Monday, April 29, 2013

What energy efficiency tells us about healthcare

In a recent post, Mark Perry noted that last year "America had the most energy-efficient economy in US history." He has a nice chart showing how much less energy (total energy) it takes today to produce a unit of GDP. This is such a big, untold story that I thought I would piggyback on his post and highlight how much less crude oil and petroleum products it takes to produce a unit of GDP, and what this tells us about a potential solution to the problem of healthcare. 

This first chart shows that U.S. economy consumed the same amount of oil last year as it did in the late 1970s. This, despite the fact that the economy today is 133% larger than it was back then. The U.S. economy has more than doubled in size over the past 33 years, but it consumes the same amount of oil.

This next chart shows the ratio of oil consumption to GDP. From the peak in the early 1970s, U.S. oil consumption per unit of output has fallen by an astounding 61%. 

The other nice thing to note on the energy front is that U.S. crude oil production has jumped 47% in the past four years. In the past year alone, crude production is up by almost 20%, thanks mainly to new fracking technology. Crude production is surging, but our consumption of crude is not, thanks to ongoing gains in energy efficiency. 

All of this is symptomatic of a very dynamic economy. As the above chart shows, the real price of crude oil is very expensive from a long-term historical perspective. Rather than suffocating the economy, very expensive energy has sparked incredible conservation efforts, technological innovation (e.g., fracking) and efficiency gains, with the result that energy today consumes just under 6% of the average person's consumption, a little less than the average of the past 50 years.

The point here is that over time our economy responds very impressively to changing prices and fundamentals. There are lots of headwinds working to slow economic growth in recent years (e.g., government spending as a % of GDP is relatively high, regulatory burdens are exceedingly high, many millions have dropped out of the labor force, corporations are reluctant to reinvest their profits, and Obamacare threatens to disrupt almost one-sixth of the economy), but that's not a reason to give up hope.

This last chart highlights the huge contrast between spending on healthcare and energy. The energy market is largely deregulated, and responds dynamically, as shown in the previous charts, to rising prices. The healthcare market, in contrast, is highly regulated and distorted by the tax code (which only allows employers to deduct healthcare costs, thus resulting in a system where almost no one pays for their healthcare expenses out of pocket—otherwise known as the third-party payer problem), and it has not responded at all to rising costs. Because of oppressive government regulations and regulatory structures, the healthcare industry has not been able to innovate or implement the kind of efficiencies that the energy market has. Market forces are suppressed, and innovation therefore has been largely suffocated.

If we want real improvement in healthcare, we need to restore market forces to the healthcare market. A few examples: Change the tax code so that everyone can deduct healthcare expenses. Encourage employers to turn the choice of healthcare coverage over to the employee—if everyone bought their own policy, the portability "problem" would cease to exist. Allow insurance companies to compete by selling policies across state lines. Eliminate government-mandated benefits which inflate policy costs and discourage innovation and consumer choice. 


Unknown said...

Great points, but this argument was ignored before the ACA became law. I blame the right in this. They could not make the sale to show a viable alternative.

I'm a huge believer of HSAs and my business focuses on healthcare and Medicare planning.

Anonymous said...

You missed the one really big point. Health care is a government supported industry cartel with monopolistic protections everywhere; federal, state, and local.

That is what all those regulations are about.

Divsurgeon said...
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Benjamin Cole said...

Excellent charts.

I agree---but do the American people?

Remember the Terri Schiavo case? She was the brain-dead carcass being kept alive in Floroda, and her husband wanted to pull the plug (reasonably, back in 2005).

The US Congress actually held a special session (George Bush cancelled a vacation to attend!) to keep her "alive." I hate to say it, but it became a GOP-right-wing talk show cause celebre.

House Majority Leader Tom DeLay, (R-TX) said: "It won't take a miracle to help Terri Schiavo. It will only take the medical care and therapy that all patients deserve....Every hour is terribly important to Terri Schiavo."

Right-wingers do not like euthanasia, and left-wingers think health care should be a right.

That is a recipe for what we have, which the the highest percentage of GDP devoted to healthcare of any Western nation---but our results are not any better.

In truth, euthanasia will have to become an option for the elderly and terminally ill, or we will face higher and higher bills in the future.

Now, try convincing the American people to accept euthanasia.

Benjamin Cole said...

BTW, he PCE is up only 1.0% over the past 12 months, and the more important core PCE is up only 1.1%.

Inflation is dead.

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marmico said...

There are lots of headwinds working to slow economic growth in recent years (e.g., government spending as a % of GDP is relatively high...

You must be referring to mandatory means-tested transfer payments not government consumption and investment (GCI). In the first 15 quarters of the Reagan expansion, real GCI rose 21%. Likewise, in the Obama expansion, it declined 7%. That difference alone explains over half of the CBO (not Grannis) output gap.

The rapid decline in energy expenditures (particularly in petroleum) during the Reagan expansion certainly juiced personal consumption. Energy prices have risen slowly in the Obama expansion.

Why anyone would compare efficiencies between a non durable good (energy) to a service (healthcare) is beyond me.

Bob said...


He's not comparing, he's making an analogous example of how freemarket forces that the energy industry enjoys over the healthcare industy, can bring about less expensive care to the later.

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