Evans On The Economy -- Rx: The Market

With real wages for workers weakening, the case for market decisions determining health care becomes stronger.

During the past century plus a couple of decades, there have been two prolonged periods when the average real wage of workers declined in spite of general economic prosperity. The first was the 1890s, which was followed by a raft of progressive legislation. The second was the 1920s, which was followed by the Great Depression. Now we are in the middle of the third such decade. What will be the outcome?

Obviously it won't be another move toward socialism. Various countries tried that over the past hundred years, and it didn't work. Neither will we have another Great Depression. The decline in the NASDAQ composite in inflation-adjusted terms from 2000 through 2002 was actually greater than the plunge in real terms in the Dow from 1929 through 1932. But the economy has recovered almost without a trace, so that episode is behind us.

It doesn't make any sense to predict a big increase in U.S. wage rates, because the drain of jobs overseas would just accelerate. China, India, Indonesia, and other developing economies will offer cheap labor for many decades to come. But workers -- and voters -- are going to take a much more vigorous stand about someone paying for their health care benefits and offering better guarantees about retirement income.

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What factors have driven real wages rates lower for production workers? Of course, nominal wage rates haven't risen very fast, but as long as inflation was close to zero that didn't matter much. One factor behind lower wage rates is the temporary surge in energy prices. But over the longer term workers are facing much higher health care costs, both because these costs continue to rise at double-digit rates and because many firms are paying a smaller proportion of the premiums.

The answer certainly isn't socialized medicine, by whatever term you prefer. For many years, Canada was abnormally proud of its health care system, under which everyone got all the health care needed without having to pay for it. Well, at least, that was the patriotic line. Maybe people thought the Tooth Fairy paid for it. In any case, Canada recently announced that the waits for a large variety of medical procedures had become so enormous that it was bowing to public pressure and permitting for-profit hospitals to let those who could afford to pay move to the head of the line. Another "noble" experiment bites the dust.

The obvious answer is to let market decisions determine who gets what care. To some, this sounds like a reconstruction of Attila the Hun saying "let the poor die sooner." But that's hardly the point. According to my estimates, about 40% of health care is wasted -- in the sense that paperwork costs are excessive, doctors and hospitals routinely "scam" Medicare and Medicaid, patients are either offered or demand excessive testing, and there is not an effective market mechanism to control the price of name-brand prescription drugs. Let working people have a medical-care allowance, and spend it on what they need, saving the rest. Healthy people will eventually have a nest egg they can use for retirement or pass on to their heirs; sick people won't, but they will receive adequate care, which is a lot better than most of them currently get in any case.

The system is broken, and simply cannot continue to grow indefinitely at its present pace. The political hurdles are enormous, but a complete restructuring of the current medical care system will be the major economic change of the next decade.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla. Also see: Economic Outlook and Financial Market Outlook: Mike Evans' new blogs on the economy and stock market.

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