Friday, September 11, 2009

Healthcare and global imbalances

By now we all know that the global imbalances were created by excessive consumption in the US and high savings in China (and other countries). Indeed, if we recall that the current account balance is the difference between saving and investment, we will find that for the US over the past 20 years the increase in the current account deficit is almost entirely due to the increase in private consumption.

But what is exactly behind this increase? Do Americans spend more on cars, or toys from China, or is it something else? Here are the data:

As the graph below shows, consumption-to-GDP ratio stood at 62.71% in 1980Q1. The dramatic rise in consumption in the 1990s and early 2000s is clearly seen on the graph (the blue line). By 2009Q1 consumption-to-GDP ratio rose to 70.73%! When we look a little bit deeper, we realize that almost the entire increase is due to two factors: healthcare and education. Medical care plays the major role as its share in personal consumption expenditures rose from 10.2% to 18.3%. Education accounts for one percentage point in the increase in consumption.

Dealing with the rising costs of healthcare may indeed help not only resolve issues of healthcare provision in the US, but indirectly might be the most important tool for addressing global imbalances.

Ilian Mihov

on September 11, 2009 |   Edit