Recalculation and Healthcare

Arnold Kling has many interesting posts on recalculation.  His theory about this recent recession is that it is driven by a need to figure out what is happening next.

Imagine a central planner who decides to radically change plans. He has a huge recalculation to make in order to figure out where to allocate labor and capital. He says to some people, "Wait a minute. I am thinking. Some of you just have to stand idle while I figure this out."

The market economy is like that central planner. We are undergoing a Great Recalculation

 An interesting application of this theory is that the economy will recover more slowly if is more difficult than normal for a business to invest in what is happening next within the United States.  The CBO’s 2009 long term budge outlook has an interesting chart that is not good news for most US companies focused on domestic sales.

Source: Long Term Budget Outlook, CBO p 32.

Their forecast is that the only spending that will increase on a per capita basis is healthcare spending. This forecast was partially made by forecasting the current excess cost growth in healthcare into the future, assuming that these costs grow less quickly past 2020 (less than half the healthcare spending is Medicare and Medicaid).  There are definitely going to be changing markets and increased productivity within the “all other spending” category, but without healthcare this is a pie that is only really growing at the rate of population growth.

This is an increase in the size of the economy where profits are nonexistent or seen as evil.  The nature of healthcare makes it very hard to earn money in the sector. The supply of labor is restricted by licensing and thus the returns to labor are high relative to the return on capital.  In less service oriented healthcare areas the FDA approval process that doesn’t shield companies from liability increases the costs and risks to investors. The uncertainty surrounding healthcare regulation makes investing in the sector even less unfriendly than it is already.

If the recalculation story is true and the CBO’s projections on this matter can be trusted, the United States’ market economy might remain confused and below potential for some time to come.