By Patrick Cox | 20 June 2010
Two factors complicate the task of economic forecasting today— the first I bet you know, the second I bet you don't.
One, obviously, is the financial mess afflicting the world. Simply put, the subprime mortgage crisis, empowered by those attempting to use quasi-governmental agencies to promote homeownership, in combination with unsustainable levels of entitlement spending, have pulled so much capital out of the system that economies are stagnating. This reduces growth and creates unemployment, which adds to the demand for entitlement spending. It's a vicious circle spinning like a tornado from California to Greece.
For some reason, by the way, the British press is providing better coverage of the Yank economy than most U.S. publications. I recommend, for those who want to read more, an excellent article by the economics editor of The Telegraph. In a story about the IMF's analysis of the U.S. economy, he points out that "under the Obama administration's current fiscal plans, the national debt in the U.S. (on a gross basis) will climb to above 100% of GDP by 2015— a far steeper increase than almost any other country."
The good news, however, is that voters are learning important lessons. Most people are incapable of changing their minds— until the pain level is sufficiently high. We've reached that point. Economist Robert Samuelson, who is no raving ideologue, does a good job of summarizing the hard lessons of the 20th century in this piece, titled "The Welfare State's Death Spiral".
The second factor that makes it difficult to keep the big picture in mind is the dizzying rate of scientific progress. Things are changing so fast that most people, including policymakers, are operating using outdated assumptions. I'm not talking simply about new gadgets and medicines— we are experiencing a global demographic transformation that affects every area of life. It is taking place on an unprecedented scale, due entirely to advances in science and technology.
A Demographic Change For The Ages
The health care bill is a relevant example of a policy based on premises that are fundamentally obsolete and flawed. Just as government-allocated health care is now being dismantled in Greece, it will fail in America. I'm not just ranting here, by the way. There's a huge financial payoff for those who understand the flaws in the current approach to health care regulation.
The health care bill was, in fact, based on a number of key, but erroneous assumptions. One is that health care costs are out of control. The other assumption is that government can do something about it.
Let's deal with the second assumption first, that government can control costs. This is just so much obvious balderdash, I hardly know where to start. Nothing government does is ever cheaper than the private-sector version. Economists speak of the "Rule of Two". This is a rule of thumb meaning that anything done by government will cost twice what it would if it were done by the private sector.
Sometimes, we choose to pay double because government is recognized as the only legitimate provider of some services. These include courts, police and defense. To pretend that these activities are not more expensive as a result, however, would be absurd. The fact that private-sector schools and prisons, for example, operate at half the cost of government equivalents, while yielding superior results, is sufficient evidence.
Yes, I admit there are things we could do to lower health care costs now if we had the political will. Tort and regulatory reform would result in some pretty significant short-term cost reductions. Ending the disincentive problems caused by third-party payers would also help. Implementing all of these reforms, however, cannot and will not stop the inevitable future increases in health care costs.
This brings us back to the first assumption— that health care costs are out of control and represent some kind of crisis. The evidence typically given to support that claim is that we are spending more than ever before on health care, both as a percentage of our GDP and personal incomes. One ought to be skeptical of this argument for obvious reasons.
To begin with, our lives have been continually and dramatically improving for a long time. Sure, we're spending more of our total incomes in many different areas. We also are spending more of our total income today on restaurants, travel and personal electronics than we did in the past. Yet this is not viewed as a crisis by social planners.
We've all heard that we're "spending too much" so many times, people tend simply to accept it as a truism. It is not. There is a crisis, but it is not that we are living longer and spending more money on health care. The crisis is that a network of government programs were put in place in the 1930s based on the theory that people would work until their mid 60's. Then, they would retire and society would cover their costs.
Those days, few people survived long enough to collect significant benefits. Planners did not foresee life spans increasing so rapidly with all the accompanying increases in health care costs. Today, more and more people are living longer after retirement.
Because health care cost rise exponentially as we age, they are consuming far more post-employment medical services that must be paid for by younger people. This is the heart of the problem. Both the defenders and critics of medical transfer payments inevitably focus on poor, unemployed, single mothers or their children when making their cases for reform. This is, fundamentally, a ruse to avoid talking about the biggest recipients of medical welfare, older and often wealthier Americans.
The typical medical welfare recipient is not a single mother living on food stamps. It is a retired person in a sun hat, wintering in Florida or Arizona. Society could easily take care of the legitimate medical needs of disadvantaged younger people. The big, overriding problem is the transfer of money from a shrinking percentage of younger workers to an increasing percentage of older retired people.
Nothing in the health care bill changes that. In fact, it accelerates it by forcing younger, healthier workers into the insurance system earlier than they otherwise would. The inclusion of a new fee tacked onto student loans, to be used for older people's medical services, is a particularly blatant example of the stresses our system is suffering.
There are two solutions to this problem. One is to do away with biological old age entirely. An increasing number of scientists believe that regenerative medicine will eventually give us the ability to restore our bodies to a permanent biological youth, probably equivalent to about 28 years old. That is the point before our cells have started to lose function through loss of telomeres. Unfortunately, we're not there yet and don't know for sure when we will be.
This leaves Plan B. Older people, like me, will have to work longer or invest more wisely so we can afford to buy more of our own health care. It's not complicated economics.
Politically, however, it's extremely complex. Polls show that younger people, whose money is being transferred to pay for older and often wealthier people's health care, support such a change. It may be difficult politically, however, to convince older people to go along with that program. Nevertheless, the problem is going to continue to worsen until the change is made. The recent health care bill cannot and will not fix the problem, as I will demonstrate.
