The Looting Scenario

Great
So the political class is going to direct our singularitarian gains into transfer payments instead of further wealth creation.
*sulk*

My take: advancements in medical technology will make medical care not only efficient, but also cheap. The world would be already there, if people spent more money on medicine and less on other, less important things …

Frankly, I think you’re simultaneous over and underestimating the computational revolution. There was and is little reason to believe that transistors will lead us to a sentient computer. However, they are very good at one thing – performing logical operations, precisely what a massive portion of the economy is based on. Heck, even the Human Genome Project would have been impossible without it.

Right now technology is creating a fair amount of chaos in the labor markets by eliminating the jobs that provided computation (almost all manufacturing jobs, a lot of other sectors). It will take time, but creative capable people will eventually sort themselves into creative positions with a requisite boost to the economy. People incapable of useful creativity will be in trouble though.

I had an interesting conversation with uncle over the weekend. He worked in computers from the 1950s to the ’90s and he spoke somewhat disparagingly of today’s computer industry because it focuses on databases, which the pioneers considered one of the lowest function for computers.
We may seem to live in a more technically advanced society today, but in many ways we may be falling behind.

Arnold,

My point is at least a portion of the dire projections seem to be based on absent minded straight-lining of variables.

To put it simply:

Suppose economic growth is 3%. Suppose health care costs are growing by 6% and today gov’t spends 40% of its budget on health.

Of course this is going to look like a fiscal crises. If costs grow faster than revenue *foreever* then you have a problem.

But as you point out, that can’t be. If health care costs grow 6% forever then eventually the economy is going to be almost all health care and its growth rate will be 6% which means gov’t revenue growth is 6% and you’ve reached a steady state from now till the end of time.

So the question is will going up to 100% or 150% debt to GDP in the meantime be a ‘fiscal crises’. Possibly but as your friend Mr. Krugman pointed out there are precedents where such levels of debt did not produce a problem. In the analysis I’d like to see a bit less straight lining and a bit more actual analysis. What % of GDP do they forecast health to be in 2080? Assuming its a large % and assuming they are using a high growth rate for health care how will that impact economic gowth projections of only 2-3% between now and 2080? If they are not adjusting for that then the ‘fiscal crises’ must be overstated. Whether its overstated enough for us not to worry I can’t say but this is an angle I’d like to see some people explore.

Will it be looting of young to old? Well the thing you seem to be neglecting is that the young will be old at some point. If its looting then its looting from those that die young to those that die excessively old.

Boonton,
As someone largely in line with Arnold’s thoughts and his pessimistic outlook, I think you’re missing the point: at some point, health care CAN’T go up 6% because there’s no more money to pay for it.

Your future costs example also misses the point, in my opinion: what concerns me as someone who will hit current social security age more than three decades from now is the outlook in 2020 or 2030 or 2040, where the retiree/worker ratio will almost certainly be less favorable than it is now and commitments to the aged and the non-working will be rather large. Borrowing isn’t likely to make ends meet, so it’s massive tax hikes and/or serious benefit cuts, and the power of the senior lobby makes me think a lot of (a) and maybe a little of (b).

I think Arnold is too optimistic. We need only look to Europe to see our future, but we are heading there faster and with more steam. As state spending increases as a % of gdp, investment will decline and we will become poorer. The math is simple. We must save enough to 1) replace worn out equipment, 2) replace waste by business errors and 3) create enough capital to supply a larger population. All state spending is consumption. All of it. If consumption is greater than investment, we can do nothing but become poorer.

The American people and the leadership will respond with growing threats against the evils of capitalism and greater taxes and regulation, which only increase the speed of the decline. Confidence in state control of the economy is at a fever pitch now.

The end for the Western world may look something like the end of the Roman Empire when people quietly abandoned cities and went out into the countryside to look for food.

How long did it take the Roman Empire to fall?

When it fell did the people involved think it had fallen?
Rome was sacked multiple times.
The Eastern Roman Empire considered itself Roman and lasted far longer.

My point is that the USA is not likely to colapse in one big bang. It will take hundreds of years and we won’t actually know that it is happening.

Where are we at in that progression?

boonton: “In the ‘steady state’ health care takes up almost all of the economy and its paid for by everyone’s income.”

In other words, you think we can have an economy that is all consumption and now investment. But if there is no investment, there is no income to spend on healthcare. You get Cuba when you lack investment and the economy is nothing but consumption.

roversaurus: ” It will take hundreds of years and we won’t actually know that it is happening.”

