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APRIL 29, 2002

Economic
Trends
Edited by Michael
J. Mandel

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Story

Health
Care's Economic Payoff

Chart:
The Value of Health

A
Learning Gap Slows Growth

Still
a Helluva Town

Graphic:
Paying for Space

Health Care's Economic Payoff

The costs of health care
impose an enormous burden on the economy. The latest projections
from the Centers for Medicare & Medicaid Services show that,
over the next 10 years, annual health-care spending is expected to
grow to $2.8 trillion, or 17% of gross domestic product, up from 14%
today.

But surprisingly, few attempts have been made to
measure the health benefits from this spending. In particular, gains
in life expectancy do not show up at all in GDP or growth figures
from the Bureau of Economic Analysis. Because there is no good
information on the benefits, the policy debate tends to focus too
much on costs.

A new paper by William D. Nordhaus, an
economist at Yale University and a member of the Council of Economic
Advisers under President Jimmy Carter, remedies that. Nordhaus
defines a new concept that he calls "health income," the amount of
consumption that an individual would be willing to give up to get
increased longevity. That enables him to calculate the benefits from
health-care spending.

Nordhaus finds that the positive
economic impact of health spending has been enormous. By his
calculations, "the value [to the economy] of improvements in life
expectancy is about as large as the value of all other consumption
goods and services put together." He estimates that, in the first
half of the 20th century, when life expectancy at birth rose from 49
to 68 years, the value of improvements in health outstripped the
value of increased consumption of goods and services.
Life-expectancy gains have slowed in recent years, so the
contribution is not quite so large. Nevertheless, from 1975 to 1995,
life expectancy rose from 72.6 years to 75.8 years. By his
calculations, the annual average increase in life expectancy was
equivalent to increasing consumption by an extra 1.6% to 2.0% per
year. That's not too far from the 2.0% annual increase in ordinary
consumption over the same period.

The enormous increase in
health income means that there is a bigger payoff from health-care
spending than is commonly realized. By Nordhaus' estimates, the
1980s--the last decade for which he had full information--the
increase in health income was approximately twice the growth in
spending on health, making it an excellent investment. "It is an
intriguing thought to contemplate that the social productivity of
health-care spending might be many times that of other spending,"
writes Nordhaus. "If this is anywhere near the case, it would
suggest that the image of a stupendously wasteful health-care system
is far off the mark."

A Learning Gap Slows Growth

Poor countries are often criticized for
having a big income gap between a small elite and the bulk of the
population. But to boost economic growth, reducing disparities in
education may be more important than narrowing the income gap.
That's the finding of a new study by Amparo Castelló of Jaume I
University in Castellón, Spain, and Rafael Doménech of the
University of Valencia.

Using data from 108 countries for
1960-90, the authors found that a concentration of higher education
within a small percentage of the population was associated with
slower per capita income growth. By contrast, unequal income
distribution did not seem to be strongly correlated with slow
growth.

The regions with the most unequal distribution of
education, the study reports, are South Asia and sub-Saharan Africa.
The advanced countries have the least inequality of education, with
East Asia not too far behind.

The authors do point out that
there has been a general move toward less education inequality, even
in the poor regions. Still, policymakers need to focus on bringing
high school education to as many people as possible.

Still a Helluva Town

Commercial real estate in New York's
financial district has been suffering since September 11. But at
least for now, rents on Class A office space in Midtown Manhattan
seem to be holding up better than in other big global cities. That's
the conclusion of a March study of downtown office space in the
world's top 50 markets published by New York real estate firm
Cushman & Wakefield.

The study reports that the cost of
occupying a square foot of office space, including rent and other
expenses, in Midtown Manhattan was more or less flat in the fourth
quarter of last year, in the aftermath of the terrorist attack
(table). That's better than London, Paris, or Frankfurt, where costs
fell by roughly 2.5% in the fourth quarter alone. Asian financial
centers saw even sharper declines, with Tokyo and Hong Kong prices
falling 16.1% and 13.6%, respectively.

In part, Midtown
benefited from an outflow of tenants from Wall Street in the fourth
quarter. But overall, the surprising buoyancy of New York also
reflects the strength of the U.S. economy, compared with the rest of
the world. The five most expensive markets, none of which are U.S.
cities, "are all suffering some type of recession," says John B.
Coppedge III, executive vice-president for international operations
at Cushman & Wakefield. New York real estate also benefits from
not being heavily dependent on the slumping tech sector. Boston, hit
hard by the dot-com meltdown, saw its downtown rents drop by almost
10% in the fourth quarter, says Coppedge.

Of course, these
short-term results say little about the long-term future of New York
commercial real estate. Midtown's vacancy rate is creeping up, and
recovery plans for the financial district are still up in the air.
Ultimately, the ability of landlords to demand higher rents depends
on the willingness of businesses to locate in New York--and there's
no answer to that yet.

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