Journal of Macroeconomics
, Pages 1-22
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Over the past two decades, medical expenditure growth in the US has outpaced GDP growth by over 1.3% annually. To date, the literature has primarily focused on explaining the rapid rise in medical consumption relative to output, with only limited attention given to understanding the long-run macroeconomic implications of this trend. In this study, I modify the standard Neoclassical growth framework to include health capital accumulation, public and private health insurance, and GHH utility. After calibrating the model to match US data for the period 1996–2013, I systematically investigate the response of output, physical and health capital, medical and non-medical consumption, and household time allocation to one-time exogenous shocks to various potential determinants of medical expenditure growth. I find that a 10% increase in final goods and medical sector productivity shocks each have a positive effect on aggregate welfare. On the other hand, a 10% increase to the endogenous depreciation rate of health capital, or to either the public or the private health insurance share are all found to be welfare reducing.
The elevated growth rate of health care consumption relative to GDP that has occurred throughout the last several decades is one of the most significant and challenging macroeconomic phenomena facing modern industrial nations, and has dramatically altered the structure of the US economy. Between 1963 and 2013, the GDP share of personal health care (PHC)1 expenditures increased by a factor of nearly 3.25, rising from 4.56% to 14.72%. Many have expressed concern over the sustainability of the health care sector’s current growth trend, claiming that the GDP shares of non-medical consumption, investment, and discretionary government expenditures will be diminished as household and government budgets become increasingly constrained by rising medical expenditures (see Auerbach etal., 1992 and Hsiao and Heller, 2007). As a result, there is considerable support for cost containment health care reforms that attempt to curtail the growth of medical expenditures.2
Despite these concerns, there is sufficient evidence in the literature to suggest that the growth in medical consumption relative to output may be the optimal response of households to changes in the economy that have occurred over the past 50 years, potentially contradicting the common assertion that cost containment health care reform is essential. Unfortunately, to date there has not been a systematic attempt in the literature to identify the macroeconomic consequences of the rise in medical expenditures that incorporates the significant aggregate externalities (both positive and negative) that are associated with health investment.
Therefore, in what follows I develop a benchmark neoclassical model that is useful for investigating the aggregate steady-state response to changes in the economy that are related to the growth of the health care sector. More specifically, I adapt the standard Neoclassical growth model with endogenous labor supply to include health capital accumulation following Grossman (1972). Health investment is financed in part by employer-provided private health insurance as well as a government subsidy intended to mimic the public financing of private medical consumption through programs such as Medicare and Medicaid. I assume that the household does not internalize the impact its actions have on the rate of depreciation of health capital and the private health insurance premium, generating a negative externality that may result in a non-optimal level of medical consumption. At the same time, I assume that health capital generates a positive externality on final goods production that may result in under-investment in health capital. Consequently, the response of aggregate welfare to an expansion of health insurance3 is uncertain and will depend on the relative magnitudes of these two competing externalities.
The analytical model is calibrated to match annual data for the US economy from 1996 to 2013. After calibrating the model and solving for the steady-state numerically, I analyze the transition dynamics and steady-state welfare response of the model to various changes in the economy that have been identified by the literature as being related to the growth in medical expenditures. These scenarios include 10% increases to 1) final goods productivity, 2) medical sector productivity (i.e. new medical technologies), 3) the endogenous rate of health capital depreciation, 4) the private insurance share of medical expenditures and 5) the public share of medical expenditures.
The model predicts that a one-time, beneficial productivity shock to either the final goods sector or the health investment sector will have a positive impact on total output, physical capital, and medical and non-medical consumption, leading to an increase in aggregate welfare. In contrast, an increase in the exogenous component of the endogenous depreciation rate of health reduces aggregate output, physical capital, labor supply, and consumption of medical and non-medical goods, leading to a decline in social welfare. Similarly, expanding public or private health insurance motivates the household to investment more in its health, increasing health capital and output. However, since the household is spending more on health care, aggregate non-medical consumption will fall, causing aggregate welfare to decline despite the rise in aggregate output, health capital, and leisure time.
