherwise unemployed. But more important, secondly, the total institutionalization has not changed. Mental hospitals have been emptied out. Sad to say, many of these mentally ill people are in jail. The point is that the sum of all institutionalization is probably stable. As for comparing the US to Europe, many European countries reduce their unemployment rates by putting the long-term unemployed on disability, so they drop out of the labor force.

Bad as things are now, they don't feel as bad as in 1982. With good reason. The ratio of employment to working age population for those 20 years old or older has fallen a lot, from a peak of 65.4% in Q1:2007 to 62.0% in Q2:2009. But by contrast, in Q4:1982, that ratio was only 58.9%. In recovery, the rate did not hit 62.0% until mid-1986. Our current bad rate is the same as a good then-record high in 1986. More people working is a type of income insurance.

Judging Downturns

A teacher emails me a query:

I am a U.S. history teacher and an avid reader of your blog, and I have a question which you might want to address (again) in your blog. I came across a story saying that we were coming out of "our worst recession since the 1930s." This strikes me as curious, considering our unemployment levels are not as high as the 1982 recession, I don't think. By your reckoning, assuming the worst has passed, has this been the worst since the 1930s? That raises a bigger issue:what standard should one use to "judge" a recession?

There is no right answer to this question, as various macro variables reflect economic conditions, and they do not move perfectly in lockstep. But a very standard metric is the peak-to-trough decline in real GDP. The chart above, from Donald Marron, shows that by this measure, the current recession is the worst since the Great Depression, as as long as you exclude the return to trend after the World War II boom.

Note that the phrase the worst since the Great Depression may inadvertently lead the reader to think that we are somehow getting close to the Great Depression in severity. As the chart shows, that is not at all the case.

One might wonder why the unemployment rate was higher in the 1982 downturn if that recession had a smaller decline in GDP. Part of the answer is that the 1982 recession followed closely after the 1980 recession, from which the economy had not fully recovered when the next downturn began.

Update: A data junkie who reads this blog emails me some conjectures about why unemployment is lower now than it was at the end of 1982:

I believe that a large part of the answer is the aging of the workforce. Unemployment rates are much higher among younger workers, so it takes a much larger downturn today than it did in 1982 to generate the same unemployment rate.

For example, the August 2009 unemployment rate was 9.7, while the rate was 10.8 in December of 1982 - the worst year of that recession. However, if you take the age-specific unemployment rates for persons age 16-19, 20-24, 25-34, 35-44, 45-54, and 55+ in August '09 and take a weighted average, weighting by these groups' labor force shares in December of 1982, your new "simulated" August 2009 unemployment rate is 10.9. In other words, if the age distribution of our labor force today looked like the age of the labor force in 1982, but we still had our current age-specific unemployment rates, overall unemployment would be worse now than in 1982. Obviously, this assumes that the age distribution of the labor force does not affect age-specific unemployment rates (not true!), but it's a nice way to show that this is an important factor.

The U.S. also incarcerates many more persons today than it did back in 1982 (1 in 100 according to a famous Pew estimate). Many of these persons would be unemployed if they weren't behind bars.

All intriguing ideas. Thanks.

Field Research in Economics

Click here to watch talks given this past summer at the NBER by John List and Michael Kremer.

Speech Review

"Inspiring."

That's what I was told about the President's speech to schoolchildren when I asked my favorite 5th grader about it last night at the Mankiw family dinner table. He even recounted the story of young Barack Obama having to wake up at 4:30 am for his lessons.

Good job, Mr. President.

Saving the Capitalists from Capitalism

Insights from University of Chicago economist Luigi Zingales:

We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms....

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.

Unfortunately, it looks for now like the Obama administration has chosen this latter path.

Matthew Weinzierl

An interview with one of my coauthors.

Most Lucrative College Majors

Click here for the list.

Of course, these data do not allow one to distinguish the treatment effect from self-selection based on innate characteristics.

How large is the fiscal policy multiplier?

Volker Wieland's answer:

Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

Update: A reader emails me a recent, related study, which makes an important point: The impact of a fiscal change depends on whether and how quickly people expect it to be reversed. If the fiscal stimulus is very temporary and soon to be reversed, the crowding out effects described above by Wieland will be smaller, and the effects on output will be larger.

Unemployment Update

Source of graph. Click here for my interpretation of it.

More on Rising Healthcare Spending

In a previous post, I quoted economic historian Robert Fogel on the income elasticity of healthcare. Fogel's claim of an elasticity substantially greater than one brought this email from MIT's Daron Acemoglu:

Dear Greg:

We noticed your blog on health care and I thought it might be useful to bring my research with my colleague Amy Finkelstein and our PhD student Matt Notowidigdo to your attention.

In this paper, Amy, Matt and I looked at the relationship between income and health care spending. Unlike the results you reference, our findings suggest that rising income cannot explain much of the rising share of GDP devoted to health spending. (In other words, we do not find evidence of an elasticity of health spending with respect to income that is greater than one). We think that the "assumed" relationship that health-care share of GDP should rise automatically as incomes rise is on much shakier grounds than most people realize.Of course, people with different priors will interpret the evidence differently, but we think in this case the evidence is interesting and informative. The paper is here.

Of course, one may ask, if not income, what is responsible for the dramatic rise in the health-care share of GDP. Amy has a very interesting paper on this, which you may have seen, estimating that the spread of health insurance may have played quite a large role in explaining the rise in health spending. So our view has now evolved,as a result of the empirical evidence in these papers, to the tentative conclusion that much of the rise in the health-care share of GDP may be due to policies and regulations related to private and social insurance and the way that the health market is organized (that dreaded word "incentives"). But again I am sure many people will not agree with this conclusion.

In any case, some quick reactions from us, which may or may not be useful to you.

Daron

Thanks, Daron.

Beyond a large income elasticity and the effects of incentives Daron describes, there is a third logical possibility to explain a rising healthcare share of GDP: an expansion in the range of products available to the consumer due to exogenous* technological change. As doctors figure out new and better ways to prolong and enhance life, we may rationally choose to buy these products. It might be tempting to view this effect as a large income elasticity (which is perhaps what Fogel is doing), for the technological change raises real incomes as well as healthcare spending. But the resulting parameter is not a true income elasticity, which measures how much more healthcare we buy if income rises while the range of products is held constant.

--------
*Of course, technological change is not completely exogenous. Surely, the incentives offered by such policies as the patent system and government research funding matter for medical advance. Here what I mean by "exogenous" is not driven primarily by the incentives determined by the health insurance system.

Krugman on Macro

Paul offers up a very nice essay explaining his view of the field.

Why are we spending more on healthcare?

The answer from Nobel Prize winning economic historian Robert Fogel:

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.

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

See also these wise words from DeLong the elder.

The secret is out

Click on the graphic to enlarge.