Two Trillion Spent on Healthcare Each Year: A Sick Way to Prop Up an Ailing Economy

For the first four years after the dot-com bust in 2001, a weak economy in most sectors was masked by an explosion in real estate sales, rocketing home values and a surge of consumer spending as people taking advantage of super-low interest rates and easy credit grabbed chunks of equity out of their newly high-priced digs and went shopping.

In the summer of 2005, the New York Times reported that the real estate biz -- "everything from land surveyors to general contractors to loan officers" -- had added 700,000 jobs to the American economy during the previous four years, while the rest of the work force had lost 400,000 jobs over the same period. Technically the economy was in "recovery," when in fact most of it remained soft.

A few economists sounded a warning about having all our eggs in one economic basket. People like Yale's Robert Shiller and Dean Baker at the Center for Economic Policy and Research pointed out that home values weren't syncing up with the fundamentals of the market, and that we were headed for an "adjustment" -- either a real estate crash leading to a recession or, in the best case scenario, a "soft landing."

But while there were some voices of caution, other economists told us that everything was going gangbusters. This was the New Economy in action: American manufacturing may have been gutted during the previous few decades, but the service sector is where more "value" is added anyway -- where the big profits are -- and Americans would be just fine selling each other houses, insurance and the occasional cheeseburger until the Next Big Thing came along.

It was a hot debate, but something else was going on at the same time that got less attention: There was the emergence of what could be called the healthcare economy. As Michael Mandel wrote in Businessweek last September, "Without [the health sector], the nation's labor market would be in a deep coma." Between 2001 and 2006, 1.7 million new jobs were added in the healthcare sector. Meanwhile, the rest of the private sector added exactly zero new jobs (net) during that period.

(The conventional wisdom is that the economy needs to add about 150,000 jobs per month to keep up with the growth of the working-age population.)

If current trends continue, 30 percent to 40 percent of all new jobs created in the United States over the next 25 years will be in the healthcare business. Mandel argued that this trend is partly responsible for the United States' low overall unemployment rate. "Take away healthcare hiring in the U.S.," he wrote, "and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher."

One could argue that this is precisely how a vibrant economy should work. A dynamic industry takes off and compensates for weaknesses in other sectors. When it cools, another field will explode, perhaps one we can't even conceive of today.

What's more, healthcare jobs have increased at the same time as we've shed millions of relatively high-paying manufacturing jobs. Wages in the health sector vary widely, but the average is slightly higher than the average income in the private sector as a whole. Healthcare is labor-intensive, so a lot of the more than $2 trillion we'll spend this year in the Unites States will end up in healthcare workers' pockets. It's also an industry in which offshoring and outsourcing are uncommon; you might be able to schedule your colonoscopy with a guy at a call center in Mumbai, but ultimately your ass has to be in the same country as the personnel who do it.

So, is a healthcare economy a bad thing?

It is, and for three reasons in particular. The most obvious is that these jobs are coming at a cost that the United States can't continue to pay without facing severe consequences (especially as the baby boomers get into their Golden Years). According to government data (PDF), healthcare costs exploded between 2000 and 2005 -- increasing by a whopping 47 percent. Over a longer period, from 1995 to 2005, per capita healthcare spending increased by 77 percent. That's slowed a bit, but not by much; total costs are projected to reach $2.25 trillion dollars this year, up 14 percent just since 2005.