This Short Term Tonic Has Lethal Long Term Side Effects

Call it "a bedpan economy." One of the supreme ironies of America's inability to control its escalating health-care spending, says Robert Marks of som Economics Inc., is that such outlays have been "a significant source of economic strength in recent years."

The chart tells the story. As the economy slowed after 1988, fell into recession, and then crawled forward, increases in health-care spending accounted for an outsized share of the growth in gross domestic product. Indeed, Marks calculates that since 1988, health care has accounted for over 25% of the rise in current-dollar national output, and in 1990, when the economy declined in real terms, its share was just under 50%.

Similar effects show up in the employment picture. Marks notes that total payroll employment is up 993,000 since January of 1989 and 96,000 since the first quarter of 1991. But in the same periods, health-care employment jumped 1.2 million and 466,000, respectively. In other words, says Marks, "in recent years health care accounted for all of the nation's job growth and then some."

None of this, of course, implies that rising health-care outlays are more than a short-term tonic for the economy. Such spending enriches health-care providers and benefits users, but economists agree that the ultimate effect of this is to weaken growth and productivity. "Unchecked health-care spending," observes Marks, "consumes resources that could be utilized more productively elsewhere and imposes considerable costs on the economy and the American people."

A recent Congressional Budget Office report notes, for example, that business' rising health-care costs are ultimately passed on to workers through lower wages. Thus, one reason that real wages and salaries hardly rose over the past 20 years is that employers' contributions to health insurance absorbed more than half of employees' gains in compensation. Meanwhile, soaring outlays for medicare and medicaid are undermining efforts to reduce the federal deficit.

Unless the nation can control health-care spending, the cbo warns that its impact on national saving "will reduce investment and substantially cut future incomes--by almost 2.5% in 2002 and even more thereafter."

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