The rest of the paper is laid out as follows; In Section2, I describe the growth of medical expenditures, review the medical expenditure growth literature, and discuss the aggregate role of health investment in the economy. In Section3, I introduce the model. Section4 describes the data sources utilized in the calibration of the model and presents the relevant output ratios and time allocations that the model is calibrated to match. I then discuss the values selected for the parameters in the model and compare the results from the model with the data. In Section5, I analyze the welfare response and transition dynamics that result from one-time permanent shocks to final goods productivity, health investment productivity, the endogenous rate of health capital depreciation, the public share of medical consumption, and the private health insurance share of medical consumption. In Section6, I change certain parameters that influence the size of the externalities mentioned above. Finally, in Section7, I provide my conclusions.
The aggregate role of medical consumption
The majority of the early studies in this literature utilized static, micro models of health investment and health insurance markets. These studies primarily concentrated on identifying and estimating the welfare losses that arise from various market inefficiencies that are present in the health care and health insurance markets.4 These welfare losses were found to be substantial5
I assume that the economy is composed of a representative household, a final goods producer, a medical care provider, a private health insurer, and a government that provides public health insurance and a non-medical government consumption good. The household has a health capital stock h that serves two important functions in the economy; 1) it is employed in the production of the final good and 2) it enters the household’s utility function.7
The data for the calibration is obtained from the national income and product accounts (NIPA), the national health expenditures accounts (NHEA), the penn world tables 8.1 (PWT), the American time use survey (ATUS), and the centers for disease control and prevention (CDC).11 The sample means are presented in Table1. NIPA is the primary data sources for output, its
Long-run effects and transition dynamics
In this section I analyze the transition dynamics for a 10% increase to each of the following; final goods productivity, health investment productivity, the exogenous component of the endogenous depreciation rate of health capital, and the public and private insurance shares of medical expenditures. The transition paths of (a) output, (b) leisure time, (c) health maintenance time, (d) physical capital, (e) private non-medical consumption, (f) medical expenditures, (g) the physical
The welfare response to the five shocks I consider depends on the relative size of the positive output externality and the loss from moral hazard. In this section, I test the sensitivity of the model to variations in the magnitude of these two respective externalities. This section is broken down into two parts. First, I test my prior assertion that the benchmark model approximates the moral hazard problem. Then, I test the sensitivity of the model to variations in the parameters μ and η.
Over the past several decades the growth of medical expenditures in the US has significantly outpaced the growth of GDP, leading to concern that household and government budgets will become increasingly constrained. In response, health economists have sought to identify the various factors in the economy driving the rapid expansion of the medical sector. This line of research has successfully identified several factors that drive the growth in this sector, including rising income levels, the
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Impact of infectious disease pandemics on individual lifetime consumption: An endogenous time preference approach
2023, Journal of Macroeconomics
This paper considers the impact of the coronavirus disease 2019 (COVID-19) pandemic on long-term individual lifetime consumption profiles. The framework for the analysis is a model that extends Strulik (2021) to include the government sector, where time preference is determined by individual health damage (deficit) distinct from normal aging. Thus, the health damage caused by COVID-19 changes the rate of time preference and consequently affects the Euler equation for consumption. Our theoretical contribution is the consistent incorporation of public health investment into the existing model to understand the effect of government measures against a pandemic. Numerical analysis based on this model is used to estimate changes in health status over time, trends in the rate of time preference, and individual lifetime consumption profiles, taking into account differences in age at the time of the pandemic and the nature of the government responses. Because the long-term negative economic impact would be enormous, we should avoid advocating for “living with COVID-19” without due consideration. The reopening of the economy must be accompanied by a commitment to the containment and elimination of infections with future novel coronaviruses.
