TheHealthofNations-DepartmentofEconomics.docx
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TheHealthofNations:
TheContributionofImprovedHealthtoLivingStandards
WilliamD.Nordhaus,YaleUniversity ThepresentresearchwassupportedinpartbytheNationalScienceFoundation.IamgratefulforcommentsfromDavidCutler,AngusDeaton,RobertGordon,andT.N.Srinivasan.
January25,2002
I.Introduction
Nationsgenerallymeasuretheireconomicperformanceusingtheyardstickofnationaloutputandincome.Itisnotwidelyrecognized,however,thatconventionalapproachesdoapoorjobofcapturingimprovementsinthehealthofthepopulationinourgrossdomesticproductorincomespercapita.Howwouldstandardeconomicmeasureschangeiftheyadequatelyreflectedimprovementsinthehealthstatusofthepopulationaswellasothergoodsandservices?
Thisisthequestionaddressedinthepresentstudy.
Thefirstsectiondiscussesthetheoryofthemeasurementofnationalincome,examinessomeoftheshortcomingsoftraditionalconcepts,andproposesanewconceptthatcanbeusedtoincorporateimprovementsinhealthstatus.Inthesecondsection,wediscusshowtheproposedmeasurefitsintoexistingtheoriesofconsumptionandvaluation.ThethirdsectionappliestheconceptstotheUnitedStatesoverthetwentiethcentury.
Attheend,weconcludethataccountingforimprovementsinthehealthstatusofthepopulationwouldmakeasubstantialdifferencetoourmeasuresofeconomicwelfareoverthetwentiethcenturyintheUnitedStates.
II.IncludingHealthStatusinMeasuresNationalIncome
CurrentApproachestoMeasuringtheContributionofHealthintheNationalAccounts
WhiletheGDPandtherestoftheNationalIncomeandProduct
Accounts(NIPA)mayseemtobearcaneconcepts,theyaretrulyamongthegreatinventionsofthetwentiethcentury.Muchasasatelliteinspacecansurveytheweatheracrossanentirecontinent,socantheGDPgiveanoverallpictureofthestateoftheeconomy.SincetheirfirstconstructionbySimonKuznets,whowontheNobelprizeinEconomicsforhiscontributionstonationalincomeaccounting,enormousstrideshavebeentakenindevelopingandimprovingindexesofeconomicwelfare.Startingwithrudimentarymeasuresofnationalincomeandoutput,nationsnowhaveawiderangeofindexesthatnotonlyincludeconventionalconceptsbutalsodisaggregatetheseforindustriesandregions,useimprovedtechniquesforaggregation,anddisplayawealthofdetail.
Nevertheless,sincethebeginning,therehavebeenconcernsthattheaccountsareincompleteandmisleadingbecausetheyomitmostnonmarketactivity.Tomeetthiscriticism,privatescholarsaswellasofficialstatisticalagencieshavebegunextendingthenationalaccountstoincludeseveralnonmarketsectors,includingnationalresources,theenvironment,transportation,leisuretime,andunpaidwork. SeeEisner[1989].ArecentreviewofenvironmentalandotheraspectsofnonmarketaccountingiscontainedinNationalResearchCouncil[1999].
Onequestionthathasbeenvirtuallyignoredinattemptstoextendthenationalaccountsistheneedtoaccountadequatelyforimprovementsinhumanhealth.Itislittleunderstoodoutsidethepriesthoodofnationalaccountantsthatthereisnoseriousattempttomeasurethezzrealoutput"ofthehealth-careindustry.Thetechniquesusedtomeasurethepriceandquantityofhealthcarearehighlydefective,andtherearenoattemptstoaccountforimprovementsinthelengthoflifeintocurrentmeasuresoflivingstandards.
Itmightbearguedthatincludinghealthstatusissomeradical,far-out,andwoolly-headedattempttoincorporateintangible,non-economiczandsociologicalmeasuresintooursocialaccounts.Thisargumentiswrong,forhealth-careexpendituresarealreadyincludedinmeasuresofnationalincomeandoutput.IndeedtheyareagrowingfractionofGDP-thefractionofpersonalconsumptionexpendituresdevotedtomedicalcarerosefrom5.1percentin1959to15.3percentin1998.Whatisradicalisnottheinclusionofhealthcarebutthenotionadvancedherethatweshouldmakeaseriousattempttomeasuretheoutputofthehealthcaresectorandtovaluethisoutputcorrectly.
Bothcommonsenseandrecenteconomicstudiessuggestthatthereislittleconnectionbetweenmedicalspendingandthemeasuredeconomicvalueofhealth-statusimprovements.Atacommon-senselevel,thelackofconnectioncomesbecause"real"medical-carespendinginfactmeasuresspendingoninputsratherthantheresultsinhealthoutcomes.Thecurrentapproachistomeasurehealthoutputprimarilybythenumberofphysicianvisits,thenumberofhospital-days,andsimilarmeasuresratherthantheactualdeliveryofservicesorchangesinhealthstatus.Itwillcomeasasurprisetomostnon-economiststhatimprovementsthatcomefromnewproducts,suchasthediscoveryofantibioticsorthesubstitutionofdrugsforinvasivesurgery,arecompletelyomittedincurrentmeasuresofrealoutput.