Mises has an interesting account of the collapse of the Roman Empire in his “Human Action.” It didn’t take centuries, either. It started with the state spending more than it could take in even with massive tax increases. So the emperor resorted to inflation by diluting the gold content of coins while keeping the face value the same. Prices rose thousands of percent in a short time. So the emperor responded with price controls, especially on food. Rather than lose money, farmers refused to sell food to the cities. Production plummeted. The cities emptied farely quickly as people left in search of food. The collapse of the economy made it easy for barbarians to conquer the Romans. Scholars spent the next thousand years trying to figure out what happened.

I think we’re at the beginning of the phase. Socialists have made it clear that they will never under any circumstances give up on socialism. With the aid of the media, they will always be able to blame greedy oil companies, car companies, bankers, speculators and on and on. Eventually, our debt will grow to the point that the state cannot borrow any more from anyone. Tax increases will kill economic growth and bring in less and less money with each increase. Eventually, inflation will be the only option left, followed by price controls.

In early 2008 when the latest crisis was unfolding, a writer in the WSJ advised people to buy 40 acres and a mule. He thought that the crisis would be so bad that we would need to feed ourselves, similar to what happened to the Western Roman Empire in its last days. I don’t think he was wrong, just premature.

The 1994 Republican strategy was to slow the growth of government to ever so slightly below the rate of GDP and they and Clinton basically achieved that until 2000 and the start of the Bush spending spree. If that could be done again, then the deficit is like the WW2 example and it can be paid for, with inflation and growth shrinking it over time.

However, the problem is that as healthcare grows as a percentage of the economy, and that spending increasingly comes from government, it becomes nearly impossible (politically) to have government spending growing less than GDP.

There’s also increased Social Security payments. In the 1990s, there was a rising SS surplus that the government could tap to balance its books (under their accounting methods). That is gone and SS has a shrinking surplus each year, which, since it is 100% spent in the present, means that the rest of government must be cut just to keep the deficit from expanding.

> I think we’re at the beginning of the phase. Socialists have made it clear that they will never under any circumstances give up on socialism.

Exactly! . . . This will be puzzled over by future generations. Why were so many people committed to the idea that confiscating the property of others was the key to prosperity? It’s logically implausible, empirically false, and immoral. What could be better than that!

Kurbla,

My take: advancements in medical technology will make medical care not only efficient, but also cheap. The world would be already there, if people spent more money on medicine and less on other, less important things …

My take is that it won’t get anything but more expensive, until the government busts up all the cartels etc that have been imposed on us. Imposing free market forces on medical care would be the right thing to do, and I’d bet lots of money that it would start driving costs down in real terms.

ObamaCare is the final proof that our ruling class has no intentions of doing the right thing. Which is why I think Arnold is unfortunately right on in his dire predictions.

Arthur_500,

Computers require training and even today we do not utilize spreadsheets and word processing to the capabilities they offer.

True. But a very strong case could be made that this is in large part due to the way certain dominant software companies prefer to do business — combined with the fact that people in general seem dumb enough to keep buying said same software.

Certain software companies, which seem to be industry trend setters, have a) stirred up menus and user interface commands unnecessarily with each new release over the years, and b) made the information you need in order to do these more “advanced” tasks you’re describing, ever harder to get a hold of.

So you invested the effort and learned how to do advanced things in a spreadsheet five years ago. Today that knowledge isn’t going to do you much good. You have to go relearn because the software commands have all been scrambled up.

I am 100% certain this is not necessary. I could name software I’ve personally used for over a decade where they didn’t scramble it all up, and yet they’ve added similar increases in functionality and power over this same time frame. But 95% of what I learned a decade ago, still works the same way today.

Software suppliers need to figure out that software is a tool — and We the Users have no interest in having to relearn how a F***ing hammer works every three years.

Then there’s the issue of proprietary file formats, which are designed to slow you down and (theoretically) protect the software vendor.

If the government was going to get “involved”, I’ve love to see them impose uniform file format requirements for word processing, spreadsheets, CAD, etc etc etc. Impose these requirements on the performance of government contracts (big chunck of the overall market) and I’ll bet, a lot of the crap that’s slowing us all down, would melt away. Then software companies would have to compete on the basis of providing a better user interface, better solutions to basic security problems (which certain dominant software companies have contributed greatly to), better stability, etc etc etc, i.e. all the things that the end user actually cares about.

….Because all that technology offers takes time and money. We have a declining population of educated people.

This would seem to be at odds with Arnold’s recent threads on (what my grandfather would have called) our growing educated idiot class. They may be idiots in a general sense, but all these humanities majors at least know something about how to run a word processor and a spreadsheet.

Our educated people are retiring and dying. The population coming behind it is smaller and less educated.

Smaller, perhaps yes. But I lead teams of R&D scientists and engineers, and I’ll tell you first hand: the kids coming into our corporate ranks today are way better with computers than the old timers that are retiring. There may be fewer young people, but I don’t think saying “they’re not as well educated as their parents and grand parents” is even close to the truth. If anything, they’re better educated today.

