Two Booms We Can’t Afford

03/13/2012 10:45 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The soaring cost of health care and education, spurred by government subsidies, is undermining the rest of the economy, writes MoneyShow.com senior editor Igor Greenwald.

Between 2000 and 2011, the number of jobs in America dipped 0.3%. The manufacturing labor force declined 32%. Construction shed 19% of its jobs. Big bad government boosted employment by all of 6%. Meanwhile, education and health services jobs saw a 32% surge.

These boom industries have been both a blessing and a curse.

A rich and aging country should value good health care, while excellent universities have contributed much to America’s technological and economic dominance, and remain the growth engines of our most promising regional economies.

But their costly success has come at the expense of the rest of the economy, which has been saddled with unaffordable health and education cost increases.

By one reputable estimate, health-care spending has outpaced GDP growth by 2.4 percentage points annually between 1970 and 2009. Meanwhile, the cost of tuition, room, and board at colleges and universities has risen more than twice as fast as inflation since 1976. Other figures suggest the run-up has been even steeper.

We’ve been losing these two wars for so long that, by now, small defeats can be marketed as relative triumphs. For instance, the Centers for Medicare and Medicaid Services recently hailed the news that nationwide health-care spending rose not quite 4% in both 2009 and 2010, on the heels of the steepest economic downturn in generations.

Meanwhile, a fresher if less comprehensive survey found the cost of employer-purchased health insurance rising 5.9% this year, including a 9.3% increase in the cost to employees.

It’s not hard to divine what health care and education have in common: in both fields, most of the revenue is not coming directly from consumers of the services. Plus, good health and education are valued so highly that demand for them is not terribly sensitive to price, especially when someone else is fronting the money.

The consequences of such relentless compounded inflation have become too glaring to ignore. National health-care spending is expected to grow nearly 6% annually through 2020, at which point it will consume a fifth of the GDP. By 2022, government spending on Medicare and Medicaid can be expected to double from current levels, according to the Congressional Budget Office.

Student debt has ballooned to $870 billion according to the Federal Reserve Bank of New York, and as many as 27% of the borrowers not in school are delinquent on their payments.

The notion that a bachelor’s degree protects its owner from the indignities of competition with low-cost Asians has been cruelly dispelled. With so much money invested in higher education and such disappointing returns, there’s the temptation to write off the entire field as a big waste of scarce resources.

Instead, we should fix the market distortions created by government subsidies. In education, it would mean gradually limiting federal aid to schools that held tuition increases to the general inflation rate over the long run. Government has also been right to insist that institutions benefiting from such aid improve their standards, a requirement that needn’t be limited to the for-profit schools.

In health care, the major distortion has been the tax subsidy for employee health benefits, which takes purchasing decisions out of the hands of health-care consumers. The Obama administration has compounded this longstanding error by getting into bed with private insurers.

This is a cost-plus industry not interested in rationing scarce resources. It will let employers do that by eliminating health benefits once annual hikes make them unaffordable, and then send government the bill once many of those people sign up for Medicaid as provided in the 2010 health reform.

It’s not a coincidence that the major escalation in health-care spending in recent decades has happened alongside a big decline in the share paid out of pocket. Until the government ensures that a household dollar not spent on health care is a dollar earned, until it forces health care providers to compete on price among other easily compared criteria, health care spending will continue to outpace the economy.

And as long as that remains the case, any budget-balancing exercise will remain unnecessarily difficult, verging on pointless.

Government spending on health care and education has been gamed by providers who hold most of the market power, to the detriment of the intended beneficiaries. Taxpayers and consumers deserve better.

Related Articles on MARKETS