Greg Mankiw isn’t impressed by Obama’s comments on health spending. Obama thinks that increasing health spending without limit is a bad thing. Mankiw points to a QJE article that suggests increasing health spending is optimal:
As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.
What I find interesting is the choice of assumptions in this article. The authors assume diminishing returns to consumption spending, but constant returns to extra years of life. Obviously this means that, as consumption utility becomes saturated, more will be spent on health care as incomes rise. The assumptions drive the outcome in a way that the authors are very clear about. But is there really a constant return to extra years of life?
I wouldn’t have thought that a year of life at age 85 is equal in utility to a year at age 25. But then I have no experience so I’m just guessing. Health spending probably increases the marginal utility of an extra year, but is the MU really age invariant? I’d be interested to know what people think about this one since I have nothing but prejudice to go on 😛