When I have a project with big computer needs, I make sure that a goodly sized fraction of my team consists of “kids” who aren’t too many years out of college.

Then I make them teach me how they do what they do with computers. 🙂

But you’re right, the advances that I’ve seen computers bringing about in recent times (right up to today) do require a lot of education. btw, the advances I’m talking about are way beyond the realm of word processors and spreadsheets. Keeping people trained so that we can use the technology is an ongoing cost.

I agree, getting all that a new technology has to offer, costs a lot of money. Computers are a perfect case in point.

Boonton: “Err no, an economy that’s 100% health care would have investment, investment in health care….”

Health care is not investment; it is consumption.

Suppose markets think Arnold Kling is right. How would we know? What indicator(s) should I be looking for?

Jeremy, Alabama says “now smart people will be invested in legalized stealing….” How can I invest in this legalized stealing?

Jim
“And the problem of 2030 *isn’t* rising medical costs. It overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits.”

Notice how Medicare has to get lumped in there to illustrate the problem *isn’t* medical costs…..

Boonton,

I am sure you are capable of reading the word you omit there, “rising”, and of understanding the arithmetic that goes into:

“And the problem of 2030 *isn’t* rising medical costs. It overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits”.

That is, the expense to the government of the surging number of Boomers who will newly have 100% of their medical costs paid for by the government circa 2030 (plus Social Security, of course) dwarfs the expense of the incremental rise in medical costs per person projected by 2030.

And that’s what CBO says will cause the 50% income tax increase by 2030 (or alternatively, the junk bond status for Treasuries then).

Yet somehow, bizarrely, you read and present …

“the problem of 2030 …overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits”

… as a claim that “the problem *isn’t* medical costs” — as opposed to the rising medical costs which you’ve been going on and on about.

Hello?? Didn’t have your morning coffee before posting that?

Or are you just feel particularly disingenuous today?

“And the problem of 2030 *isn’t* rising medical costs. It overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits”.

Social Security is well defined as a solid number. $1,000 per month means $12,000 per year. Computing life expancy is a well developed science and barring some sudden development its a very known variable.

There is no ‘Medicare benefit’ in this sense. You don’t get $12,000 a year in medical care. You get the care you need. That might be a single $100 doctors visit for a cold or it may be $12,000 a day in the most advanced life support facilities imaginable. To know how much the gov’t or anyone must set aside for Jim’s medical care in 2040 one needs to know what he will need (single doc visit or the works) and what that will cost.

Boonton: “Accounting wise health care spending includes the investments made to maintain and expand capacity just like your spending on Netflix covers Netflix’s investments in servers, database mining, R&D, etc.”

OK, some healtcare spending is investment, but most is consumption. And if healthcare is 100% of gdp, where will the food, cars, clothing etc. come from?

Boonton, you’re really off your game today:

Jim,…
As a % of GDP it clearly has Social Security alone going from 4.3% in 2007 to 6.1% in 2030. An increase yes but in 2050 Social Security remains at 6.1%. In other words Social Security is stable.

Medicare it projects going from 2.7% to 5.9% in 2030 to 9.4% in 2050. Clearly your attempt to paint an alarmist picture for Social Security is accomplished by combining a stable forecast for it with an unstable forecast for Medicare.

Um, MY alarmist picture is for 2030 — so 2050 is irrelevant. How many times need I requote myself?:

“the problem of 2030 *isn’t* rising medical costs. It overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits”.

It is 2030 when CBO says income taxes must go up by 50%, else we’ll see T-bonds become junk, with current spening projections.

And to quote myself again, because of the program changes to SS and Medicare that *must* occur in that 2030 to resolve that fiscal crisis: “Projections beyond that are meaningless”.

Which means I’m not projecting anything at all to 2050, eh?

Your 50% income tax increase is likewise suspect

That’s CBO’s number, not mine. Complain to it.

payroll taxes are left out of this even though they raise nearly as much revenue as the income tax … By restricting the hypothetical tax increase to just one type of tax you are presenting a distorted picture of its impact

Well, quoting myself again: “(Of the 2030 income tax increase, about 30% is for operation of the Social Security trust fund)”

You do understand the Trust Fund is going to be serviced with income taxes. That’s why income taxes rise so much more than payroll taxes, as per CBO.

Of this increase in projected spending which amounts to 10.2% of GDP only 1.8% is due to Social Security. Yet you would have us buy that health care is not the source of the troublesome forecast!

????? You are becoming incoherent. When did I ever ask anyone to “buy” any such thing? ~~Sigh~~ what I wrote, yet again:

“the problem of 2030 *isn’t* rising medical costs. It overwhelmingly is the surging number of retirees with unfunded SS and Medicare benefits … (Of the 2030 income tax increase, about 30% is for operation of the Social Security trust fund)”

Get it? 2030 … 50% income tax increase due to unfunded SS and Medicare benefits … 30% of the income tax increase for Social Security, which means 70% for Medicare, right?

