the people based economy kevin m. murphy the university of chicago october 25, 2013
TRANSCRIPT
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The People Based EconomyKevin M. Murphy
The University of ChicagoOctober 25, 2013
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U.S. Real Per Capita GDP 1889-2012
1880 1900 1920 1940 1960 1980 20008.25
8.75
9.25
9.75
10.25
10.75
Log
of R
eal P
er C
apita
GD
P
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Where Does Growth Come From?
• There are three primary sources of growth• Investment in physical capital• Investment in human capital• Improvements in technology (knowledge)
• Primary goals of policy should be to• Maintain the incentive for physical investment• Provide an environment that fosters the growth of
human capital• Provide rewards for innovation
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How do People Fit into the Economic Picture?
• People are important as both inputs and outputs• Human capital is our most important input
• Accounts for roughly 65 percent of our productive capacity• With increasingly mobile capital and technology, countries
will be increasingly defined by their human capital
• The production and maintenance of human capital is our most important output• Education• Healthcare• On the job training
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People as Output
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1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200040.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
Cross Sectional Life Expectancy at BirthUnited States, 1900-2000
YEAR
Lif
e E
xp
ec
tan
cy
at
Bir
th
Males at age 50
Females at age 50
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1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200040.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
20.0
24.0
28.0
32.0
Life Expectancy at Age 50United States, 1900-2000
YEAR
Lif
e E
xp
ec
tan
cy
at
Bir
th
Lif
e E
xp
ec
tan
cy
at
Ag
e 5
0
Males at age 50
Females at age 50
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People as InputsThe Demand for Skill
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Education Wage Premiums
1.3
1.5
1.7
1.9
2.1
2.3
1965 1975 1985 1995 2005
Rel
ativ
e W
age
College Graduates
Graduate School
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Education Premiums by Gender
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1965 1975 1985 1995 2005
Re
lati
ve
Wa
ge
Women
Men
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Education Premiums by Race
1.3
1.4
1.5
1.6
1.7
1.8
1965 1975 1985 1995 2005
Re
lati
ve
Wa
ge
Blacks
Whites
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Overall Rise in Wage Inequality for Men
80.0
100.0
120.0
140.0
160.0
180.0
1966 1971 1976 1981 1986 1991 1996 2001 2006
Ind
ex
ed
Re
al W
ag
e (
19
67
=1
00
.0)
10th Percentile
50th Percentile
90th Percentile
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Wage Growth by Percentile 1968-2004
0.00
0.10
0.20
0.30
0.40
0.50
0.60
5 15 25 35 45 55 65 75 85 95Percentile
Rea
l Wag
e G
row
th
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Wage Growth by Percentile 1968-1977
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
5 15 25 35 45 55 65 75 85 95Percentile
Rea
l Wag
e G
row
th
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Wage Growth by Percentile 1977-1986
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
5 15 25 35 45 55 65 75 85 95Percentile
Rea
l Wag
e G
row
th
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Wage Growth by Percentile 1986-1995
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
5 15 25 35 45 55 65 75 85 95Percentile
Rea
l Wag
e G
row
th
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Wage Growth by Percentile 1995-2004
0.00
0.05
0.10
0.15
0.20
0.25
0.30
5 15 25 35 45 55 65 75 85 95Percentile
Rea
l Wag
e G
row
th
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Explaining Changes In Education Returns Using Supply & Demand
• Growth in the college premium can be explained by a very simple model
• Model based on Katz-Murphy 1992• The model:
• Demand grows steadily over time• Fluctuations in supply cause education premiums to
fluctuate• Supply grows faster than demand premium falls• Demand grows faster than supply premium rises
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Supply Growth & Relative Wages
1.20
1.40
1.60
1.80
2.00
2.20
1963 1973 1983 1993 2003
Actual Wage Ratio
Predicted Wage Ratio
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The Supply Response
• Growth in the college premium has generated a predictable response – more people have gone on to college
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Wage Ratios & College Enrollment
0.35
0.40
0.45
0.50
0.55
1965 1975 1985 1995 2005
Fra
cti
on
of
20
-25
Yr.
