Lower Consumption, Lower Economic Growth, Improved Healthcare?

Private household consumption is weak among most western economies. While this might only be a temporary situation for some of them, other nations are faced with a structural adjustment of consumption.

For example, consumption has been the main driver of the U.S. economy in the past 20 years with consumers buying and spending everything they could get. This has resulted in a situation where excess consumption was financed by rising asset or home equity prices or in many cases even worse, increased borrowing from credit cards and other sources.

Long-term, this is not going to work and we are now starting to see this situation getting corrected, for many it is quite a painful adjustment. After a huge destruction of wealth in the past two years, many people are only left with one choice and that is savings from their income, provided that they still have an income. We expect this to continue for a number of years, with the share of consumption as a percentage of GDP falling significantly.

So therefore the outlook for GDP growth is very bleak you might say, right? Not necessarily, we think. Falling consumption spending can be compensated by increased investment spending and rising net exports. While we are relatively optimistic on net exports (partially supported by a weak and falling U.S. dollar), we are less optimistic on investment spending. The various economic stimulus packages have in our view failed to address this enough. Economic theory tells us, and historical evidence supports this view, that spending on infrastructure actually can increase GDP longer-term.

It goes without saying that the need for infrastructure spending in the U.S. has been neglected far too long and there is an urgent need to upgrade infrastructure. Did you know for example that the U.S. electricity grid is by far the oldest in the western world? So money would be better spent on such investments that provide the basis for long-term economic growth rather than wasting money on simply redistributing wealth, over-regulating the economy or pursuing ‘pet’ political initiatives.

With the U.S. having the highest tax burden among western economies, taking into consideration income and inheritance taxes, it would be time to completely overhaul the tax system before even thinking and possibly increasing healthcare programs. Increasing financial pain and worries about how to finance increasing healthcare is a common problem among most developed economies. While many people think that the cost for healthcare has reached a level which is unbearable, we think that the costs will continue to grow for a long-time.

The main problems here are changing demographics, improved medical technologies and often wrong incentives within the healthcare system that keep costs rising. Let’s face it, we all appreciate the fact that our life expectancy has grown so rapidly over the last few decades. Now that we have the medical options to not only increase our life expectancy but in most cases also the quality of our life, we are prepared to spend extra money on healthcare.

The flip side of the coin is that we need to be prepared to work more years before we can retire. We see this as the only way to manage surging healthcare costs and pension liabilities.

Comments

[W.E. Heasley:]

Interesting points.

Agree with you that if one decides to deploy Keynesian Government Deficit Spending, historical track records show Infrastructure is the play. However, the current Keynesian Government Deficit Spending plan is based on Political-Political rather then Political-Economy. Hence the current stimulus plan has become the Spruce Goose of all stimulus plans.

Also agree with you that the current economic climate puts "Health Care" way down the list of areas that need corrected. Regardless of the Health Care priority, any correction in Health Care needs to be through cost reduction due to efficiencies, not a quasi-cost reduction due to increased taxes. That is, with few if any cost reduction features in Health Care due to efficiency, then masking a net cost reduction through increased taxes, when in fact its a cost increase (taxes), is more Political-Political not Political-Economy. Even Howard Hughes knew not to build a second Spruce Goose.

Oct 13 08:24 AM

[Tony Petroski:]

Mr. Zurbrugg is talking sense here.

"So money would be better spent on such investments that provide the basis for long-term economic growth rather than wasting money on simply redistributing wealth, over-regulating the economy or pursuing ‘pet’ political initiatives."

Unfortunately, 52% of the American voters chose the candidate who promised to spread the wealth around and re-regulate the economy. As for "pet political initiatives," alas, they are with us always.

Also from the author:

"Let’s face it, we all appreciate the fact that our life expectancy has grown so rapidly over the last few decades. Now that we have the medical options to not only increase our life expectancy but in most cases also the quality of our life, we are prepared to spend extra money on healthcare."

Sounds like a good problem to have. You start with the "extra money" part.

Oct 13 08:46 AM

[johnnywalker:]

Mr. Zurbrugg:

You argue, “It goes without saying that the need for infrastructure spending in the U.S. has been neglected far too long and there is an urgent need to upgrade infrastructure.” I completely agree, having just returned from a trip to Spain, which is considered to have one of the weakest economies in Europe. Coming back to the US felt like returning to a third world country. The roads, train stations and airports in Spain were modern, clean and efficient, and the trains were on time. Windmills and solar panel installations were ubiquitous. The US seems to be falling behind the rest of the advanced world in infrastructure, and this will ultimately affect our competitiveness.

With regard to “over-regulating the economy,” what is the value added to the nation as a whole, excluding the already very wealthy, from the deregulation that led to the recent economic meltdown?