And 2050 has nothing to do with it.

Please, read what you are responding to.

fundamentalist

OK, some healtcare spending is investment, but most is consumption. And if healthcare is 100% of gdp, where will the food, cars, clothing etc. come from?

Work with my GDP(nh) and GDP(h). What is GDP(h)? It’s the regular GDP formula, C+I+G+Ex-Im. All I did was split regular GDP into health related spend by all of those variables and non-health related spend. Netflix would be in GDP(nh). A hospital buying a new MRI machine would be I in GDP(h). You filling a prescription at Wal-Mart would be C in GDP(h), if you happen to buy a bag of chips it would be in C of GDP(nh).

Jim

Um, MY alarmist picture is for 2030 — so 2050 is irrelevant. How many times need I requote myself?:

Using the source you cited there is no way you can say Social Security is the problem and not health unless you are purposefully putting blinders on. Declaring 2050 ‘irrelevant’ simply because you happen to want to talk about 2030 is an example of this. OK talk about 2030. We are still talking about Social Security increasing its spend by 1.8% of GDP. Medicare goes from 2.7% to 5.9%, that’s 3.2% of GDP for Medicare’s increase!

It is 2030 when CBO says income taxes must go up by 50%, else we’ll see T-bonds become junk, with current spening projections.

Not only did the CBO not say that neither did your source.

And to quote myself again, because of the program changes to SS and Medicare that *must* occur in that 2030 to resolve that fiscal crisis: “Projections beyond that are meaningless”.

Your own source caps Social Security at an increase of 1.8% of GDP that is stable from 2030 and beyond through 2050. Why the ‘AND’ in that above sentence? Your insistence on coupling Social Security and Medicare makes little sense.

The programs are alike in that they are funded by payroll taxes, make benefits available to the elderly. They are different in that Medicare’s forecasts are essentially guesses about the cost and demand for health care into the future. Social Security forecasts simply require good demographic estimates.

You do understand the Trust Fund is going to be serviced with income taxes. That’s why income taxes rise so much more than payroll taxes, as per CBO.

So let’s stick with one view of Social Security. If you believe the fund is real and it must be serviced with income taxes (as opposed to payroll taxes or any other type of tax) then you’re dealing with 1.8% of GDP, with income tax receipts at around 11% you’re talking about a 20% increase, not 50%.

If you’re going to assert the trust fund is not real then social security becomes just another budget item whose spend is expected to go up by 1.8% of GDP, like any other type of spend its unclear why that couldn’t be serviced by a combination of all taxes and even borrowing!

Jim,

So you *assume* future GDP growth, with a sector of GDP growing at 6%, and then rather unsurpisingly find future GDP growth, with the GDP growth rate accelerating to approach 6%, as that special sector grows past all the rest. Ahem.

My key argument here is that you can’t assume rapid health care growth and tepid economic growth forever. I agree what will actually happen is anyone’s guess. Someone straight lining from current trends in, say, 1955-1965 might project our economy would be dominated by automobiles, kitchen appliances and TV’s 50 years hence.

But if health care does not grow at 6%, if it suddenly slows down that will impact medicare spend. I believe there are reports this is already happening with pharmaceuticals as blockbuster drugs are coming off patent faster than new drugs are being introduced to the market. IMO that’s not great news. If some super pill was discovered that cost us $5K per year but gave us 100% immunity to all forms of cancer, diabetes and heart disease it would be well worth it despite the fact that Medicare D spending would shoot through the roof. But if such a pill isn’t discovered administring the drug plan becomes easier as more and more pills go generic.

The problem is, growth of spending on an item is not growth of GDP. And the question is, “How will future growth of government spending on health care affect future growth of GDP?”. So your assuming assumes what is to be deduced, the conclusion. 🙁

Well actually it is. GDP is a measure of income and spending premised on the fact that every dollar someone or something spends is a dollar someone or something has earned. That’s why there are two ways to compute GDP, one by adding up spending and the other by adding up incomes and both should, in theory, reach the same number.

This is not a Keynesian multiplier type argument that by spending more on health care the gov’t is going to cause more doctors and nurses to get hired and have higher incomes which results in higher taxes etc. This is an observation that health is generating more opportunities to grow incomes than other areas in the economy right now. That is the other side of the coin with the fact that spending on health is growing faster than other types of spending in the economy. This is a correlation, not causation.

Now here’s the thing. With health care spending the gov’t currently pays about 50% if I recall some ‘rule of thumb’ statistics correctly. In the overall economy gov’t spending is about 20% of GDP. If health care continues to dominate more and more of the economy then the gov’ts budget is going to feel more and more pressure to rise EVEN IF there’s no particular ideological change in favor of greater gov’t spending.

