A Path to Downward Mobility

By Robert J. Samuelson
Monday, October 12, 2009

Every generation of Americans should live better than its predecessor. That's Americans' core definition of economic "progress."

But for today's young, it may be a mirage. Higher health spending, increasing energy prices and stretched governments at all levels may squeeze future disposable incomes -- what people have to spend -- and public services. Are we condemning our children to downward mobility?

Good question. Considering how health spending could threaten future living standards, it ought to be center stage in the "reform" debate. Instead, it's ignored. An oft-stated view is that the growth of the U.S. economy will make the young so much richer than their parents that they can afford a bigger health-care sector and still enjoy large increases in their living standards. Complaining about providing more generous health care is selfish. This is a powerful argument; unfortunately, it isn't true.

Look at the table below. It portrays the U.S. economy from 1980, with a projection for 2030 from Moody's Economy.com. The projection assumes that the recession ends and growth revives. Superficially, the table suggests that economic growth can easily pay for more health care. In 2007 the economy's total output -- gross domestic product, our national income -- was $13.3 trillion. In 2030 it projects to $22.6 trillion, up 70 percent. (All amounts are in 2005 "constant" dollars to eliminate inflation.)

YearTotal GDPPer Capita GDPPer Capita Health Spending
1980 $5.8 trillion $25,700 $2,300
1990 $8 trillion $32,100 $3,900
2007 $13.3 trillion $43,900 $7,100
2030 $22.6 trillion $60,600 (see below)

Surely that's ample. Not really. First, the economy's growth is projected to slow in the future, reflecting an aging population. Lots of workers retire; the labor force doesn't expand much. From 1980 to 2007, GDP grew an average 3.1 percent annually. From 2007 to 2030, Moody's projects 2.4 percent annually.

Next, it's necessary to adjust for population. In 2007 there were 302 million Americans; in 2030 there are expected to be about 375 million. As a result, per capita GDP -- the average amount of income for every American, though (obviously) some receive more and some less -- grows even more slowly. From 2007 to 2030, it's projected to rise from $43,900 to $60,600. That's a 38 percent increase or 1.4 percent a year, down from 2 percent.

Unless controlled, rising health spending would absorb much of that gain. The increase in per capita GDP from 2007 to 2030 is $16,700. If health spending continued to grow at past rates, it would go from $7,100 per person in 2007 to $15,300 in 2030. This rise of $8,200 is half the overall gain ($16,700) in per capita income. (For policy wonks: This assumes health spending grows 2 percentage points faster than GDP per capita, the 1975-2005 trend.)

Downward mobility is possible. Expanding health spending would raise taxes (to pay for government insurance), lower take-home pay (to pay for employer-provided insurance) or increase out-of-pocket medical costs. Other drains also loom: higher energy prices to combat global warming; higher taxes to pay for underfunded state and local government pensions and repair aging infrastructure; higher federal taxes to cover deficits and payments to retirees (much of which reflect health spending). The pressures will undermine private living standards and other public services (schools, police, defense).

The young's future has been heavily mortgaged. Taken together, all these demands might neutralize gains in per capita incomes, especially if the economy's performance, burdened by higher taxes or budget deficits, deteriorated. One study by Steven Nyce and Sylvester Schieber of Watson Wyatt Worldwide, a consulting firm, examined just health spending. The continuation of present trends would result in "falling wages at the bottom of the earnings spectrum and very slow wage growth on up the earnings distribution. These dismal wage outcomes would persist over at least the next couple of decades."

To be sure, extra health care enhances our well-being. Some care extends life and improves quality of life. But the connections between being healthy and more health spending are loose. The health of most people reflects personal habits and luck. They get few benefits from high spending. The healthiest 50 percent of Americans account for just 3 percent of annual spending, reports the Kaiser Family Foundation; the sickest 15 percent represent nearly 75 percent. Half of spending goes to those 55 and over, a third to those 65 and over. Any expansion of health care tends to be a transfer from young to old.

The road to downward mobility is paved with good intentions. The health debate has focused on insuring the uninsured and de-emphasized controlling runaway spending, much of which is ineffective. The priorities should have been reversed. The chance to reorder the medical-industrial complex to restrain costs and improve care has been mostly squandered. Some call this "reform"; no one should call it progress.

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