Attemptstomeasureimprovementsinthehealthstatusofthepopulation—includingeverythingfromvaccinations,microsurgery,andnewdrugstoairbags,exercise,andanti-cigarettesadvertizing—poseanewanddifficultchallengetomeasuringnationalincome.Recently,economistshavebegunprovidingbetteroutcome-orientedestimatesofthepricesandoutputsinthissector.OneofthemoststrikingfindingscomesfromastudybyCutleretal.,whoestimatedthatatruepriceindexforthetreatmentofheartattackswouldriseabout5.5percentperyearmoreslowlythanthecorrespondingcomponentoftheCPL Cutler,McClellan,Newhouse,andRemler[1998].
SimilarresultswerefoundinstudiesoftreatmentforglaucomabyShapiroandWilcoxandforcataractsurgerybyShapiro,Shapiro,andWilcox. SeeShapiroandWilcox[1997,1999].
Giventhelikelihoodthatwearedramaticallymismeasuring,andalmostcertainlyunderestimating,thecontributionofimprovementsinhealthcaretoeconomicwelfare,thisraisesthequestionofhowtoproceedtoobtainbetterestimates.Oneapproachwouldbetocontinuetheapproachjustdescribedofconstructingbettermeasuresofoutputandpricestoreflectthe(literal)declineinthecostofliving.ThisapproachwasadoptedbytheBoskinCommissionandisthethrustofmuchcurrentresearchonhealtheconomics.SeeAdvisoryCommission[1996]andMurrayandLopez[1996].
Anotherquitedifferentapproach,whichisusedinthepresentstudy,istoobtaindirectmeasuresofhealthstatus,weightthemwithappropriateprices,andthenestimatethevalueofimprovementsinhealthstatus.Thisapproachtreatsmedicalcareasaninstrumentalinputandsubtractsitfromconsumptionexpenditures.Wewouldinsteadadjustrealincometoreflectthevalueoftheimprovementofhealthstatus.Thisapproachisactuallymuchsimplerthan"fixing"priceandoutputindexesbecausemeasuresofhealthstatusaregenerallymuchbetterthandataontheimpactsofparticulartechnologiesonhealthstatus.Wewillseethatfollowingthispathhasradicalimpactsonourmeasuresofrealincomeandoutput.
AlternativeMeasuresofNationalIncome
Beforeproposingalternativeconcepts,itwillbeusefultodescribedifferentapproachestomeasuringnationalincome.Theconceptsofsocialincomeandnationalincomegobackcenturies.Theyarelargelybasedontheanalogousdefinitionsofindividualincomewithappropriateadjustmentsforaggregationandnationalboundaries.Wecandistinguishtwofundamentallydifferentapproachestomeasuringincome-onebasedonproductionandonebasedonutility.(Utilityinthiscontextmeanspreferences,notusefulness.)Theformeristhebasisofmodernnational-incomeaccountingwhilethelatterismoreappropriatewhenconsideringsustainableincomeandthecontributionofimprovementinhealthstatus.
Production-basedmeasures(HicksianIncome)
ThemodemtreatmentofsocialincomedatesfromthewritingsofJ.R.Hicks.Wheneconomistsandaccountantsmeasurenationalincome,theyhavealmostuniversallyrelyupontheHicksiandefinition.ThediscussionofsocialincomeinValueandCapitalstates,"Thepurposeofincomecalculationsinpracticalaffairsistogivepeopleanindicationoftheamountwhichtheycanconsumewithoutimpoverishingthemselves.'*Hicksthengoesontoprovidehisfirstdefinitionofsocialincome:
IncomeNo.1isthusthemaximumamountwhichcanbespentduringaperiodifthereistobeanexpectationofmaintainingintactthecapitalvalueofprospectivereturns...;itequalsConsumptionplusCapitalaccumulation. Hicks[1939],p.172.
Hicks[1939],p.173,178,emphasisadded.ThisdiscussionignoresthesubtletyofHicks'discussionofpricechanges,interestrateeffects,thedifferencebetweenexanteandexpostcapital,andanumberofotherfactors.
Thisdefinitioniswhatiscalled/zHicksianincome"-themaximumamountthatcanbeconsumedwhileleavingcapitalintact.Inpractice,thismeansthatincomeequalsconsumptionplusageneralizedmeasureofcapitalaccumulation.
TheHicksianconceptisthestandarddefinitionofnetnationalordomesticproductusedinthenational-incomeaccountsofvirtuallyallnationstoday,whereconsumptionandinvestmentarelimitedtothoselegalgoodsandservicesthatpassthroughthemarketplace.Itisproduction-basedinthesensethatitattemptstomeasuretherateofproductionatagiventime.Suchmeasuresarenotconcernedwiththehealthstatusofthepopulationorwhetherpeopleareenjoyingthatproductionforalongerperiodoftime.
Utilitv-basedmeasures(Fisherianincome)
Whilestandardconceptsofincomeareusefultoolsformeasuringcurrentproduction,itisdifficulttoextractanywelfaresignificancefromthem.Theshortcomingofthetraditionalapproachisclearwhenweconsider