Economic Trends
Edited by Michael J. Mandel
Health Care's Economic Payoff
The costs of health care impose an enormous burden on the economy. The latest projections from the Centers for Medicare & Medicaid Services show that, over the next 10 years, annual health-care spending is expected to grow to $2.8 trillion, or 17% of gross domestic product, up from 14% today.
But surprisingly, few attempts have been made to measure the health benefits from this spending. In particular, gains in life expectancy do not show up at all in GDP or growth figures from the Bureau of Economic Analysis. Because there is no good information on the benefits, the policy debate tends to focus too much on costs.
A new paper by William D. Nordhaus, an economist at Yale University and a member of the Council of Economic Advisers under President Jimmy Carter, remedies that. Nordhaus defines a new concept that he calls "health income," the amount of consumption that an individual would be willing to give up to get increased longevity. That enables him to calculate the benefits from health-care spending.
Nordhaus finds that the positive economic impact of health spending has been enormous. By his calculations, "the value [to the economy] of improvements in life expectancy is about as large as the value of all other consumption goods and services put together." He estimates that, in the first half of the 20th century, when life expectancy at birth rose from 49 to 68 years, the value of improvements in health outstripped the value of increased consumption of goods and services. Life-expectancy gains have slowed in recent years, so the contribution is not quite so large. Nevertheless, from 1975 to 1995, life expectancy rose from 72.6 years to 75.8 years. By his calculations, the annual average increase in life expectancy was equivalent to increasing consumption by an extra 1.6% to 2.0% per year. That's not too far from the 2.0% annual increase in ordinary consumption over the same period.
The enormous increase in health income means that there is a bigger payoff from health-care spending than is commonly realized. By Nordhaus' estimates, the 1980s--the last decade for which he had full information--the increase in health income was approximately twice the growth in spending on health, making it an excellent investment. "It is an intriguing thought to contemplate that the social productivity of health-care spending might be many times that of other spending," writes Nordhaus. "If this is anywhere near the case, it would suggest that the image of a stupendously wasteful health-care system is far off the mark."
A Learning Gap Slows Growth
Poor countries are often criticized for having a big income gap between a small elite and the bulk of the population. But to boost economic growth, reducing disparities in education may be more important than narrowing the income gap. That's the finding of a new study by Amparo Castelló of Jaume I University in Castellón, Spain, and Rafael Doménech of the University of Valencia.
Using data from 108 countries for 1960-90, the authors found that a concentration of higher education within a small percentage of the population was associated with slower per capita income growth. By contrast, unequal income distribution did not seem to be strongly correlated with slow growth.
The regions with the most unequal distribution of education, the study reports, are South Asia and sub-Saharan Africa. The advanced countries have the least inequality of education, with East Asia not too far behind.
The authors do point out that there has been a general move toward less education inequality, even in the poor regions. Still, policymakers need to focus on bringing high school education to as many people as possible.
Still a Helluva Town
Commercial real estate in New York's financial district has been suffering since September 11. But at least for now, rents on Class A office space in Midtown Manhattan seem to be holding up better than in other big global cities. That's the conclusion of a March study of downtown office space in the world's top 50 markets published by New York real estate firm Cushman & Wakefield.
The study reports that the cost of occupying a square foot of office space, including rent and other expenses, in Midtown Manhattan was more or less flat in the fourth quarter of last year, in the aftermath of the terrorist attack (table). That's better than London, Paris, or Frankfurt, where costs fell by roughly 2.5% in the fourth quarter alone. Asian financial centers saw even sharper declines, with Tokyo and Hong Kong prices falling 16.1% and 13.6%, respectively.
In part, Midtown benefited from an outflow of tenants from Wall Street in the fourth quarter. But overall, the surprising buoyancy of New York also reflects the strength of the U.S. economy, compared with the rest of the world. The five most expensive markets, none of which are U.S. cities, "are all suffering some type of recession," says John B. Coppedge III, executive vice-president for international operations at Cushman & Wakefield. New York real estate also benefits from not being heavily dependent on the slumping tech sector. Boston, hit hard by the dot-com meltdown, saw its downtown rents drop by almost 10% in the fourth quarter, says Coppedge.
Of course, these short-term results say little about the long-term future of New York commercial real estate. Midtown's vacancy rate is creeping up, and recovery plans for the financial district are still up in the air. Ultimately, the ability of landlords to demand higher rents depends on the willingness of businesses to locate in New York--and there's no answer to that yet.
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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