You can argue that health spending/income is growing due to gov’t spending but I don’t actually think that’s the primary driver. I think the primary driver is that in terms of creating value the health sector has produced more innovations than other sectors like TV’s, autos, appliances etc. Sorry, HDTV is cool but targetted cancer drugs are cooler IMO and to date the market seems to agree as income earned by pharma companies, oncologists etc. seems greater than HDTV developers.

Let’s imagine that suddenly health runs into a brick wall and its innovation rate drops dramatically but TV’s suddenly start innovating faster. Of all the money spent on TV, I’m sure much less than 20% is coming from the gov’t. If TV’s started growing faster than the economy then they will dominate more and more of the GDP and, all else being equal gov’t spending as a % of GDP will trend downwards.

This isn’t really anything all that radical here. When you see a number like 2% as the growth rate of the economy that is only an average. Some pieces are growing slower, some faster. If the faster items keep growing faster they will take up more and more of the economy thereby driving up its growth rate. If your forecast, though, assumes constant growth of 2% then that is impossible. If some sector grows faster for a while then it must turn around and grow slower for a while and likewise for the slower growing sectors otherwise your rate will not hold at a constant 2% (or whatever you’re using).

“So far the Singularity, as the event that is supposed to save us all, is by all evidence approaching at the same rate as The Rapture.

I’d say that belief in it is qualitatively comparable.”

Ray Kurzweil addresses this in his writings. He points out that if the number of Internet connections doubles every year, it’s completely unnoticeable when the number of Internet connections goes from 2 to 4 or 1000 to 2000. It’s only when the number doubles from 100 million to 200 million that people say, “Wow, the Internet is a big thing!”

If my analysis is even approximately correct…that the number of human brain equivalents (HBEs) added in the year 2010 is only 100,000, it’s not surprising that nobody can tell, since 75 MILLION real human brains will be added in 2010.

But if my analysis is even approximately correct that by 2033 more than 1 TRILLION HBEs will be added every year, it’s going to be impossible for that not to have a dramatic effect on…everything (definitely including economic growth).

When you see a number like 2% as the growth rate of the economy that is only an average. Some pieces are growing slower, some faster. If the faster items keep growing faster they will take up more and more of the economy thereby driving up its growth rate.

“thereby driving up its growth rate”?? Hello?

Boonton, You continually confuse growth of consumption of one item in the economy with growth of GDP overall. This is just not so.

As the CBO analysis states, growth of consumption of an item at an above average rate can reduce GDP by depriving the economy on the whole of investment needed to maintain itself.

“…by absorbing funds from the nation’s pool of savings and reducing investment in the domestic capital stock and in foreign assets. As capital investment dwindled, the growth of workers’ productivity and of real (inflation-adjusted) wages would gradually slow and begin to stagnate…”

Right? Because growth of GDP comes not from growth of consumption but growth of production. If production doesn’t grow, then the more you consume of thing A, the less you can consume of things B-Z. Because you can’t consume more than you produce.

Moreover, if growth of consumption of that one thing is so great that to finance it you have to stop investing in production of everything else, and then liquidate the productive assets you have, you crash the entire economy. Which is exactly what CBO project in the quote above for the 2050s as the result of the deficit financing of health care, as per the link.

And note well: Productivity growth in the health care sector is below the average for the entire economy.

“The problem is, growth of spending on an item is not growth of GDP…”

Well actually it is. GDP is a measure of income and spending …

You seem to be committing the fallacy of mistaking an identity for a model (as the Moslerites do all the time, but I digress…)

The GDP of a closed economy = Govt spending + Consumption + Investment, by definition. So since GDP = G + C + I, if we increase G then GDP must increase. By definition! Right?

Wrong. Because a model of the economy shows that increasing G faster than productivity requires taxes/borrowing to rise, which reduces C + I. And increasing GDP arbitrarily faster than productivity indefinitely causes taxes/debt to explode up at an accelerating rate, crashing C + I and destroying the economy. Just as CBO described.

The identity will still apply, of course. GDP will still equal G + C + I, except at a level a lot closer to zero.

It’s the same if C increases faster than productivity — consumption of an item growing at a rate faster than productivity must come out of consumption of other items, which offsets the purported growth, and beyond that out of savings, which reduces I, reducing GDP. Without investment, future production collapses.

by spending more on health care the gov’t is going to cause more doctors and nurses to get hired and have higher incomes

Sure. But to the extent this high health consumption growth rate exceeds the low productivity growth rate of all those health care workers, it must come at the cost of reductions of other consumption and investment. If productivity grows 2% per capita, and health spending increases 6% per capita, then two-thirds of health spending growth must be financed by cuts in non-health C + in I. That’s arithmetic. (And govt financing of it via taxes-debt imposes further GDP-reducing deadweight cost.)

