It occurred to me last night that a simple story of both the 1990s era prosperity and the potential for general prosperity over the next 5 years or so could have the same simple explanation: a battle over healthcare reform.
Some economists and politicians have pushed the idea that Obamacare is leading to increased uncertainty in the business world and that this uncertainty is preventing business leaders from investing. I have pooh-poohed this idea as being both ridiculous on its face - there are many more serious sources of uncertainty than health policy - and as being inconsistent with the data - business investment is one the strongest parts of the economy.
However, there is one sector in which this story makes sense and at least a casual look at the data supports it - that is health care itself. If any industry is going to be effected by the uncertainty surrounding health care polcy then the health care industry is a good candidate. Thus, it would make sense to health care administrators becoming increasingly skittish about big ticket purchases. And, indeed we see some evidence of this:
The blue line here is business investment in IT. The yellow line is investment in health care equipment. Both of these are booming sectors and have been for some time. However, note the dynamics. IT was on a parabolic path right up until the dot-com burst when in declined suddenly and subsequently resumed a merely super-fast rate of growth rather than a out-of-this-world-record-setting rate of growth. IT then suffered another stumble with the Great Recession but has recovered and then some. This lines up well with our intuition about the IT industry.
Now look at health care equipment. Nice steady growth until a swoon from 1992 until 1995. Then rapid growth until around 2007. Note that the spending slowdown here predates the Great Recession. Since 2007 health care investment has recovered but only weakly so. From 2001 to 2006 health care and IT investment were growing neck -and-neck. Now a gap has opened up, that if anything appears to be widening. If health care investment were seeing even a simple mean-reversion then one would expect the gap to close.
A story here is that the swoon in 1992 and the stagnation after 2006 were both caused by political uncertainty. The government at all levels is far and away the biggest purchaser of health care through Medicare, Medicaid and local government employee health insurance. When government officials start swapping plans about how to reduce the cost of health care this has to make health care providers nervous.
This means less investment in health care equipment.
Here is the thing though. Health care productivity growth is notoriosly lousy. So, increasing purchases investments in health care equipment don't show up as superior service, but as higher costs. These higher costs lead to the notorious phenomenon of skyrocketing health care inflation.
Health care inflation in turn pushes up the overall rate of inflation. High levels of overall inflation lead the Federal Reserve to raise interest rates and slow investment in all sectors not just health care. Indeed, investment in transportation equipment and structures is much more sensitive to rate increases than health care investment. So, we have situation in which high levels of health care investment lead the Fed to respond by lowering investment in transportation and structures.
However, the opposite may have happened in 1992 and in 2007. The government began talking about the need to reign in health care costs. Providers got nervous and reduced investment. This in turn slowed the growth of health care costs. Slower health care inflation caused the overall inflation rate to fall and the Fed responded by reducing interest rates and increasing investment in structures and transportation equipment.
Indeed I can easily overlay investment in transportation equipment - structures are in a different database.
Transportation investment does indeed pick-up around 1992, though it fell off a cliff in 2006, from which it has yet to recover. A large part of the complication here is that investment in transportation equipment is very sensitive to not only the interest rate but also energy prices and credit availability. Without stripping out those effects its nearly impossible to get a clear picture. Nonetheless, given what we know about the evolution of energy prices and the credit crunch the data doesn't look inconsistent with the idea that below average investment in health care causes better than otherwise expected investment in transportation equipment a few years later.
Now, as for today. Things are complicated by the fact that the Fed is at the zero lower bound and the world is generally speaking in an economic twght-light zone where the normal rules of the game don't apply. Still, health care investment has slowed and as one might predict, health care costs have slowed and inflation has slowed. This gives the Fed a lot of room to keep monetary policy loose and investment in the rest of the economy high - if the Fed is willing to take it.