Congestion in a public health service: A macro approach
2022, Journal of Macroeconomics
Citation Excerpt :
The first experiment captures the impact of an expansion of NHS capacity, as is continuously and widely debated in the UK (e.g. O’Dowd (2016) and Charlesworth et al. (2012-2022)). The second and third experiments embrace the impact of productivity growth and medical progress as two of the well-known drivers of health care expenditures and life-time expansion (e.g. Hall and Jones, 2007; Jones, 2016; Kelly, 2017; Böhm et al., 2018, Fonseca et al. 2020, Frankovic et al., 2020a,b). All experiments are based on a comparison of the underlying steady states.
To study the trade-offs and the macroeconomic repercussions of rising health care demand in a public health service, we develop a continuous-time overlapping generations model with a public health care sector and a realistic aging process. Health care services are provided to two groups of individuals, the healthy and the sick, free of charge at the point of service. Without a price mechanism, the government relies on a queuing rule for allocating its services. We conceptualize this mechanism as congestion that lowers the efficacy of health care. Then, we calibrate the model to match UK data from 2007–2016 and analyze the steady-state, general equilibrium response of the economy of shocks to productivity/income and medical effectiveness. Our analysis suggests that the optimal response to an increase in the demand for health care depends strongly on whether it is due to an increase in income or medical effectiveness. We also show that there is disagreement across age-groups on the preferred policy.
Productivity, obesity, and human capital: Panel data evidence
2022, Economics and Human Biology
Citation Excerpt :
A sizeable literature points to the non-linear link between obesity and per capita income, called obesity Kuznets curve (Aydin, 2019; Grecu and Rotthof, 2015; Jolliffe, 2011). In endogenous growth framework, the calibration exercises find significant welfare costs of negative health shock (Kelly, 2017; van Zon and Muysken, 2001). At the individual level the link between health and productivity may be direct (operating through nutrition or capacity to work etc.) or indirect through social stigma, discrimination, mental health, and the quantity and quality of human capital.
The consequences of obesity for adults and children are well documented in the extant literature. We use panel data of 105 countries from 1990 to 2019 to estimate the effect of obesity on economic performance. We predict obesity using lagged values of child obesity as instruments. Predicted obesity has a negative and significant effect on productivity. This effect is independent of the effect of human capital and other macroeconomic determinants of economic performance. There is only weak evidence that this effect operates through the deterioration of human capital formation caused by childhood obesity.
Re-opening after the lockdown: Long-run aggregate and distributional consequences of COVID-19
2021, Journal of Mathematical Economics
Covid-19 has dealt a devastating blow to productivity and economic growth. We employ a general equilibrium framework with heterogeneous agents to identify the tradeoffs involved in restoring the economy to its pre-Covid-19 state. Several tradeoffs, both over time, and between key economic variables, are identified, with the feasible speed of successful re-opening being constrained by the transmission of the infection. In particular, while more rapid opening up of the economy will reduce short-run aggregate output losses, it will cause larger long-run output losses, which potentially may be quite substantial if the opening is overly rapid and the virus is not eradicated. More rapid opening of the economy mitigates the increases in both long-run wealth and income inequality, thus highlighting a direct conflict between the adverse effects on aggregate output and its distributional consequences.
Medical innovation and its diffusion: Implications for economic performance and welfare
2020, Journal of Macroeconomics
Citation Excerpt :
Our work contributes to an emerging literature on the role of medical progress as a driver of health care spending and longevity. Suen (2009), Kelly (2017) and Fonseca et al. (2020) study the impact of exogenous medical progress on health expenditure growth, life expectancy and, in case of Fonseca et al. (2020), on welfare. These paper differ in focus in as far (a) as they do not account for the sectoral reallocation that governs the impact of medical progress on economic performance and consequently remain silent about this;3 and (b) as they examine the impact of medical progress across different steady states, whereas we present a fully dynamic analysis of the transmission of medical innovations.4
We study the impact on economic performance and welfare of medical innovations and their endogenous diffusion. We construct a general equilibrium model with a medical sector and overlapping generations subject to endogenous mortality and calibrate it to reflect the development of the US economy and health care over the cardiac revolution during the 1980s and 1990s. By counterfactual analysis we find that (i) medical innovations have increased welfare without compromising GDP growth; (ii) there is a sizeable welfare loss due to the adoption lag involved with imperfect diffusion; and (iii) there is scope for Pareto improvement by way of subsidization of innovative health care.
