On October 5, the Department of Labor gleefully announced that unemployment dropped to 7.8%. My initial response was I'm sure like everyone else's, surprise and really happy to hear it. Of course, immediately many anti-Obama conspiracy theorists jumped out and claimed the numbers were manipulated to help the president win re-election. The numbers indeed are true, but the scary part lies in the bare real numbers: where these new jobs are coming from.
Of the 115,000 new jobs created in the past month 44,000 came from the health care sector, that’s nearly 40% of the new jobs this past month. Indeed this is not merely a monthly trend but has been the strongest engine in new job growth during our recession. As of May, the Pittsburgh Post reported that "Nationwide, healthcare services have added some 770,000 to their payrolls since the start of the economic recovery in June 2009 — about a third of all new jobs, according to the U.S. Labor Department."
So our recovery out of this recession has largely been fueled by the health care sector. You may ask yourself, why does this matter? Aren't all the baby boomers soon to retire and this is necessary? Indeed it is necessary, but the problem lies in the payment of these new jobs.
In the mid-1960s and 1970s, the U.S. government began getting very active within the U.S. health care system, creating two of the foundations of our modern day health care system: Medicaid and Medicare. The government began picking up the tab for the elderly and the poor who could not otherwise afford health insurance. However, just like the U.S. did with Fannie Mae and Freddie Mac to provide homes for poor individuals, it backfired.
In August 2012, Forbes Magazine reported,
"What is happening to the health sector is that it is becoming a victim of financial capitalism at the very moment that the era of financial capitalism is coming to a close. The hospitals owned by private equity are making money in the short-term at the expense of Medicare and the economy. But when the private equity firms depart, as they plan to do, they leave the hospitals with a load of debt, dispirited doctors and nurses, and a bankrupt Medicare system, with serious questions as to whether overall care has been maintained, let alone improved."
To translate, businesses have figured out that the government is an endless supply of profit (or seemingly so). If a patient has Medicaid and Medicare, what harm is to run a few extra (or a lot of extra) tests even though it may be unnecessary. Others have chimed in with similar assessments as well. Dr. Andrew Foy wrote an article for the Association of American Physicians and Surgeons in June 2012 that explained how the government involvement is unsustainably driving up the price on health care. Specifically, Dr. Foy stated, "Under the current system, consumers play virtually no role in shaping the pattern of resource use and assignment of resource rewards. The outputs produced, the methods of production employed, and the rewards given to the various owners of productivity are not dictated by healthcare consumers, but rather by government and industry lobbyists—the medical-industrial complex."
Translated into English, in a traditional free market there is supply and demand. When there is competition in the market, people tend to go to where it is the best product. However, whenever someone else is paying the bill they see no difference between which hospitals to go to, likewise the hospitals see no purpose in keeping prices affordable and efficient. Additionally, Dr. Foy breaks down the economic costs to the U.S. government as resulting from the ballooning health care costs by stating that while the government spending on health care has increased 5,400% since 1970, total government spending has only increased 1,890%.
Furthermore, the Wall Street Journal reports of the growing gargantuan size of the health care industry by stating that, "At 15% of GDP, the highest of all developed nations and destined to go higher, heath-care costs will remain a drag on the economy, especially with 3,300 lobbyists fighting to keep the cost rising."
The Washington Times reports that one of the reasons for Obamacare was to deflate this bubble before it exploded. "With Obamacare, the federal government is trying to offload the financial burden while placing additional huge demands on the system: more people “covered,” but less paid to people who care for patients and more costs shifted to states. The purported “savings,” to the extent that they don’t represent cuts in services, are accounting gimmicks. One-fifth of U.S. households make less total income than their share of national health spending, which is close to $21,000. No matter how we redistribute the burden, we just can’t afford it."
That is all to say the sad conclusion is this, it is a bubble that will eventually pop. Dr. Ralph Snyderman wrote in the Huffington Post on June 13th, 2012 about the scary parallels to another recent bubble that popped.
"What is frightening is the parallel between the growth in the health care industry and the recent experience in the real estate market. In real estate, the American dream to own a home was seen as laudable. Unfortunately, the financial market could not sustain the growth of the housing market, and it ultimately collapsed. In health care, access for all Americans is at least as important a goal and should be achieved, but it must be done in a way that is effective and affordable. The current approach, in my view, is neither effective nor sustainable."
As what happened in the housing market, or when the Federal Reserve reduced interest rates in 1990s to encourage borrowing that inflated the dot-com bubble; when the government gets involved in the free market it creates distortions. Those distortions feel really good for a short while, while the balloon is expanding, but when reality sets in and it pops we all suffer. The truth today is becoming more and more evident; we cannot have a government that dabbles in the free market. It seems that it must either be pure socialism or free markets. These two economic philosophies devour each other.
Some, fortunately, have been able to foresee these expansions time and time again by recognizing these principals, though often they are ignored for the feel-good inflating party. It's time we reject Keynesian economics that creates bubbles through government economic manipulation. Keynesian economics has failed to recognize these bubbles time and time again. Conversely it is time we embrace Austrian Economics that recognizes sound money and free market principals of supply and demand.