Samuelson: Health spending — economic brake or accelerator?

Washington PostAugust 24, 2013 

Here is the most interesting fact about the economy that you’ve never heard: Without health spending, the rest of the economy is barely producing more than it did in late 2007, just before the start of the Great Recession. We’ve spent five and a half years struggling to get back where we were, and many industries are hardly making it.

This sobering insight comes from the Center for Sustainable Health Spending in Ann Arbor, Mich., which compares health spending to the economy’s total output, gross domestic product. From December 2007 to June 2013, health spending rose a respectable 14.7 percent. Meanwhile, GDP grew a lowly 4.6 percent. Exclude health spending from GDP, and its growth is only 2.7 percent.

Gasp! Health spending accounts for almost half the economy’s meager overall gain.

The dry statistics help explain the economy’s stubborn sluggishness. As weak as the economy has seemed, health spending makes it look better than it is. In the roughly five-sixths of the economy that isn’t health care, companies often are straining to reach previous highs. If you’re a corporate executive or a small-business owner, you haven’t had much reason to hire or invest, because — in many industries — there’s been no net growth in more than five years.

Look at some conventional indicators, and that’s what you find:

•  Industrial Production: It’s about 1 percent below its 2007 average, reports the Federal Reserve.

•  Vehicle Sales: Car and light truck sales are predicted to hit 15.6 million this year, much better than the recession low of 10.4 million in 2009 but nowhere near the 17 million early in the 2000s, notes Susan Sterne of Economic Analysis Associates.

•  Air Travel: The number of passengers for domestic and international flights, 742.7 million in 2012, was more than 4 percent below 2007 levels and continues to run behind in 2013, according to the Department of Transportation.

•  Home Sales: Sales of new and existing homes should hit 5.3 million in 2013, a big improvement from the 2010 low of 4.5 million, according to Sterne. But that’s still well short of 2005’s 8.4 million.

No one should be surprised that employment, though rising, remains below its pre-recession peaks. (In July, payroll employment was 136 million compared with 138 million in December 2007.)

Health spending has partially obscured the economy’s weakness. “What we’re seeing is that health care has a countercyclical component,” says economist Paul Hughes-Cromwick of the Center for Sustainable Health Spending. Medicare, Medicaid and other government programs account for about half of health spending and occur more or less automatically. Private insurance often operates much the same way.

This poses some tricky choices. Do we want health spending to serve as an economic locomotive, an unannounced jobs program? From December 2007 to July 2013, health care’s share of total employment has increased from 9.5 percent to 10.7 percent, says the center. If so, do we also accept that health care’s relentless growth continues to squeeze wages, salaries and other government programs? Consider: From 1999 to 2013, wages and salaries rose 50 percent (in current dollars) while health-insurance premiums increased 182 percent, reports the Kaiser Family Foundation. Companies diverted some compensation into insurance premiums that otherwise might have gone into paychecks.

Right now, we’re having it both ways. Although health spending has aided the recovery, it also has slowed from past trends. In 2013, premiums for family coverage rose 3.8 percent, down from a 9.5 percent increase as recently as 2011, says Kaiser. Compared to the rest of the economy, the health sector is flourishing; still, it’s under enormous pressure to provide better care for less money. That’s as it should be. We’d be better off if the recovery strengthened so we can concentrate on making health care more effective and not just bigger.

Mr. Samuelson has worked for The National Journal and Newsweek.

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