Monday, September 18, 2006

The cost of living is going to health

Fruit and vegetables, health services, public transport, child care and even bread have been rising much more quickly than the overall rate of inflation.

During the past decade fruit prices are up 112 per cent, vegetables 70 per cent, health care 50 per cent, public transport 49 per cent and bread 48 per cent. Child care has risen an eye-popping 91 per cent since 1996.

In that time, however, the average increase for all 90 goods and services that make up the official inflation measure - the consumer price index or CPI - has been just 29.6 per cent.

A report, "Let them eat cake - How low-income earners are disavantaged by the consumer price index", claims the disparity in price changes between many essentials, like a loaf of bread, and many non-essentials, like plasma TVs, reveals shortcomings with the CPI.

The CPI is not an accurate guide to the cost of living and underestimates the impact of inflation on low-income families, including many retirees, it says.

"Families who spend relatively more than average on food have experienced a more rapid cost of living rise than suggested by the CPI while the cost of living for those families that spend heavily on new cars and electrical appliances has risen more slowly than indicated by the CPI," the report, commissioned by the Australian Greens, says.

The Greens' leader, Bob Brown, said the report highlighted the need for a new cost of living index to be developed to complement the CPI, which ignores the cost of interest rate payments and the land which houses are built on.

"The CPI has its uses, but the Bureau of Statistics is the first to concede that it is no longer a cost of living index. It is time that the Government funded the bureau to construct a proper cost of living index that includes the costs of mortgage interest, the cost of land, and focuses more on the costs of the essentials that low-income earners rely so heavily upon," he said.

The real CPI: cars cheap, food a luxury

And Barry Ritholtz points to a BusinessWeek story that summarizes, "Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None.":
For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Sure, housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs.

Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google (GOOG ) and Yahoo! (YHOO ), businesses at the core of the information economy -- software, semiconductors, telecom, and the whole gamut of Web companies -- have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.

Meanwhile, hospitaL administrators like Steven Altschuler, president of Children's Hospital of Philadelphia, are on a hiring spree. Altschuler has added the equivalent of 4,000 new full-time jobs since he took over six years ago, almost doubling the hospital's workforce. To put this in perspective, all the nonhealth-care businesses in the Philadelphia area combined added virtually no jobs over the same stretch.

Altschuler plans to add 3,000 more employees over the next five years as the hospital, one of the nation's leading pediatric centers, spends $1.7 billion to expand. Next up is a new 1.2 million-square-foot research facility that will be packed with well-paid scientists and support staff. "Health care is the major engine for the economy of the city of Philadelphia," says Altschuler.

The City of Brotherly Love is hardly alone. Across the country, state and local politicians, desperate for growth, are crafting their economic development strategies around biotech and health care. California will pour $3 billion into stem cell research over the next 10 years, and other areas are on the same path. "Our downtown business leaders and politicians have traditionally considered health care as a cost center, not as an economic engine," says Baiju R. Shah, a former McKinsey & Co. consultant who runs Cleveland's BioEnterprise, a nonprofit founded four years ago to stimulate the local health-care and bioscience industries. "But people are waking up."

What they're waking up to is the true underpinnings of the much vaunted American job machine. The U.S. unemployment rate is 4.7%, compared with 8.2% and 8.9%, respectively, in Germany and France. But the health-care systems of those two countries added very few jobs from 1997 to 2004, according to new data from the Organization for Economic Cooperation & Development, while U.S. hospitals and physician offices never stopped growing. Take away health-care hiring in the U.S., and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher.

Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing.

Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.

Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.

There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy. One solution would be to make health care less labor-intensive by investing a lot more in information technology. "Low productivity in health is mostly a product of low investment," says Harvard University economist Dale Jorgenson.

The biggest worry is that demand for health care will absorb too much of the workforce and squeeze out other types of jobs. If medical spending rises to 25% of gross domestic product by 2030, as many economists expect, health care's share of jobs could grow to 15% or 16% of the labor market from today's 12%, based on historical patterns.

Such a shift in employment would require health care to be the single biggest creator of jobs in the economy for the foreseeable future. And while the U.S. could in theory afford to spend 25% of GDP on health care, it's hard to imagine a world in which our children have to choose between working for the local hospital or the local health insurer.

But is this shift to health care employment boom just another phase of the economic digestion of the baby boomer generation?


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