A look at health care expenses and consumer spending.

Last week I posted a link to CNBC interviews by Tobias Levkovich. He alluded to the fact that over the last 30 years, all growth in consumer expenditure as a percentage of GDP had come from health care.

Well, came across this interesting post from Calculated Risk which discusses consumer spending as a percentage of GDP with and without health-care expenditures. It basically drives home the above point.


I’ll let the graph do the talking:



The inference is quite amazing. The consumers did NOT go on a spending binge as is widely believed. The actual increase was barely in line with GDP growth rates. The increase in consumer spending as a percentage of GDP was simply due to the rise in health care costs (!)

Ex-health, the ratio has stagnated. CR has these ominous lines:

But the more important point is what will happen in the future. From a demographic perspective, these are the best of times for healthcare expenses. The original baby busters (from 1925 to the early 1940s) are now at the peak medical expense years, but their medical care is being heavily supported by the baby boomers (now in their peak earning years).

Great point. The baby boomers could afford to support the expenses of the baby busters. Going forward, supporting baby boomers will be difficult. Health care expenses should thus face a secular downward pressure because of the changing demographics.

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US Federal receipts.

Interesting chart from Zero Hedge showing past and projected individual and corporate federal receipts. Looks like either the economy is going to boom, or individual taxes are going up, A LOT.



Raising taxes (or interest rates for that matter) will dampen any incipient recovery. Well, looks like we're already headed there. From WSJ: Small Business Faces Big Bite.

The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.

Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.

Greg Mankiw reports that once sales tax is factored in, the top earner would be facing a marginal tax rate of 55%.

Why is this important for markets? The bull market of the 1980s and 1990s coincided with tax reforms and tax cuts. Taxes, instead of being a tailwind, will actually hamper profitability and economic growth going forward. (I'm not suggesting that raising taxes is a wrong idea. I realize higher taxes is the price we have to pay for the excesses of the past few years.) Taxes are a very important determinant of market sentiment and the economy. Apart from healthcare, the cost of cap and trade is effectively a tax. Corporate taxes should be headed higher as well. (For instance, by taxing employer health insurance, removing the deduction of expenses from foreign operations, etc). This Economist article has more.

I don't think the markets have priced this in yet. Definitely not great news going forward.

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