I thought the chart below that Tyler Cowen highlighted yesterday was fascinating, precisely because it begs Tyler's question, "What happened in 1980?"  Unfortunately, the discussion got immediately sidetracked.  The Incidental Economist guys argued that the chart was somehow wrong and there was no big jump in health care inflation in 1980.  But as Kevin Drum points out in a comment to the post, their trend basically looks just like in the chart they are criticizing.  Then Tyler posted an email excerpt from Austin Frakt of Incidental Economist that focused on why things flattened out in the late 1980s.
Let's dial this conversation back.  The fascinating thing about the original chart is how the U.S. pulls away from all the other countries starting in 1980.  So, fine, maybe there's not a dramatic change in trajectory in the U.S. beginning in 1980, but American health care inflation departs from the relatively tight pack of countries that it was part of prior to 1980 in a dramatic way.  I'd love to hear the IE guys and other health care experts hypothesize why that is.

My main interest in the chart is related to my (on-going, but much delayed) research into inequality trends.  Richard Burkhauser and Kosali Simon have shown that the rising cost of health insurance basically explains the (small) increase in income inequality that occurred in the late 1990s and 2000s.*  The exceptionalism of the American health care inflation trend in the 1980s mirrors the sharp increase in measured income inequality in that decade.  Might the two be related somehow?  Perhaps accounting for health insurance would reduce the apparent rise in inequality.  Alternatively, perhaps the rise in income inequality might explain the American exceptionalism.  Inquiring minds want to know! (mine anyway...)

Sorry for the light posting, by the way--there is a very cute 7-month-old to blame.

*Disclosure: my employer funded the research they conducted, and I played a primary role in the decision, but rest assured that my employer wants a big distance between this blog and its own work!
12/2/2010 07:01:20 am

"Perhaps accounting for health insurance would reduce the apparent rise in inequality."

Yes, employer paid health insurance does not show up in the reported inocme numbers on which Piketty Saez et al rely. As it forms a greater portion of compensation the less one's wages are, its omission (understandable as one can only work with what one has), results in in equality being overstated. The same can be said for the underground economy; for scholarships and other educational grants; for the forgiveness of debt in bankruptcy; and other items the inclusion of all of which would further reduce the extent of inequality.

Wendy Rahn
12/3/2010 04:13:11 am

I don't have the answer to the reformulated puzzle, though I have some not very well developed ideas, but my sense is that most Americans do not feel like their employer-provided health insurance is "income" in the same way that wages are, or that these benefits represent savings in the way the 401K contributions do. Even if you factored in health-care benefits, the proportion of national income going to the super rich (top 1%) and the stupendously rich (top .01$) of Piketty and Saez would still have grown over time because of capital gains, stock options, and executive compensation. That's my guess anyway.

3/21/2011 08:49:44 pm

"begs the question" does not mean what you think it means. Look it up!


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