Identification of the important variables for prediction of individual medical costs billed by health insurance
2020, Technology in Society
Citation Excerpt :
A model of insurer price setting and consumer welfare under risk adjustment, a policy commonly used to combat inefficient sorting due to adverse selection in health insurance markets was developed according to the study . In this study , it was found that 10% increase in final goods and medical sector productivity shocks, each have a positive effect on aggregate welfare. In this study , the lifetime effects of exogenous changes in health insurance coverage on the dynamic optimal allocation (consumption, leisure, and health expenditures), status (health and wealth), and welfare and results highlight positive effects of insurance on health, wealth, and welfare, as well as mid-life substitution away from healthy leisure in favor of more health expenses, caused by peaking wages, and accelerating health issues.
The cost of health care insurance is one of the most important factors in the health care development. To establish a better health care system, there is a need to estimate the cost of health insurance. The prediction of the cost is one possibility to improve health care development. There is a need for more advanced methods other than traditional regression approaches, because the prediction of the health insurance costs are now a big data problem. To simplify the prediction process in this study, a selection procedure was performed to identify the most important factors for the prediction of the health care insurance costs. Artificial neural network, namely adaptive neuro fuzzy inference system (ANFIS), was used for the identification procedure. ANFIS architecture was employed to model nonlinear relationships between data samples. Five input factors were considered in the analyzing (age of primary beneficiary, insurance contractor gender, Body mass index, Number of children covered by health insurance, and smoking). The obtained results showed that smoking has the highest impact on the cost of health insurance. Moreover, prediction accuracy is acceptable and could be used for future management of health care development.
Misallocations and policy constraints on mergers in the modern manufacturing sector
Journal of Macroeconomics, Volume 52, 2017, pp. 268-286
Resource misallocation has resulted in differences in inter-economy total factor productivity (TFP). However, the factors driving different levels of resource misallocation still need to be investigated. This paper argues that firm exits through mergers can be an important source of change in the level of resource misallocation. Traditional policy regulations for the key manufacturing sectors are based on either the four-firm concentration ratio (CR4) or the Herfindahl–Hirschman Index (HHI), which measure the market concentration. This paper takes a different approach. It first deduces the optimal input allocation by measuring aggregate resource misallocation; this approach allows us to identify productivity-improving merger events and complements the market concentration indexes, which have traditionally been the focus of attention. We then construct a unique dataset in the TFT-LCD industry to analyze the change in productivity resulting from the merger between two major TFT-LCD producers, Chimei and Innolux, in the first quarter of 2010. The proposed and actual team of Chimei and Innolux record a remarkable efficiency jump by achieving optimal input allocation immediately after this merger. We further interpret this scenario as a firm that is smaller and more efficient pre-merger, acquiring a larger weaker producer in a prominent IT manufacturing sector.
Explaining the durable goods co-movement puzzle: A Bayesian approach
Journal of Macroeconomics, Volume 52, 2017, pp. 75-99
A standard two-sector sticky price model with flexibly priced durables depicts negative comovement between durables and nondurables after a monetary policy shock, which is at odds with the empirical evidence. Several papers have addressed this issue with different model mechanisms, which can essentially be divided into three categories: financial frictions (on the production side or on the household side), stickiness in the price of productive inputs (labor or intermediate goods), and non-separable preferences between labor and composite consumption. While each mechanism can independently resolve the comovement problem, it is unclear which mechanism is empirically most relevant. This paper conducts a horse race among three alternatives that can resolve the puzzle in isolation, namely, a working capital channel with habit formation, sticky wages, and non-separable preferences, using a Bayesian approach. Based on the posterior estimates and a log marginal likelihood comparison exercise, the working capital channel combined with habit formation is the most important mechanism, as it can simultaneously resolve the comovement problem and fit the data well.
