There was an interesting editorial item in The Economist that unintentionally says a lot about the impact of government intervention on industry. In the last generation, the average number of working hours needed to purchase an automobile, clothing or other consumer goods has fallen by 50%. There are only three industries that completely defy this trend; healthcare, education and housing.
For hundreds of years, the Chinese have sarcastically referred to secure bureaucratic jobs as an “Iron Rice Bowl.” Whether you worked in the Emperor’s Palace or for the Communist Party, being a faceless worker in a large faceless organization may not have brought wealth, but it also meant you wouldn’t starve.
Why are Healthcare, education and housing exempt from long term trends? Since 1973, the purchasing power of the median wage has remained essentially flat after adjusting for inflation. During that time, the real cost of a higher education rose by over 500%. That comes as no surprise to anyone with a college-aged child. The top-tier state university that I attended in the 70’s cost about $3,000 a year for tuition, room and board. Today it is more like $40,000.
Inflation over the same time has raised the average cost of a dollar’s worth of goods to $5.32. A dollar’s worth of medical treatment, on the other hand, now costs $11.21. As a percentage of all goods and services in the nation (GDP) healthcare has risen from 7% to 16% of our economy in that time.
Housing has risen and fallen with the economy, and except for rental rates in major cities is currently considered to be at the high end of the affordable range (around 30% of household income). The US economy as a whole, however, is working through its 8th year of recovery from the subprime lending fiasco and subsequent collapse of real estate values.
The three Iron Rice Bowl industries of healthcare, education and housing are still competitive on a microeconomic scale. Businesses grow and fail. People make fortunes and lose jobs. From a macroeconomic perspective, however, these are industries that the government deems critical for social reasons. That government support has distorted market forces to the point where those three sectors no longer respond to normal supply and demand elasticity.
This is not just a phenomenon of the Obama administration. For forty years successive Federal Governments have embraced the cause of social engineering with tax revenues. The result is a generation of college students laboring under a trillion dollars of too-easy-to-incur debt. It is a health care market that is squeezing wages and business profits. It is a housing market that caused the biggest downturn since the Great Depression. All of these cripple, rather than support, a strong middle class.
During that time Americans have come to accept that government should play a major role in the financial support of the Iron Rice Bowl industries. Perhaps it is time we stepped back and considered the results.
For a pdf of this or any of my columns, please contact me at jdini@mpninc.com
We must never let our guard down.
While I completely concur with the article with respect to education and housing, healthcare is a different beast entirely. The United States has by far the least efficient healthcare system of any developed country because of a deficiency of government involvement, not an over-abundance of it.
By depending on a vastly greater level of market-based forces, instead of control, the U.S. has created a monster. This is because healthcare by definition does not work on market principles. When any individual’s health is at stake they do not care what it costs, they just want to be treated. That means the suppliers have total coercive control over the “market”.
Can anything realistically be called a market when it a) is difficult or impossible to even determine what a product costs before it is purchased; and b) there is not really choice about whether it should be purchased? Do you operate that way in any other aspect of your life?
U.S. healthcare has evolved to a level of insanity beyond what even a pure market system might produce. The stakeholders: people, providers, insurers, employers, state government and the federal government all have competing interests. The result is that if you are lucky in terms of employment, insurance, income and location, you might get absolutely world class healthcare. If not, you might get none at all. Meanwhile the entire system thrashes against itself creating unbelievable inefficiency and overhead, resulting in costs 3 to 4 times higher than necessary. Small example: our local hospital system has 12 executives making over a million a year.
ANY other business operating this way would have been bankrupt a very long time ago. Some things should not be market driven. I submit access to roads, clean water and healthcare for starters.
I would say, “Don’t get me started. . . .” but too late for that.
Well stated, David, although I don’t entirely agree. Correcting healthcare won’t come from further government intervention. The competing special interests you mentioned hold too much sway over Congress. They will never address the twisted incentives that drive the system, where unnecessary work (both direct care and regulatory) makes everyone more money.
To take the average working hours concept a step further: (1) the average working hours to purchase an automobile has decreased, yet vehicles haven’t remained static — they’re loaded with many more safety, comfort, and entertainment features today than ever before; (2) a student leaves school with about the same amount of basic knowledge today compared to say the ’70s or ’80s and pays considerably more.
Don’t forget (3) healthcare: The amount we SPEND on healthcare is up considerably, but the value we receive is up considerably too. I agree healthcare isn’t a normal marketplace, but 40 years ago we did not have the choice to have life saving and life improving MRIs, Cat scans, organ transplants and many prescription drugs. All of those innovations come with a cost.
As the slice of our income pie needed for basic needs shrinks, the rest of the pie necessarily grows. If not to healthcare, housing and education, then to where? Smaller homes with larger flat screen TV’s?
My issue is not with MRIs, medical technology, research or even prescription drugs (though that is also an outrageous “market”), or anything else that directly relates to delivering healthcare. I get riled up over the incredibly high overhead, inefficiency and waste. These are the direct result of competing interests and multiple layers of profit motivated entities exploiting a distorted system.
For example, billions of dollars are spent annually on prescription drug advertising. That is entirely a function of profit motive, not any objective to improve health. If everyone had access to preventive care on a regular basis, decisions about prescription drugs would be made by doctors and patients discussing someone’s health, not a TV or magazine ad.
Add to that the fact that a significant portion of the population has limited or no access to healthcare, and the overall situation is just plain dumb.
Dave,
You are on the mark, but it is such a huge and complicated system that no one really has any idea how to tackle it. Obamacare doesn’t, since it had to specifically exempt (at least for now) hospitals, physicians, attorneys, insurers and pharma from direct intervention in order to get through the lobbyist blockade. I went back and looked up two pieces I wrote a while ago on this. You may find them interesting.
http://www.awakeat2oclock.com/2012/10/health-care-costs-is-medicine-a-market.html/
http://www.awakeat2oclock.com/2009/06/socialized-medicine-or-capitalized.html/
The ACA is a grotesque, convoluted and inadequate response. It is the not surprising result of the grotesque, convoluted and corrupt political and economic environment surrounding healthcare.
That said, it is preferable to having done nothing. 1) It forced the concept of reform onto the table. 2) Millions more people do have coverage. Our son was refused coverage for a condition he had received no treatment for in many years, until the ACA.
The Algebraic equivalent is transitivity. (If a=b and b=c, then a=c). Money is power. Power corrupts. Pour a few trillion dollars into a system, and some level of corruption is inevitable. The more money there is, the more corruption results.
Sadly, your response is entirely correct.
Thanks for introducing me to the Iron Rice Bowl concept. You guys in the beltway and Washington DC area, it is time to listen up!
When will we bring back an objective money standard, i.e., gold or silver?