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06 December 2012

Government Suppression of Productivity in the Health Industry

Consider the non-farm business productivity growth history according to the BLS:

In comparison, the 1 - 7 December 2012 issue of the Economist in an article called Fighting fit - Start-ups in health care, claims that the health care industry accounted for 18% of the American GDP in 2010 and for 20 years has had a negative labor productivity of -0.6%!  Why is this one huge sector of the American economy performing so miserably?  The answer is mostly or entirely because this industry is one of the most heavily regulated industries in America and because half of all medical bills are paid by government.

Let us have some fun with numbers.  The average labor productivity of the total non-farm private sector grew at an average rate of

[10(2.1%) + 7(2.5%) + 4(1.8%)]/21 = 2.2%

over the last 21 years.  In the last 20 years, 18% of this part of the economy a rate of -0.6% in labor productivity growth.  Without this single depression of our standard of living by government, the rest of the private sector labor productivity growth rate, r, over the last twenty years can be calculated from the equation:

2.2% = (0.82)r + (0.18)(-0.6%), so r = 2.8%.

The difference between an economy with a labor productivity rate growing at 2.2% compared to one growing at 2.8% is very significant over a generation.  It used to be that a generation was taken to be about 23 years, but that is no longer even close to the case.  A generation is equal to the average age of all mothers giving birth to children.  I have not found a good number for that in the U.S. as a whole.  The state of New Jersey says that the median age was 30.5 in 2004.  Median and average are not the same and NJ may not be entirely typical, but let us take the length of a generation to be 30 years for our purposes here.

During a generation of 30 years, the labor productivity at a growth rate of 2.2% a year has cummulatively become 1.92 times what it was at the start of that period.  But, with a labor productivity growth rate of 2.8% a year, the labor productivity is 2.29 times what it was at the end of the generation or more than 19% greater.  This also is a component causing health care costs to rise at much higher rates than do those of other sectors of our economy.

Yet the suppression of our standard of living of the last 20 years by the health industry due to government interference compared to what it could do if free is a small depression compared to what the game-changing ObamaCare or ObamaUncaringTax will do to the economy!  The story for the next 30 years will be quite miserable in terms of lost labor productivity and hence our standard of living.