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Tyler Cowen was right and Paul Krugman was wrong about life expectancy.

Before I started blogging, there were claims made in a debate by liberal bloggers that bothered me. While the particular debate is of course old and stale now, the topic, comparing the U.S with Europe, never dies. So let’s not let the left get away with this.

Tyler Cowen
wrote a post saying:

“At birth, someone living in the Netherlands can expect to live 2.35 years longer than someone born in the US, but at age 65, the difference is reversed, and someone living in the US can expect to live 0.4 years longer than someone living in the Netherlands. This difference can be explained by assuming that semi-socialized health care is better for young and worse for old people, or, at least as likely, different policies are not the main cause of the difference.”

Matthew Yglesias
answered

“Americans over the age of 65 participate in a Canadian-style national health insurance scheme known as Medicare. The data, if we want to take it seriously, indicates that the Dutch system is better than private sector medicine but worse than Medicare and tends to support a “Medicare for all” approach”

Paul Krugman wrote:

“As Yglesias points out, such arguments weirdly miss the fact that older Americans are covered by Medicare. If you say that American health care works well for the elderly, then the part of our system you’re praising is the “socialized” part.”

I compare life expectancy in Sweden and US 1950 and 2001-2005, for all, and for those aged 65.

Medicare was introduced 1965 in the US. Public health coverage for the elderly existed by 1950 in Sweden, but full universal coverage dates to 1955 in Sweden (a public health insurance was founded in 1891, and public municipal public health existed for even longer).

In 1950, before Medicare, and before Universal coverage in Sweden the difference was +2.6 at birth and +0.3 at 65. In 2001-2005 the difference between the Sweden and US was +2.7 at birth and +0.3 years at 65. Identical!

First, regarding the life expectancy at birth we can note that 50 years of different health policy, labor mark policy, welfare state coverage seems to have had zero effect on total outcome.

Second the pattern of large differences at birth but small differences at 65 existed well before the introduction of Medicare in the U.S, refuting Yglesias and Krugmans automatic attribution of differences in outcomes to the differences to policy.

It suggests a shallow understanding of the world to attribute every national difference to policy. Reality is more complex than that. Health outcomes in Europe and the U.S differ for other reasons, especially having to do with lifestyle, including auto accidents, the murder rate, smoking, diet, and demographic differences.

Last note: around 1900, before the expansion of the welfare state, the estimated life expectancy at birth was 54.0 years in Sweden and 47.3 years in the US, a difference of 5.3 years, twice the current gap. I don’t know if we can rely on comparatives that far back, when for example child mortality was high.

Europe free-rides on America

Americans pay for medical innovation, especially pharmaceuticals, and are taken advantage of by Europeans. American consumers are first-users that pay for the development of new technology, which the rest of the world after a while gets for closer to production cost (which is very low for most drugs). The same is true for other spending on medicine that involves innovation, such as dialysis technology, invented by a European but commercialized in the U.S. Swedish dialysis firm Gambro has two thirds of its sales in the U.S.

To give a simple example: Albania has a life expectancy close to as Western Europe (77.6 years). They spend very little on health care. But even Albania can buy generic heart medicine – that is better than anything you could have had in 1995 – for almost free. Not in a hundred years could Albania have developed this on their own: They free ride on the rest of the world.

Western Europe does not free-ride quite as much as Albania, but certainly bear less of their full share of the costs. Even though Europe has a much larger population than the U.S, all of Europe accounted for a smaller share of global pharmaceutical sales than the U.S, which alone accounted for 41% of the world market in 2005, despite having only 4% of world population.

According to this study 57% of European pharmaceutical profits was made in the U.S market, whereas only 24% of American pharmaceutical profits were made in the European market.

The regulated European system pays for less of the cost of medicine, but gets get the same drugs. Drugs in the American free market system costs much more. Consumers in both places get the same quality drugs, but Americans pay much more, and bear the burden of development.

Does this mean the U.S should copy the same system? No. If America stops paying for innovation there is no one to free-ride on. Unfair but true.

The irony is that Europeans root for America to move towards socialized medicine, which would harm them massively. This suggests that ideology is stronger than self-interest, especially regarding abstract concepts.

Value of work and leisure

A commentator asked about the value of leisure time. As it happens I have written a report about this (not yet published).

Based on time diaries (ATUS and HETUS) Americans 20-74 on average have 15.25 hours of sleep, leisure and personal care per day. Swedes this age have 15.55 and Europe (population weighted average of Germany, France, Italy, UK, Spain, Poland, Hungary, Baltic nations, Slovenia, Sweden, Norway, Finland and Belgium) has 16.01.

Europeans have almost 280 hours more leisure per year compared to Americans. Some of it is involuntary (or tax and benefit induced) unemployment and other forms of social insurance. About 40% of the differences in work/leisure are explained by the higher American labor force participation rate.

The question is how much we should value leisure. The hourly wage in the US is $18.4, and $15.6 PPP adjusted for the Euro-area (the latest figures I could find for Europe are for 2002, they have probably gone up a little). On one hand this underestimates the cost, since this is a usually measure for production workers, and does not include many high-earners, self-employed etc.

On the other hand this is the marginal value of work, which is higher than the average (if you have lots of free time you value each hour less than someone who only has a little free time). Also, much of it is involuntary unemployment, people would like to work for $15.6 or even less, but no one would pay them that.

Let us be generous and value each hour at $16. That is about $4400 in leisure time advantage for Europeans compared to Americans. This accounts for third of the raw GDP gap between Europe and the US.

What about the demographically adjusted gap? I estimate that to be $19.600 per capita. However European-Americans also work more, and have less free time. According to the American Time Use Survey non-Hispanic whites had 65 hours less leisure than the US average. So Europeans enjoy a 342 hour advantage in leisure. For the average value of free time to account for the Europe-US difference, it should be $57 per hour. I don’t value my free time that much, do other people? At the European hourly wage of $16 their advantage in leisure is worth $5.500 per person, accounting for 28% of the gap in income between Europeans and European-Americans.

I (it should be emphasized subjectively) believe this overestimates the differences. Americans, the British and Scandinavians have good norms, and enjoy and take pride in their work. In all societies people who have intrinsically rewarding jobs, such as teacher, policemen or researchers, derive less dis-utility from working. The main achievement is for society and individuals to take pride in work that is not intrinsically rewarding, but nonetheless valuable for society (administrators and welders are needed).

According to the latest available World Value Survey 87% of Americans, 83% of Brits, and about 60% of Swedes say that they take “a great deal” of pride in the work they do.

Other European countries, France and Germany in particular, have after decades been influenced by Social Democratic ideology in considering work a form of exploitation that should be avoided.

The corresponding figure for Italy is 30%, Netherlands 26%, Germany 18%, France 15%.

In a healthy society working and doing something (anything) well, is part of life satisfaction and a purposeful life. Like Marx I believe that alienation is a huge problem, but unlike Marx I don’t believe it is the structure of work in a capitalist society that leads to alienation of production workers, it is Marxist ideology itself!