Duncan’s Economic Blog

The US Economy & Healthcare

Posted in Uncategorized by duncanseconomicblog on September 10, 2009

John Ross has an excellent article up on the US economy.

For the US, however, a ‘malign’ reduction of the balance of payments deficit has occurred. The US balance of payments deficit is necessarily identical to the degree by which US domestic investment exceeds its domestic savings. But this deficit has not been cut in 2009 by US savings rising towards its investment level but US by investment collapsing downwards towards a saving level which has itself fallen further.These trends are confirmed by the revised 2nd quarter 2009 GDP data.

 As can be seen US fixed investment in the second quarter of 2009 declined to the lowest level since World War II – 14.7% of GDP.

The consequences of such a severe fall in investment will have short, medium, and long term negative consequences for the US economy. Cyclically the fall in investment is the major factor depressing GDP. In the medium term, unless growth in fixed investment is resumed, it is hard for the US to resume expansion. In the long term, as investment is the most important factor input into economic growth, such a severe decline in investment will reduce the US growth rate.

 …

As previously pointed out on this blog claims that US consumption has been falling, and saving rising, are erroneous because they confuse a rise in household saving, which has occurred, with total US savings – which have declined further under the impact of the growing budget deficit.

 …

A ‘perverse’ structural shift is thereby occurring whereby US consumption, which is already the highest of any major economy in the world, is actually rising further as a proportion of the economy and US investment declining sharply. It is for this reason that the internal reshaping of the US economy indicates a ‘malign’ closing of the gap between US savings and investment reflected in the declining trade deficit.

This rise in US consumption (as a % of GDP) is certainly not helpful, Stephanie Flanders does a good job of tying this into the healthcare debate:

The third, less obvious, reason to care about the US healthcare system is that it has actually played an astonishing role in making the US the world’s largest consumer in the past 20-30 years.

Between 1950 and 1980, personal consumption in the US was around 62% of GDP. But in the next 30 years it grew to nearly 70%, about 8 percentage points more than the OECD average.

We tend to think that rise was all due to a debt-fuelled spending spree on foreign-made cars and TV sets.

But the share of spending devoted to those kinds of physical goods actually fell sharply during that period, from 45% in 1980 to about 33%.

That was partly thanks to those things getting cheaper. But the main reason was the onward march of healthcare costs.

According to the US Bureau of Economic Analysis, healthcare costs now account for 16% of total private consumption, roughly double the share in 1975. And of course, government healthcare spending has risen hugely since the 1970s as well.

The bottom line is that America’s very high level of consumption relative to other countries is a relatively new story, and it is almost entirely accounted for by rising healthcare costs.

I’m starting to wonder if the US healthcare debate can’t be tied back to the dollar. As John notes: 

The last time the US balance of payments deficit contracted, in the early 1990s, it was by the same mechanism of a recession. As soon as the US economy began to expand again the balance of payments deficit widened very sharply again. Given the proven inability of the US economy to compete at its present exchange rate it is therefore extremely probable that as the recession slows down, and growth resumes, the US balance of payments deficit will expand again.

But if healthcare reform leads to lower costs, consumption could be lowered and maybe, just maybe, the US BoP deficit would not widen as much in any economic expansion? How much of the US’s ‘proven inability to compete’ is down to healthcare costs?

Either way, the dollar’s role as a reserve currency will still be questioned.

Sept. 7 (Bloomberg) — The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

7 Responses

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  1. […] Originally posted here: The US Economy & Healthcare « Duncan's Economic Blog […]

  2. dannyboy said, on September 11, 2009 at 2:10 pm

    Duncan, is it not fairly obvious that the solution in general to healthcare costs is to switch the economy over to providing more healthcare services per capita? Presumably that would have to come as a result of de-focussing manufacturing and financial engineering, but demand in these sectors is plummeting and demand in the healthcare/care sector is sky rocketing.

    Why in theory can’t one have a consumer economy in which the centre of gravity is provision and consumption of domestically produced and consumed healthcare services, rather than domestically and externally produced consumer goods?

    But I believe you advocate re-industrialisation of britain, which it seems to me may not be the best choice in the long term.

    • duncanseconomicblog said, on September 14, 2009 at 8:15 am

      Dannyboy,

      I don’t back re-industrialisation as an end in itself. Just a re-balancing. Healthcare (and pharam) are certainly growth areas we shouldn’t rule out.

  3. 5 blogs | Kyle's C-block blog said, on September 11, 2009 at 4:09 pm

    […] https://duncanseconomicblog.wordpress.com/2009/09/10/the-us-economy-healthcare/ some guys blog about us economy and healthcare […]

  4. Pete B said, on September 12, 2009 at 8:50 am

    (Drawing hesitantly on my O Level Economics) If a lot of US consumption expenditure growth is due to healthcare spending, doesn’t that mean that it also accounts for a lot of growth in GDP? So cutting healthcare costs would mean a fall in GDP?

    • duncanseconomicblog said, on September 14, 2009 at 8:17 am

      Pete,

      In the short term – yes a fall in consumption of healthcare services would cause GDP to fall.

      But GDP is price adjusted to account for inflation so if only the price of healthcare falls, and not the amount of consumption, real GDP would not fall.

  5. vishal said, on October 1, 2009 at 9:16 am

    amidst all the discussion on healthcare spending, take a look at switzerland’s data vis a vis that of the US

    Swiss Health care learning for US


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