Old
s w
ith
So
me
C
olle
ge
1.3
1.4
1.5
1.6
1.7
1.8
Wa
ge
Ra
tio
Attendance
Wage Ratio
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College Graduation by Gender (Age 30)
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Mean GPA of High School Graduates, High School Transcript Studies
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DISTRIBUTION OF FIRST-YEAR UNDERGRADUATE GPA, BEGINNING POSTSECONDARY STUDENTS LONGITUDINAL STUDY
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Improvements in Health & Longevity(Based on Murphy & Topel 2007)
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Basic Results• Historical improvements in life expectancy
have been very significant – improvements in longevity from 1970 to 2000 were worth roughly $95 trillion (or about $3.2 trillion per year) to U.S. citizens
• Improvements in life expectancy have contributed about as much to overall welfare as have improvements in material wealth
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Methodology
• Groundhog Day model• Model based on willingness to pay• Willingness to pay based on market
experience• Cigarettes• Safer cars• Risky jobs
• Value is measured by the value to people not contribution to GDP
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1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200040.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
20.0
24.0
28.0
32.0
Life Expectancy at BirthUnited States, 1900-2000
YEAR
Lif
e E
xp
ec
tan
cy
at
Bir
th
Lif
e E
xp
ec
tan
cy
at
Ag
e 5
0
Males at age 50
Females at age 50
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Figure 5: Cumulative Value of Longevity Gains Since 1900: Men and
Women in 2000
-$200,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
Gai
n (
1996
Bas
e Y
ear)
Males
Females
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Figure 6a. Gains from Increased Longevity for Males 1970-2000
-$100,000
$0
$100,000
$200,000
$300,000
$400,000
$500,000
0 10 20 30 40 50 60 70 80 90 100
Males1990-2000
Males1980-1990
Males1970-1980
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Recent & Longer Term Changes
• Recent improvements are reflective of longer term gains in longevity
• Gains were actually somewhat greater in earlier decades using a fixed valuation profile (like fixed basis GNP accounting)
• Gains have become increasingly concentrated at older ages in recent decades
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Aggregate Gains 1970-2000
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Aggregate Gains from Increased Longevity 1970-2000
Aggregate Gains (Billions of $2004)
1970-1980 1980-1990 1990-20 1970-2000
Males $26,699 $15,471 $19,153 $61,323
Females $20,515 $9,067 $4,440 $34,022
Total $47,214 $24,538 $23,593 $95,345
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Estimated Gains Net of the Increase in Health Expenditures 1970-1980 1980-1990 1990-2000 1970-2000
Gross Gains (from Table 5) $47,214 $24,538 $23,593 $95,345 Increase in Expenditures $8,206 $14,928 $11,591 $34,725 Gains Net of Expenditure Growth $39,008 $9,611 $12,001 $60,620 Expenditure Increase as a % of Gains 17.4% 60.8% 49.1% 36.4%
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The Good News & the Bad News:
• The Good: People value gains in health and longevity a lot
• The Bad: Medical care is not cheap• While life extension added 3 trillion per year
in value, medical expenditures grew by roughly 1 trillion per year
• For the oldest groups expenditures grew by more than the value of life extension
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Balancing the Costs & Benefits
• In thinking about medical advances we must consider both sides of the equation
• Progress is important• Controlling costs is important• Controlling costs raises the value of medical
advances• Cost containment and medical progress
complement one another
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A Simple Example
• 200 billion dollar “war on cancer”• 50% probability of success – 50% probability
of total failure• Success = 10% reduction in cancer death rates• Based on Murphy & Topel – value of success ≈
$5 trillion• What about costs of care?
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Costs of care• Two scenarios:
• “good” outcome = treatment adds 2.5 trillion (50% of value) to costs of care
• “bad” outcome = treatment adds 10 trillion (200% of value) to costs of care
• Assume each scenario is equally likely
• Three potential outcomes:• 50% chance of “Failure” = -$200 billion• 25% chance of “Good Success” = +$2.3 trillion• 25% chance of “Bad Success” = -$5.2 trillion
• Expected gain = -$825 billion
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What matters in this calculation?
• Costs of research are small by comparison to costs and benefits (making them $100 billion or $300 billion has little effect)
• Probability of success matters some but not much
• Expected costs of care matter a lot• Question: What can we do to improve the
situation?• Answer: Make good care decisions!
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Example Continued• Improve care system = don’t implement if
costs of care are high• Chance of “failure” now 75%• But expected gain now +$425 billion• Bottom line: appropriate cost containment
RAISES the value of research by eliminating the major downside
• The potential downside to research is not failure but unaffordable “success”
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How do we get there?
• Best solution: improve incentives and decisions in the delivery system – research will follow
• Second best: change the direction of research to look only for lower cost solutions
• Both enhance the case for more research
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What does it take?
• Improve incentives for doctors and patients to control costs
• Use technologies appropriately – not all or nothing – many treatments will be cost effective for some patients not for others
• Focus on treatments with low incremental costs – reduces problem of over use
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Potential Pitfalls• Behavioral change is not free – people value behavior
as well as health – people value eating and even smoking
• Behavioral change that mitigates gains in longevity does not diminish the value of progress and maybe increases it
• Behavioral factors increase in importance as care moves out of the hospital and into the household
• Patient inputs make education more important and inequality a bigger issue
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Important Policy Questions• How do we take advantage of growing
demand for education and skills?• Increasing investment in higher education• Improving education at lower levels• This is a long term project
• How do we take advantage of potential gains from medical advance?
• Balancing the costs and benefits• Improving delivery system/ treatment choices• Talking advantage of scalable technologies and the
world-wide growth in incomes