It’s called Gross Domestic *Product*, and it can’t exceed domestic *production* no matter how much of it is consumed on whatever. So GDP growth is determined by productivity growth, not consumption growth. Spending that merely bids away workers and resources from other industries into the health industry does not increase productivity. (And if such spending is driven by inefficient subsidies, politics, etc., such “bidding away” could reduce productivity outright, right there, before getting to higher taxes and debt and lower I).

If your forecast, though, assumes constant growth of 2% then that is impossible.

Well, for 150 years productivity growth has been remarkably steady on average at 3% per year: 1% growth in work force + 2% growth in the value of the output of labor, due to advancing tech, etc.

Going forward though, with the retirement of the Boomer generation, labor force growth pretty much stops. So the mainstream projection is 2% GDP growth from 2020 on. For a lot more detail on this, “Can economic growth head off the entitlement funding crisis?”.

If in a world of 2% GDP growth (and health care productivity growth lower than thatg) health care cost really grows 6% annually, ouch, see above.

If you have any serious suggestions for increasing GDP productivity growth to well above the 100+ year average, apart from waiting for the Rapture or Singularity, the prize-givers in Sweden await.

I mean, if you can do it just in the health care sector alone, that will be fine.

“Boonton, You continually confuse growth of consumption of one item in the economy with growth of GDP overall. This is just not so.”

This is not debatable, its accounting definitions.

My word. You really *are* arguing economics by accounting identities!

But Boonton: Accounting isn’t economics, and identities aren’t models of how anything works.

Every dollar spent is a dollar of income. If spending happens on health (whether by G(overnment), C(onsumption) or I(nvestment)) it is also income. Either way its GDP. If health spending grows at 6% then income from health grows at 6% and the health portion of GDP grows at 6%. Period.

This is a bit frustrating since I thought the equation I provided:

GDP = GDP (health) + GDP (everything else)

Illustrated the micro foundations of a macro variable like GDP.

You’re serious? Hey, accounting identities don’t provide a “micro foundation” for *anything*.

The simplest consideration of economic micro foundations tells that consumption is limited by production (what isn’t produced can’t be consumed) … thus increase in consumption over time is limited by growth rate of productivity … while level of production is dependent upon investment in earlier time periods … and the same dollar cannot be both consumed and invested.

I presume you agree with these statements. If you don’t please specify.

How many of these economic facts are captured in your little accounting identity there? None — so let’s try to improve it:

“GDP = GDP (health) + GDP (everything else)” becomes…

GDP = G + C(health) + C(non-health) + I

Now let’s say:

A) Overall productivity growth rate is the real life long term 2%.

B) Health sector productivity growth rate also is the real life *less than average* — say “Baumol’s cost disease” (there’s micro foundation for you!) — at about 1%.

http://prescriptions.blogs.nytimes.com/2010/01/17/an-economist-who-sees-no-way-to-slow-rising-costs/

Note that we aren’t assuming anything, these are the approximate *real numbers*.

Also, it’s after 2020 so the working population isn’t growing, so productivity growth is all the production growth you get.

Any disagreement so far?

Now as we go from Year 1 to Year 2 GDP grows 2% — and health spending grows your 6%.

BUT productivity in the health care sector grows only 1%. Thus, of the 6% increase in resources consumed on health care only 1% is “self financed” by the health care sector … so 5% of the 6% must be taken from other sectors of GDP. That’s simple arithmetic. Any disagreement?

Holding G even, that means the GDP components C(non-health) and I *must* be reduced by an amount equal to 5% of the growth in the health care sector. QED.

Obviously, to the extent C(non-health) and I are reduced to offset increase in C(health) there is no increase in GDP — and micro foundations tell us that to the extent the 6% growth of C(health) is financed by reducing I, *future* production must be *reduced*.

Really, adjust your spreadsheet to show …

(1) *ever more* of GDP being pushed into a sector that has *below average* productivity growth, like health care, and you will see total productivity growth rate, and thus GDP growth rate, *decline* over time. Right?

(2) the ever-growing expenditures in that sector are in part financed by steadily reducing I. That forces a future decline in productivity and GDP growth. Right?

Add the effects of (1) and (2) together, running for an indefinite period of time, and GDP growth will slow then eventually plunge negative. Right? Excel it and see.

if an industry maintains steady growth at a more rapid pace than the entire economy-wide average that industry will become larger and larger relative to the slower growing ones and the average will start to rise to approach that industry’s growth rate.

Um, no. You forgot the key word. I’ll fix it for you:

“if an industry maintains steady PRODUCTIVITY growth at a more rapid pace than the entire economy-wide average”, then the statement is true.

