Commentary: Health Care May Be Just What the Economy Ordered

History teaches that the sectors that manage to grow during a downturn are often the ones that drive the next expansion. The willingness of consumers and businesses to increase spending on information technology during the recession of 1990-91, for example, foreshadowed the tech boom of the 1990s.

This time around, information technology is tanking. But you might be surprised at what's taking its place. Health care is driving the lion's share of what growth there is in the current economy. It may do so during the eventual upturn as well. Adjusted for inflation, the health-care sector--which includes everything from cutting-edge biotech research and drug manufacturing to hospitals and nursing homes--has accounted for 30% of gross domestic product growth over the past year. By comparison, the housing sector--which many economists see as responsible for keeping the economy afloat--has generated only about 18% of GDP growth.

Equally significant, health care generated about 45% of all new jobs over the past year. In contrast, the entire housing sector--including construction workers, mortgage brokers, and employees at stores such as Home Depot--accounted for only about 25% to 30% of job growth. And it isn't simply a case of medical-care spending holding its own while everything else slows. Health-care job growth over the past year has accelerated to an annual rate of 2.4%, compared with 1% a year earlier. Meanwhile, job creation elsewhere in the economy has fallen to near-zero.

What's more, the high-tech "lab coat" sector of health care has been growing faster than the "bedpan" industries. Employment at drug companies has risen 4.5% over the past year, compared with only about 1% for lower-skilled nursing home and home health-care jobs.

It may seem odd that one sector of the economy can be so robust amid overall weakness. But it's the result of the same forces that are sending health-care insurance premiums soaring (page 46). For one, an aging U.S. population is demanding more care. At the same time, real disposable income per person is up 14% over the past five years and still rising, despite the slowdown. This gives Americans the ability and desire to pay for more health care. And two decades of heavy investment in biotech and medical research are finally bearing fruit in the form of new drugs and treatments.

Still, many skeptics argue that growth driven by health care is as much a drain on the economy as a boost because higher health-care costs serve as a sort of tax on consumers and business. Indeed, it's quite possible that a big chunk of health-care spending is wasted.

But remember that not so long ago, the economics profession mostly dismissed spending on computers as frivolous and not important for economic growth. It wasn't until the late 1990s that most economists conceded the positive impact of the computer revolution.

REAL IMPACT. Similarly, medical innovations may, in fact, be contributing more to economic output than the numbers show. Improvements in physical and mental capabilities--the result of, say, better asthma treatments or more effective drugs for depression--are important outputs of the economy, just like clock radios or the development of an ad campaign. Unfortunately, they are not currently directly measured as part of gross domestic product.

If health-care innovation turns out to be the leading edge of the economy during the next decade, it may be necessary to rethink what we mean by growth. It would not be the first time. Over the past 15 years, the official statistics have been systematically revamped to better capture the nature of the information economy. The statistics may need another overhaul to better track the impact of medical spending.

But even without such changes in the statistics, the shape of the next recovery is starting to appear. If the Information Revolution propelled the the first decade of the New Economy, its second decade may be marked by the Health-Care Revolution. And there's nothing wrong with that.

By Michael J. Mandel

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE