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Why Some Medical Spending Should Count as Investment


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December 15, 2005

Why Some Medical Spending Should Count as Investment

Michael Mandel

I get fried when economists don't play by their own rules. The government statistics consistently count medical spending as consumption--that is, not contributing to productivity or future growth.

But more and more, it's becoming clear that at least some medical spending--especially for the young--should be thought of as investment in the future.

A new paper from the National Bureau of Economic Research makes that very clear. From the Cradle to the Labor Market? The Effect of Birth Weight on Adult Outcomes makes several very important points:

*"An extra 10% of birth weight raises earnings by about 1%."

*" An increase in birth weight of 10 percent increases the probability of high school completion by a bit less than 1 percentage point "

*"10% more birth weight is about as valuable in the labor market as a quarter of a year of education."

Medical spending for the young should be counted as investment, not consumption.

12:50 PM

Health

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Are we continuing to get healthier though, or are our own habits defeating us? If childhood obesity and diabetes are epidemic, isn't much of this medical spending just applying the brakes to limit even faster declines?

Posted by: Lord at December 15, 2005 03:09 PM

I basically agree that medical spending on the young is an investment in the future. The story behind the story, however, is that democracies will always neglect this kind of investment. Children have no votes. Seniors and the status quo in general dominate how our society allocates resources. Think about it: federal funds flow to old people (the status quo), agricultural subsidies (the status quo) and companies with political savvy (the status quo). Imagine what would happen in, say, a technocracy, where public investment focused on the future...childrens' health, infrastructure, scientific research. It won't happen here, but it will be interesting to see what societies like China and Singapore (meritocracies) do with their public sector spending.

Posted by: logic at December 15, 2005 09:06 PM

Ideally health and education spending would be counted as investment. But it's not the no-brainer, gee whiz economists sure are stupid issue that you make it out to be.

The problem with education and healthcare spending is that we have no idea what works and what doesn't. In the case of private firms making capital investments, there is a great mechanism to make sure those investments work (on average) -- the competitive marketplace. Businesses that make bad investments will die, those that make good ivestments will thrive, and so we know that, on average, investments made by business really are investments.

When it comes to education and healthcare expenditures, the mechasnisms for making sure that additional spending is investment rather than consumption are not nearly as strong as a competitive marketplace. Since a large proportion of health care spending, and a huge proportion of education spending, is done by the government, switching from calling this spending "consumption" to calling it "investment" creates bad incentives for politicians -- they can throw more and more money at these problems without a good mechanism to make sure that money is being spent productively. That is, it's not like the government will go out of business and be replaced with a better government if they don't spend it productively.

There are some hopes of solutions to these problems. Experimental evaluations of government programs using random assignment are gaining traction as a way to distinguish effective programs from ineffective programs (see a variety of studies at www.mathematica-mpr.com). If we can build on this type of rigorous evaluation to create a transparent incorruptible way to determine what works and what doesn't, and if government can be required to take this information into account when spending money, then perhaps we can reclassify this spending as investment. But until that day (a day which I hope will come), I don't think it's a good idea.

Posted by: Blastdoor at December 16, 2005 07:00 AM

You will have a better chance gaining support for medicine as an investment from both politicians and business leaders, looking to shift health care off the corporations and into a one payer social net.

Like agricultural subsidies and food stamps, the social and political need of this growing demography (older citizens), means medicines increasing price as a percentage of the economy will gain more acceptance as an investment.

Politicians fulfilling the social contract is going to be the deciding factor not it economic definition.

Posted by: Mike Reardon at December 16, 2005 03:49 PM

Good comments. But here's the thing...it's a verifiable fact that it matters what you call something. It's easier to build political support for something which is called investment, not consumption.

Blastdoor, I would argue that the average dollar of investment of health care spending on the young has a higher social return than the average dollar of capital investment on, say, the newest electronics retailer.

Posted by: Mike Mandel at December 16, 2005 04:48 PM

Mike --

I agree that in principle a dollar spent on improving a child's health has a greater return than research into, say, a smaller iPod. However, the gap between "in principle" and actual policy can be large. The implication of changing health spending to investment from consumption is huge, if for no other reason than politicians could claim big chunks of medicaid spending shouldn't count against the deficit. And indeed, perhaps they shouldn't, provided that we have a mechanism to ensure that the spending works. But my concern is that as soon as this is reclassified, there will be a lot of additional spending that is labeled "healthcare" because it no longer counts against the deficit, without any evidence that this new spending really improves healthcare.

Look at it this way, if you reclassify healthcare expenditures as an investment without putting in place a mechanism to ensure those expenditures are effective, what is to stop Republicans from creating giant tax shelters for "medical expenditures for children"?

Bottom line-- I will agree with you, but only if you agree that such a reclassification requires the development of a rigorous, objective evaluation regime to ensure that government spends money on things that actually work. I think that if political liberals were to embrace the development of such a regime, they would really castrate the right-wing argument that government doesn't work and so shouldn't be funded.

Posted by: Blastdoor at December 16, 2005 05:41 PM

To get cost lower the health business is supposed to look for profit in competition with higher quality products and from increased productivity, investing in gaining that return is investment.

Business now wants to lose its commitment to health care and wants to shift a larger part of the cost of health care, back into the wages of employees, directly removing disposable income from these workers.

Shifting it with R&D into the investment column is not the poorest idea you can put out. Bush did have something like a 529 investment for catastrophic health care that did not happen. Calling it investment and adding tax incentives is all right by me.

I still stand on my above post. The massive effect health care will have in the greater economy, as a better reason to move it off businesses back and into a one payer system.

Posted by: Mike Reardon at December 17, 2005 06:57 PM

Your suggestion implies is that we should view the national 'stock of health' as a factor of production. Or at least: think or production factor Labor as something like 'healthy labor equivalents'. In that case an increase in the health of workers could be considered an investment. The price, however, would be that statistics on production factors and investment demand will be more difficult to interpret.

Moreover: what about disinvestments in health? Should we deduct money spent on fast food and cigarettes from the annual investment?

And what about car safety? Safety features on cars cost money, but safe (workers) lives and health. An investment? Is money spend on fertility clinics an investment? Is birth control disinvestment? Lower lead emissions will raise the average IQ. Does that mean that we should consider the emissions as an 'depreciation' on the potential stock of human capital?

That?? the problem with the concepts of consumption and investment: the grey area between the two is very large. Arbitrariness is unavoidable. And once you start relabelling part of consumption as de facto investment, you will end up with no consumption at all. Buying a candy bar is an investment in future consumption, as is unpacking it. Even chewing the chocolate is an investment, because it takes effort to release the tasty substances that tell your brain that it is enjoying itself.

Posted by: Mattew at December 20, 2005 06:53 AM

I find it novel that we're offered only two descriptives here: the opposite of investment has been labeled consumption. Expenditures on health care are neither, and, if the Government would stop hiring the Wall Street Crowd to define its statistical models (and thereby define what's important ... Orwell must be spinning!), we'd have at least one new term: quality-of-life staples. Are there fiscal benefits to making such expenditures? Yes, and by that reasoning, dollars spent on things like health care could be construed as yielding a return. However, yielding a return on that dollar is not the point of spending it in the first place!!! The point of spending that dollar is so that our citizens will come closer to meeting what might be deemed a 'minimum community standard' for quality of life - not so that some fat-cat on Wall Street can make a buck!

Nor is such spending representative of consumption. Why? Because you and I don't really have a choice as to whether we spend the money. Okay, I can CHOOSE not to buy my blood-pressure drug for nearly $2/pill, but isn't suicide illegal? Consumption is buying a BMW when a Chevy will get you to work; buying a thousand dollar suit, when one can be had for $300. It's buying a third car for an empty nest family; buying an extra DVD player because it's dirt cheap (thanks to some Asian DVD plantation), and not because the buyer even has an extra TV. We should strive to measure consumption as expenditures above the mean price; expenditures on things that we could easily live without (even if we'd rather not). At the very least, we should subtract quality-of-life staples out of our current consumption number.

Posted by: Larry B. in OP at December 20, 2005 09:38 AM

Mattew and Larry B.

You both make a very good point. Maybe it's appropriate to define a third category of quality of life staples. (I'm making a note to myself here for a future story). Thanks.

Posted by: Mike Mandel at December 20, 2005 10:44 AM

The American Association for Health Education serves health educators and other professionals who promote the health of all people. WBR LeoP

Posted by: Health Advisor at January 29, 2007 07:41 PM


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