Finally, you state, “… it would be time to completely overhaul the tax system before even thinking and possibly increasing healthcare programs.” I disagree. As a nation, we spend more on health care, on a per-capita basis and as a percentage of GDP, than any other advanced nation, and yet by all objective measures of outcomes, we are near the bottom of the list. By analogy, we are paying for a BMW and getting a Pinto. Where is our excess health care expenditure coming from (directly or indirectly, out of all our pockets), and what drag does it exert on the economy? Wouldn’t it be better to emulate other advanced nations, make our health care system more efficient, and use the savings for other purposes, like infrastructure?

Oct 13 02:41 PM

[Daniel Zurb...:]

Thank you for your comment, I hear your points and understand them. However, whether we like it or not, in this world any attempt and measures to protect an economy from global competition, we make it even weaker. The more we try to control and regulate, the less attractive we become. We in the west have become too spoiled. We need to realize that we have to work until we turn 75 otherwise pension costs can't be financed anymore. Healthcare problems? I think there is a lot of inefficiency in this system, which make things very expensive...but also we need to face reality...a higher standard of living makes a lot of people lazy, they spend more time at McDonalds than working out and what we get is a society that is increasingly living an unhealthy life. We need to get moving again...I think that's where the problems are today...


On Oct 13 02:41 PM johnnywalker wrote:

> Mr. Zurbrugg:
>
> You argue, “It goes without saying that the need for infrastructure
> spending in the U.S. has been neglected far too long and there is
> an urgent need to upgrade infrastructure.” I completely agree, having
> just returned from a trip to Spain, which is considered to have one
> of the weakest economies in Europe. Coming back to the US felt like
> returning to a third world country. The roads, train stations and
> airports in Spain were modern, clean and efficient, and the trains
> were on time. Windmills and solar panel installations were ubiquitous.
> The US seems to be falling behind the rest of the advanced world
> in infrastructure, and this will ultimately affect our competitiveness.
>
>
> With regard to “over-regulating the economy,” what is the value added
> to the nation as a whole, excluding the already very wealthy, from
> the deregulation that led to the recent economic meltdown?
>
> Finally, you state, “… it would be time to completely overhaul the
> tax system before even thinking and possibly increasing healthcare
> programs.” I disagree. As a nation, we spend more on health care,
> on a per-capita basis and as a percentage of GDP, than any other
> advanced nation, and yet by all objective measures of outcomes, we
> are near the bottom of the list. By analogy, we are paying for a
> BMW and getting a Pinto. Where is our excess health care expenditure
> coming from (directly or indirectly, out of all our pockets), and
> what drag does it exert on the economy? Wouldn’t it be better to
> emulate other advanced nations, make our health care system more
> efficient, and use the savings for other purposes, like infrastructure?

Oct 14 08:59 AM

[Daniel Zurb...:]

Thank you for your comment...the longer we live, the more diseases we can cure, the more money we spend on health care...this can't be changed, since we all want a longer life.

But the spending on infrastructure is key if you want long-term sustainable growth...an area where the U.S. has not done enough and where it will need to spend a huge amount of money in coming years...which gives some great investment opportunities by the way..


On Oct 13 08:46 AM Tony Petroski wrote:

> Mr. Zurbrugg is talking sense here.
>
> "So money would be better spent on such investments that provide
> the basis for long-term economic growth rather than wasting money
> on simply redistributing wealth, over-regulating the economy or pursuing
> ‘pet’ political initiatives."
>
> Unfortunately, 52% of the American voters chose the candidate who
> promised to spread the wealth around and re-regulate the economy.
> As for "pet political initiatives," alas, they are with us always.
>
>
> Also from the author:
>
> "Let’s face it, we all appreciate the fact that our life expectancy
> has grown so rapidly over the last few decades. Now that we have
> the medical options to not only increase our life expectancy but
> in most cases also the quality of our life, we are prepared to spend
> extra money on healthcare."
>
> Sounds like a good problem to have. You start with the "extra money"
> part.

Oct 14 09:07 AM

[YoYoMama:]

Mr Zubrugg:

You said - "...we need to face reality...a higher standard of living makes a lot of people lazy, they spend more time at McDonalds than working out and what we get is a society that is increasingly living an unhealthy life. We need to get moving again...I think that's where the problems are today..."

Agreed. This is the problem with health care in our country, 60% of us are overweight, and 1/2 of those are obese.

What is your suggestion to fix the ills of human laziness? If people just don't care how fat they get (and I swear, most people do not), what can be done? Especially since the whole system of insurance is set up so that the healthy person foots the bill for the ill?

Oct 14 09:54 PM