Thursday, September 3, 2009

Why Does Health Care Spending Increase with Time?

The answer is simple according to Nobel Prize economist Robert Fogel. It's because the richer we become, the largest is the share of our budgets that we want to spend with health care. In other words, as expected, health care expenditures are what economists call a superior good (HT Mankiw). In Fogel's own wise words:

Consequently, there is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century. It is a leading sector, which means that expenditures on healthcare will pull forward a wide array of other industries including manufacturing, education, financial services, communications, and construction.

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