The meta-technology cost ratio: An indicator for judging the cost performance of CO2 reduction
Economic Modelling, Volume 35, 2013, pp. 1-9
This paper constructs an innovative ratio of meta-technology cost (MTCR) by combining the meta-frontier framework and shadow price model. This ratio is not only an indicator to account for country-specific technology heterogeneity or technology heterogeneity across a group of countries to measure improvement toward the meta-frontier. This ratio also computes the absolute value difference between the real and ideal minimum marginal abatement costs for the non-market good CO2 to achieve specific emission reduction. An equally weighted combination of technological readiness and innovation is used to classify countries into groups. The value of the MTCR via the computation of the meta marginal abatement cost (MACmeta) and group marginal abatement cost (MACgroup-k) allows us to identify the possible improvement of marginal abatement cost (MAC) in absolute value. That is, observation of the MTCR, along with its components the MACmeta and MACgroup-k, provides more intuitive and comprehensive information for commanding the cost performance of CO2 reduction than the traditional meta-technology ratio alone.
Factor-biased public capital and private capital crowding out
Journal of Macroeconomics, Volume 52, 2017, pp. 100-117
This paper studies the dynamic effects of public investment on private capital accumulation in a general equilibrium macroeconomic model of a small open economy with factor-biased public capital. I show that public investment induces rather complex private capital dynamics—falling in the short and in the long run, but potentially increasing along transition—if public capital augments private capital and private inputs are gross complements in production. Whether private investment is crowded in or out during transition critically depends on parameters that are empirically hard to measure, such as the labor supply elasticity and the elasticity of substitution between private inputs—a small increase in the latter from 0.5 to 0.6, for instance, turns a totally negative transitional effect into a predominantly positive one. These results help rationalize the lack of empirical consensus on the relationship between public and private investment.
Immigration-induced effects of changes in size and skill distribution of the labor force on wages in the U.S.
Journal of Macroeconomics, Volume 52, 2017, pp. 118-134
We isolate the effect of immigration-induced changes in the size and skill distribution of the labor force on labor market outcomes using a model in which firms endogenously respond to these changes. We analytically show that while the immigration-induced increase in the size increases the relative wages, employment and output shares of the skill intensive sector, changes in the skill distribution lead to analytically ambiguous effects. We derive quantitative results for the US economy under different counter-factual scenarios with respect to immigration-induced changes in size and skill distribution of the labor force, where these changes resemble those of U.S. as a whole, New York, California and Canada, and reflect different immigration policy regimes. For example, immigration increases the mass of workers at the lower range of the skill distribution in the U.S., and the upper range in Canada. Regardless of these differences across scenarios, our quantitative results indicate that immigration increases the relative average wages of the skill intensive sector. Further, real wages of all workers increase due to reduced prices caused by the increased size of the labor force.
Retirement with risk aversion change and borrowing constraints
Finance Research Letters, Volume 16, 2016, pp. 112-124
We quantify how an economic agent’s risk aversion change at retirement and borrowing constraints affect her optimal consumption, portfolio, and retirement decision. Numerical results with a reasonable parameter set imply that increase in an economic agent’s relative risk aversion at retirement, strong pre-retirement borrowing constraints, alone or together, can reduce the amount of wealth that must be accumulated to allow retirement. The numerical results also say that increase in an economic agent’s relative risk aversion at retirement, decrease in pre-retirement borrowing constraints, or both, can increase the consumption drop at retirement. We also display analytical results for some extreme cases.
I would like to thank my advisor, Santanu Chatterjee for his guidance throughout this project. I would also like to thank the remaining members of my committee, William Lastrapes, William Vogt, and David Bradford for their numerous contributions to this work. Additional thanks to the participants and discussants at the 82nd, 83rd, and 84th Annual Meetings of the Southern Economic Association, the seminar participants at Colorado College and Baylor University, and the anonymous referee from the Journal of Macroeconomics for their helpful comments. Finally, I would like to acknowledge the Earhart Foundation and the Knox Scholarship for their generous support of this research while I was a student at the University of Georgia.
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