Life and growth.

• Author: Jones, Charles I.
• Position: Research Summaries - Report

During the twentieth century, life expectancy in the United States rose from less than 50 years to 77 years, while average incomes rose by about a factor of 7. Which change was more valuable? William Nordhaus famously posed this question to his friends and colleagues about a decade ago: which would you rather have, the health care system in 2000 but the average income in 1900, or the reverse? Based on this informal survey and on a range of other evidence, Nordhaus argued that the two changes were about equally important. The rise in longevity in the twentieth century was just as valuable as the more standard measure of economic growth. (1) Motivated in part by this observation, a number of my recent research papers explore the interplay between the value of life and economic growth.

The Value of Life and the Rise in Health Spending

Health spending was about 5 percent of GDP in the United States in 1960 and has risen to more than 17 percent in recent years. Importantly, this increase is not just a U.S. phenomenon: health spending as a share of GDP is rising in every OECD country for which there is data over this time period. (2) While part of the increase in the United States is surely due to particular institutional features of the U.S. economy, the fact that the health share is rising across a broad range of countries suggests that deeper economic forces may be at work.

My research with Robert Hall on this topic observes that standard utility functions--of the kind that economists use to study asset pricing, the labor-leisure tradeoff, and macroeconomic fluctuations--already contain a key ingredient that can deliver this type of "income effect" in health spending. In essence, consumption runs into strong diminishing returns during any given time period. These diminishing returns cause the value of life to rise disproportionately as we get richer, so that economic growth naturally tilts spending toward preserving life. Put more coarsely, as we get richer, which is more valuable: an additional flat-screen TV, another smart phone, or additional days of life to enjoy our already high standard of living? (3)

Quantitative analysis of this mechanism suggests that these effects can be substantial. For example, our baseline model indicates that it could be efficient to spend as much as 33 percent of GDP on healthcare by 2050, and even more in later years, assuming that economic growth continues. While this particular number is subject to a range of uncertainty, the more general point is that it could be economically efficient for society to spend ever-larger amounts of our GDP on life...