But if an industry maintains only steady *consumption* growth at faster rate than the rest of the economy, with below-average productivity growth, then you get the unhappy results of (1) and (2) above combined. Excel it and see.

You know the big difference between consumption growth and productivity growth in a sector of the economy, I’d presume — but you are not showing any sign of it.

“you can’t consume more than you produce.”

Consumption (broadly speaking) = Production in the long term. There is nothing you are getting paid $1 to produce that someone else isn’t paying $1 to consume in some fashion. If health consumption grows 6% then health incomes grow 6%.

Consumption is used as a measure of production in calculating GDP. I use a foot-long ruler to measure my shoe. But increasing consumption by an arbitrarily large amount doesn’t increase production beyond the limit of productivity increases any more than my using a yardstick to measure by my shoe makes it the size of Krusty the Clown’s.

Causation: Productivity gains can increase consumption by any matching amount. Consumption cannot increase beyond the limits of productivity. If consumption in one sector grows more than productivity in it, the difference must be taken from other sectors.

“if growth of consumption of that one thing is so great that to finance it you have to stop investing in production of everything else, and then liquidate the productive assets you have, you crash the entire economy. Which is exactly what CBO projects”

Actually this isn’t true. Investment follows income. In my simple Excel model investment flows more towards hospitals buying MRI machines than, say, investment in fixed auto plant capital

Ah, you agree the investment goes into health care FROM other sectors of the economy — zero gain in GDP via I there! And as the shift of I is into a sector of the economy with *below-average* productivity growth, we’re seeing (1) above.

As to your spreadsheet, GDP = G + C(health) + C(non-health) + I.

Year 2: GDP x 1.02 = G x 1.02 + C(health) x 1.06 + C(non-health) x Y, + I x Z.

How does your spreadsheet allocate the necessary decline between C(non-health) and I, to determine Y and Z? How much does the decline in I reduce GDP in future years?

If more is spent on MRI machines then an hour of MRI machine time will yield more income to its owner hence will be more productive.

No, no, no! That’s the exact *opposite* of more productive, the definition of UNproductive.

Productivity is measured by benefit to the consumer — the *reverse* of boosting profits to the profiteers, er, providers.

If the cost of using an MRI machine per hour is bid up the consumer gets LESS and productivity FALLS.

Compare that to zooming productivity in agriculture: price and profit per bushel of wheat has *plunged* … in semiconductors, price and profit per K of memory *halves* every 18 months.

That is increasing productivity, supply increasing so that by supply-and-demand price and profit *falls* for any unit of product/service.

OTOH, demand bidding up price (and profit son) each hour of MRI use, of nurses’ or therapists’ wages, etc, gives consumers *less* and *reduces* productivity. Less is produced per unit of cost! That simple.

Hey, if you think a thing “yielding more income to its owner” makes it more productive, then you must believe an empty lot in Manhattan is *hugely* productive, for the income it yields its owner. Although this is called “rent”, and is rent collection generally considered the *opposite* of productivity.

Highly-productive industries charge *low and falling* wages and rents on equipment, per unit of production, and provide low profits per unit. Say “agriculture, semiconductors”.

Low-productivity industries charge high and rising wages and rents per unit provided to consumers. Say “health care”.

Consumption increases must drive productivity increases otherwise the consumption increase would not happen.

Unless supported by reducing savings/investment and drawing resources from other sectors of the economy, with all attendant economic costs. ;-(

Look, it’s a great dream that “Consumption increases must drive productivity increases”, think of the heaven we’d be in! Everybody could just decide to consume more and more, and productivity would increase and increase, and we’d all get richer without end!

But in real life, if people decide to consume more and more and…

1) The govt facilitates it by increasing the money supply, the result is just inflation as people bid up the prices of things that can’t be produced beyond the productive limit.

2) The govt doesn’t, we get bankruptcies as people consume beyond their income and savings into debt.

Productivity growth limits consumption increases. Period.

Assume low growth and you’re going to have to assume lower health spending, assume high health spending and you’re going to assume high growth.

Assume nothing. The *facts* are historical long-term per-capita productivity growth about 2% … productivity growth in health care *less* than that … and rapid growth of consumption of health services *above* that rate.

As I said before, if you have the magic formula for dramatically increasing these productivity growth rates, the prize-givers in Sweden await you.

But they ain’t going to give you any prize for saying “Increasing consumption must increase productivity”.

BUT productivity in the health care sector grows only 1%. Thus, of the 6% increase in resources consumed on health care only 1% is “self financed” by the health care sector … so 5% of the 6% must be taken from other sectors of GDP. That’s simple arithmetic. Any disagreement?

