As inflation reached its 40-year high, discussions centered on rising price levels and attracted the attention of policy makers. There is growing consensus that the Federal Reserve must immediately strengthen and tighten monetary policy to cool the economy, hopefully without causing a hard landing in the economy.
But taking a step back and considering the long-term impetus for inflation in the two key areas of higher education and healthcare, there are deeper challenges that both market reforms and fiscal policy changes are needed and must be addressed. It will be clear soon.
In 2020, US health care costs reached a staggering 19.7% of GDP, up from the already high level of 17.6% in 2019. Even before the pandemic, the United States was famous for spending far more medical expenses than its peers. Results of various indicators, including life expectancy and avoidable deaths. The underlying issues associated with the US healthcare system are well documented.
There is a well-thought-out role of financial intervention to promote efficiency and competition in the medical sector. If we can maintain the Big Pharma lobby, we can reform the U.S. patent system, make the federal government a more effective negotiator, and take advantage of our role as a large buyer to lower drug prices. A low-priced fruit that can be picked with bipartisan support in the bay.
Increasing the supply of highly needed health care workers is another priority. Overcoming the high costs associated with training medical professionals and reducing the management burden associated with medical practice are also important from the perspective of cost management. Reducing the current high level of concentration in the hospital sector will promote competition and increase productivity.
Healthcare economics is somewhat complicated by the presence of externalities, market failure, and the problem of information asymmetry (adverse selection and moral hazard). The standard supply and demand approach and laissez-faire attitude may not work in the context of healthcare. It’s time for US policy makers on both sides of the aisle to have serious discussions aimed at reducing health care costs across the United States.
From a macroeconomic point of view, the American economy misallocates valuable resources on a large scale. If the United States cuts health care costs to about 12% of GDP (a level normally observed in Germany), it will significantly increase resources to focus on more productive ventures such as early childhood education, physical and digital infrastructure. increase. And public research and development (R & D) funding.
Another concern is about the long-term financial health of the United States. As the population ages, the proportion of Americans increases and is eligible for Medicare. Although the US system is dominated by private health providers and private insurance, the total government spending on health care is actually about the same as the OECD average. The US government is already spending as much (as a percentage of GDP) as its peers, but still covers a much smaller proportion of its population.
According to a recent Brookings report, in 2018, “34% of Americans received medical care through government insurance or direct public provision,” and medical care “from 11.9% to 2 of total government spending in the last 30 years.” Doubled. 24.1% from 1990 to 2018. “
Regarding the cost of higher education, there are four main explanations for college tuition and the decades-long surge in tuition fees. One explanation, called Bowen’s Cost Income Theory, is that higher education institutions are willing to spend virtually any amount of money they can raise to pursue the key objectives of educational excellence, fame and influence. It suggests that there isn’t.
Another explanation is based on Baumol’s cost disease. Baumol says that unlike the sector where technology-induced productivity growth is inherently available, higher education, healthcare, and some other service industries are usually characterized by low productivity. Said. Higher education and healthcare need to hire highly educated professionals (otherwise they may be hired in alternative high productivity sectors), so they need to provide high wages to attract talent. Yes (resulting in a combination of high wages and low productivity).
The third explanation is called the Bennett hypothesis. In a 1987 New York Times editorial, then Secretary of Education William J. Bennett said: In essence, cost subsidies in the form of federal loans / subsidies push up demand for higher education and raise costs faster than supply.
Finally, like healthcare, the higher education sector suffers from information asymmetry. Because college education is a “good experience,” it is difficult for students and parents to ascertain the quality of educational services and the value of their degree from the beginning. This will allow educational institutions to compete for students by providing more luxurious facilities and facilities than ever before.
Gathering and disseminating information about median alumni income (classified by major) and job / graduate placement helps to shed light on the quality of the organization and limit the need for costly construction army expansion competition. .. Reducing policy distortions and providing alternative routes for high school graduates to obtain skill training can also limit college tuition inflation.
The complex cost issues facing both the US medical and higher education sectors need to be carefully considered. Throwing good money after bad is not the best answer — socializing the costs of core social goods does not curb inflation or place the United States on a stronger financial base in the long run.
Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.
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