A parable about healthcare

2/15/2013 04:34:00 PM
Often in economics we work with models of single-good economies, where we represent all final goods and services--all the things people consume--as a single composite good. Typically we call this good "consumption" though my undergrad macro professor called it "cucumbers"--a tradition that he borrowed from his macro professor way back in the day. I'm sure I will loose plenty of readers on this blog for saying so, but I think that Dr. Noble's examples of cucumber-based economies would provide some much needed perspective for all the people so hyped-up about healthcare spending today.

I've actually provided several examples of such single-good cucumber based economies on this blog before. Here is one. What, you don't see any references to cucumbers? No matter, just pretend that $C_t$ represents the quantity of period $t$ cucumbers, instead of consumption. The math's all the same.

Ok, here's my point: in these models, cucumbers represent 100% of GDP--after all, it is a one-good universe. People invest cucumbers to make cucumbers, some of which they eat, and some of which they invest into making more cucumbers in the future. Now suppose that, way back in time, there was a second good, say, pickles. Maybe if you go back far enough, most of GDP was actually devoted to making pickles instead of cucumbers. But a series of technological advances steadily increased the amount of utility we derive from cucumbers, so we started devoting an ever-increasing share of our resources to making cucumbers. Breakthroughs in cucumber technologies were happening all the time, and people were spending more and more on cucumbers. Some people were spending so much on cucumbers they didn't have anything left to spend on pickles anymore. We introduced Cucumber Management Organizations to try to arrest the growth in cucumber spending. We instituted a universal cucumber coverage, which only increased the demand for cucumbers further. All the politicians and media were talking non-stop about how we were going to pay for all these cucumbers. Massachusetts institutes an innovative plan that would cap the growth of cucumber spending at the growth rate of GDP. Pickle-makers' unions demand that congress take action to halt the growth of cucumber costs.

But, it was all for naught. The measures to control cucumber costs proved ineffective, and eventually no one was able to afford pickles any more. The last pickle rolled off the assembly line, and the factory was shut down. Then the economy collapsed right? With cucumbers now at 100% of GDP, no one had any money left to spend on the outrageous cost of cucumbers, right?

Wrong. Very, very wrong.  What actually happens is people go to work in cucumber factories to earn their pay checks--presumably paid in cucumbers--invest some of them in the most promising cucumber stocks which pay cucumber dividends, which they spend on...you guessed it, cucumbers. The circular flow of cucumbers turns out to be just fine. It turns out that cucumber-making can finance itself. More than that, the cucumber industry is capable of employing all of the out-of-work pickle-makers.

This all, of course, a parable about healthcare spending. All you have to do is replace "cucumber" with "healthcare" and replace "pickle" with "all non-healthcare goods and services." My point is this: the growth in healthcare spending is, at a macroeconomic level, completely sustainable. While I hate to associate with those who typically invoke Say's law, in this context it is most definitely true--100% of every dollar we spend on healthcare goes to increase someone's income by the same amount. We can thrive as a healthcare oriented economy.

The real problem, I think, is not that healthcare spending is growing--we normally like sectors of the economy that grow, right? The problem is that unlike computers, housing, entertainment and the like, at a fundamental level we do not enjoy healthcare. We derive a lot of utility from it--as evidenced by our willingness to spend on healthcare--but it does not give us pleasure.

But then, the degree of pleasure you get from healthcare spending is not an economic problem. Go talk to some psychiatrists.