Let Me Give You Some Numbers To Make My Point
Did you know that only one-sixth of per capita lifetime medical expenditures are accrued in the first third of life, before middle age? One-third of lifetime medical expenditures occur during middle age. Fully one half of medical expenses come during the senior years. For anyone who cares about the truth— it is blindingly obvious that health care costs are rising because more people are getting older and old age is expensive. And the older you get, the more expensive it gets.
Since 1900, American life expectancy has increased by 19 years. It's gone up a decade just since 1950, and the rate of increase is accelerating. We are far wealthier than the previous generation, and we can afford medical options undreamed of only a generation ago. There's a catchphrase we use in Silicon Valley: "That's not a bug, it's a feature."
This longevity effect means, by the way, that the administration's claims that better coverage of the uninsured and more preventative medicine will lower costs is patently false. In fact, it will accomplish the opposite. Better health care for the nonaged actually increases total health care costs because more people reach the expensive years of old age— not that there's anything wrong with that.
If you doubt me, I refer you to a recently released study by the Center for Retirement Research at Boston College. If you haven't thought about this subject, it may surprise you, but the facts are irrefutable. Let me quote from the introduction of the brief. The researchers conclude,
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Let me restate their point with less jargon: Sicker people have higher temporary medical costs, but they die earlier, so their total costs are far lower than healthy people's total costs. For the mathematically inclined, this is true even when lifetime health care costs are discounted in terms of current dollars.
This ought to be obvious, but there seems to be some sort of psychological block that keeps people from getting it. So let me say this once again: The study proves that healthier people, because they live longer and need increasingly expensive age-related health care longer, have higher lifetime health care costs. The researchers even imply that insurance companies are missing that point when they set higher rates for people with serious illnesses.
Putting it bluntly, unhealthy people die earlier and spare insurance companies and "the system" significant health care costs. If true actuarial principles were followed, people dying at relatively young ages of rapid untreatable illnesses would be given deep insurance rate discounts, if not refunds. You may recall that tobacco companies made this very point when they were being accused of raising medical costs.
Though it was not great public relations and the media painted them as villainous liars anyway, they accurately pointed out that smokers as a group die at significantly younger ages, and relatively quickly when they do. You tend not to "linger," after all, with heart disease and lung cancer. Smoking, therefore, actually saves the health care system money in the long run.
If cutting health care system costs is truly your goal, then you should encourage smoking. If you're a fan of socialized medicine, you should thank your smoking friends for doing their part to make government health care more affordable. In fact, you might consider promoting hang gliding and extreme sky diving sports for the middle-aged if you want to cut costs further.
Cutting costs, however, is decidedly not my goal. My goal is help you, my readers, amass the wealth needed to pay for cutting-edge medical technologies so you can live much longer, happier and healthier lives. My goal, politically, is the same. Wealthy societies take care of their own voluntarily and charitably better than well-meaning, but overtaxed and poorer societies.
Health Care, The Ultimate Hedge
So let me get back to the big picture and the opportunity that increasing life spans and health care costs are creating for smart investors. I consider health care the ultimate hedge in times of economic crisis. Not only is it the last area that people cut back, it doesn't lose value in good times, as gold does. As a percentage of our economy, health care overshadows sectors that are far more subject to economic fluctuations, such as energy.
Last year, as the economy contracted, health care spending increased by over a percent. As a percentage of the total economy, it accounts for more than 17%, and it will continue to rise. Once again, this is a feature, not a bug.
As I've said so many times, the rate of medical discovery is accelerating rapidly. Mortality rates from major diseases like cardiovascular disease, breast cancer, prostate cancer and stroke have fallen significantly in recent years. Even bigger advances are on the near horizon.
Other progress is even more immediate.
The last few weeks, for example, have seen dueling press releases in RNA interference— RNAi technology is racing forward and will likely cure a lot of the diseases that keep people from getting older. I'm convinced one small company I've been watching will eliminate the threat of influenza and other virus-born diseases that are particularly hard on older people, as well as infants. The small company I have in mind has announced several incredibly important research collaborations with world-class scientists. Soon, those results will be released and we'll know if killer viruses are on the run for good.
There are also companies that I've researched that have increased the efficacies of cancer therapies— providing various benefits in combination with chemotherapy. Another company has made real progress in the fight to cure Alzheimer's disease— while other cures fall by the wayside this company seems to be on the leading edge of technology.
Then, of course, there's "the big one". By that, I mean stem cell or regenerative medicine. Regenerative medicine will do more than cure diseases. It will extend the lives of our organs and other body parts. I'm predicting, in fact, that we'll see world-changing therapies come out of stem cell companies within 10 years.
Profitable life-altering therapies will come long before then, but I'm talking about the ability to rejuvenate critical organs and thereby extend maximum life spans. Getting back to the point; despite all of the rhetoric, healthcare costs are going to rise but we're going to pay the bill. Nothing can stop that. This is a vastly unrecognized opportunity for investors.
We're not talking about little blue pills that enhance your libido or a hot new iPhone application, we're talking about life. There's no telling how infinitely-valuable these life-extending therapies will be. But one thing is certain, early investors will profit handsomely.
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Normxxx
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Hum - I wonder if the RNAi company he is referring too is RXII? Any idea of what company he is referring to?
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