What you are describing is a model where economic growth is capped at 2% (based on, say, averaging the last decade or two of growth). In that model 6% growth in health must be offset by lower growth, even negative growth elsewhere to preserve the overall rate of 2%. But as health care takes up more and more of the GDP, there are fewer and fewer places to go negative to offset the 6% and bring it down to 2% overall. Health will cease growing at 6% which means long term cost projections for health spending will fall short.

I suspect your argument that health care is ‘low productivity’ is wrong because it substitutes an easy to measure ‘output’ for the true output. Compare a doctor’s visit with a visit to a prostitute.

A half hour or hour with a high end prostitute is about what it was back in 1950. Such a prostitute doesn’t do anything today that she didn’t do in 1950 and she sees probably about as many clients in a day or week or year or whatnot. That’s low productivity.

A doctor’s consultation has grown a bit in quantity since the old days. Maybe you got 15 minutes with him back then, now its like 5 minutes with his assistants and nurses gathering information about you before hand. Nonetheless, in terms of how many people a doctor can treat in a day he looks quite a bit like the prostitute. There’s only so many hours in the day and while cutting visits from 15 min. to 10 min or even 5 min might yield more output per hour that only goes so far.

But by this standard a lot of things are ‘low productivity’. A TV can show 24 hours of programming in a day. Back in 1950 it again could only show 24 hours of programming a day. That would be 0 productivity growth! But clearly that’s false, today’s TV is a lot nicer to watch than the best 1950 model! The doctor today is bringing more knowledge, more technique to your list of symptoms and test results than 1950.

“if an industry maintains steady PRODUCTIVITY growth at a more rapid pace than the entire economy-wide average”, then the statement is true.

If health care is not growing at 6% per year then there’s no point in spending 6% per year more for it! It would be quite easy to ‘cut benefits’ in the sense of reducing payments for them without actually cutting the quality of life for the beneficiaries. I think there’s potential here but I also suspect health care has grown because its true productivity is more than the economy as a whole.

Mark Bahner

So suppose you wanted to utilize your laptop more so that it would be more like the university mainframe of the 1970’s, what would you do? You might sign it up to do some cloud computing, saying churning data for SETI or some similar product. What else? Maybe if you have MS-Office on it you could ‘rent’ it out to an outfit in India…..perhaps using remote terminals financial analysts in India could use your computer to work on complex spreadsheets….

But I think your quest to keep your laptop doing useful work 24 hours a day would produce….well a lot of low yield projects. If we produced a trillion HBE’s what would they do? Write novels? Compute trillions of digits of pi?

Your robot idea is not the singularity. A robot is a machine that wears out the more you use it. But you aren’t talking about physical labor but mental labor. Well guess what, I have a human brain equivalent! If I showed up at your house tomorrow what HBE tasks would you give me to do? Balance your checkbook? Alphabetize your wife’s recipe collection? And when that’s all done you know I’d probably end up sitting on your sofa with you killing time watching TV.

When the singularity hits are we just going to have a lot of AI’s sitting on the net amusing themselves with killing time?

A trillion HBEs would do whatever they wanted. That’s essentially what the Singularity means, in my opinion. It’s simply not possible to predict what the computers would do. Certainly, if they wanted to eradicate homo sapiens, that would be a strong possibility. If they wanted to terraform Mars or Jupiter’s moons, that would be a possibility.

Or they would be ‘brains in a bottle’ unable to do anything unless we hooked them up in the real world with the ability to do so. But then why would they? To them the ‘real world’ would probably look like ‘virtual worlds’ to us. Maybe a place to exercise creativity or kill time but ‘real life’ happens here, not there.

Terraforming Mars or Jupiter’s moons doesn’t require a trillion HBE. It requires trillions of heavy capital machines. If you were running a construction site and had to move millons of tons of earth what would you need, more thinkers or more bulldozers?

I suspect right now the marginal utility of a HBE is very high, but adding trillions of HBE’s would be very low. The HBE’s would sit in their virtual world mostly doing their own thing only really concered about our ‘real world’ to the degree it impacts them (keep the electric going to the servers) or to the degree it entertains them to do so.

Yes, I only add the body because most people don’t see how brainpower alone contributes to GDP. But everyone can see how if a robot replaces a plumber or an electrician coming to one’s house, that contributes to GDP.

True but now we have two very different things. A robot plumber with 1 trillion HBE is unlikely to be much of a better plumber than one with 2 HBE’s or even 1 very good HBE. In fact, it’s not at all clear human intelligence is what we want. Google Maps has more data than any human giving directions but it’s different from human intelligence. In some ways its stupider than a human and other ways its smarter and we want it that way. I suspect the robot plumber would not be made with a fully HBE mind but more of a database type mind (least he pic up some Greenpeace literature and decide its more important for the environment that your house stops using running water!!!)