An Unhealthy America: The Economic Burden of ... - Milken Institute

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An Unhealthy AmericaMilken InstituteV: Long-Term Forgone Economic Growth andIntergenerational ImpactsA. IntroductionWhile the indirect impacts of chronic disease, reflected in lost workdays, disability, and reduced employee productivity,are substantial, the intergenerational impacts on economic growth are likely to be much greater. Yet there has beenlittle research to quantify the long-term effects of poor health on human and physical capital formation, or therestrictions imposed on U.S. economic growth.Since the early 1990s, the determinants of economic growth have been the subject of renewed study. Most of theexplanations fall under the umbrella of the “endogenous growth” theory. This theory is based on the observation thatthe factors that influence economic performance are determined within the model and interact with one other. 87 Othervariables and model specifications have been attempted, but only a few endogenous models have been found to bestatistically significant in explaining growth. 88Human capital is recognized as an important component of growth, but researchers have only recently begun toexamine the role of health as another component. As a result, we are now seeing greater interplay between the fieldsof health economics and macroeconomics, as well as a growing awareness of the endogenous relationships betweenhealth, human capital formation, and economic performance. Most of the research has been centered on infectiousdisease in developing economies. But in developed countries, where deaths from infectious and parasitic disease havegiven way to deaths from chronic and degenerative disease, the economic impacts have received less attention—partlybecause they have been harder to discern empirically.Economic growth depends on the stock of human capital (a well-trained work force) and continued investments ineducation and work-based learning and training procedures. Economic Nobelist Gary Becker offers an insightfulsummation of the way knowledge drives innovation:“The continuing growth in per capita incomes of many countries during the nineteenth and twentiethcenturies is partly due to the expansion of scientific and technical knowledge that raises theproductivity of labor and other inputs in production. The increasing reliance of industry onsophisticated knowledge greatly enhances the value of education, technical schooling, on-the-jobtraining, and other human capital.” 89Improved health also leads to greater investment in education, resulting in higher levels of human capital. In turn,wealth increases, and a virtuous cycle of economic growth is born. But investing in health requires a broad-based87. Romer, Paul. “Endogenous Technological Change. Journal of Political Economy.” October. 1990, p. 71–102.88. López-Casasnovas, Guillem, Berta Rivera, and Luis, Currais. “Health and Economic Growth: Findings and PolicyImplications.” (Cambridge: The MIT Press, 2005), 2.89. Becker, Gary. Human Capital and the Economy: Proceedings of the American Philosophical Society, Vol. 135 No. 1 (March1992) p. 85–92.[ 167 ]
An Unhealthy AmericaMilken Institutestrategy. It means identifying at-risk populations in order to increase rates of prevention, screening, and treatment. Anunder-investment in health leads to an under-investment in human capital, capital stock (the amount of equipment,machinery, and buildings in the economy), lower economic growth, and reduced wealth.In this section, we describe a set of models we use to produce long-term projections of gross domestic product undera baseline and optimistic scenarios. The first of these is a production function, which estimates how a number of variableinputs are converted to outputs of real, inflation-adjusted GDP. The second model is a set of reaction functions, whichthen builds in the productivity impacts on future generations. An innovation from our research is the recognition of thedynamic feedback between health and multiple independent variables over time. The leads and lags betweenimprovements in health and its subsequent impact on investments in human and physical capital can’t be fully capturedin the production function alone, which does not account for interplay between variables.The baseline GDP projections adopt the current trends in each of the variable inputs and are consistent with the baselineprojections of chronic disease. The optimistic projections assume measurable improvements in disease prevention,screening, and treatment. The difference between baseline and optimistic state GDP will indicate the trueintergenerational relationship—the endogenous relationship—between health and the investments we make ineconomic growth.Because this investigation only examines conditions in the United States, it is not hindered by the wide institutional andsystemic differences found in cross-national studies. We are able to control for state variations using a fixed-effectsmodel for a production function. A complete methodology is available online at www.chronicdiseaseimpact.com.We find that the cumulative difference between baseline and optimistic projections during the period 2003–2023 willtotal $8.2 trillion (in 2003 dollars). By 2050, the difference will grow to $101.5 trillion, also measured in 2003 dollars. Wealso calculate that the annual average real GDP growth between 2004 and 2050 will be 0.36 percent higher in theoptimistic scenario than in the baseline.B. Variable InputsThe production function establishes relationships between health, education, and economic growth by estimating howa number of variable inputs are converted to outputs of real, inflation-adjusted GDP. The variable inputs are: (1) lifeexpectancy at 65; (2) labor force size; (3) capital stock; (4) adult population with a bachelor’s degree or greater; and (5)young dependents per capita. To build the production function, we use historical data to build a balanced data set andcontrol for state variations. Each of the variable inputs is described in more detail below:(1) Life Expectancy at 65Recent research has pointed to the relationship between life expectancy change and economic productivity.For example, a one-year change in life expectancy at birth can lead to a 4 percent boost in productivity. 90Life expectancy is a significant and positive factor in a state’s real GDP, as it measures the cumulative lifetime90. Bloom, David E., David Canning, and Sevilla, Jaypee. “The Effect of Health on Economic Growth: A ProductionFunction Approach.” World Development, 2004; 32(1): 1–13. The productivity boost is consistent with established results,but one must consider the limitations of applying the results to a market like the United States.[ 168 ]
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