Month: April 2009

The True Cost of Gun Ownership

The gun industry generates a total economic loss of $15B per year in the United States.

Guns are a part of American culture, and guns are also a part of the economy in the US. While not a large industry, the small arms and hunting industries contribute roughly $29B annually to the US economy [1]. While many industries have externalities (think pollution), the gun industry’s externalities are particularly damaging: 31,000 deaths and 70,000 injuries per year [2].  From an economic standpoint, the cost-benefit of US gun ownership and the gun industry can be measured by weighing the economic benefit of the gun industry against the economic loss caused by premature deaths and injuries.

What is the annual economic loss associated with 31,000 deaths and 70,000 injuries? By looking at loss of income alone, each gun death can be valued at roughly $1.4M, or $43 Billion in total lost income [3]. A 1994 study published in JAMA concluded that medical costs from gun injuries cost another $2.3B, or $4B today including inflation [4]. The total economic costs of $47 Billion per year from gun industry externalities thus greatly exceed the economic benefit of the industry!

Perhaps this is not surprising. Guns were invented as military weapons, and while hunting and recreation are part of today’s industry, guns’ primary use remains human combat. In the 20th century, the arms industry split into two industries: a hugely profitable defense industry which sells only to the government, and a tiny small arms industry accessible to ordinary American citizens. Despite causing a $15B loss every year to the American economy, the American small arms industry exists because it is protected from its liabilities by the Second Amendment and its political allies.

Can this situation can be improved? The gun industry has thus far successfully resisted efforts at further regulation, and the NRA and other organizations have created a potent political alliance to prevent a change in the status quo. Eventually, an industry with huge negative externalities has to improve its behavior as attitudes shift, or public sentiment and politicians will force the issue (the oil and tobacco industries come to mind). The gun industry would do well to cooperate with reasonable regulations that decrease its negative side effects, or it risks harsher regulations down the road.

[1] The gun industry’s estimated total value in 1999 was $24B, or $29B today when adjusted for inflation.

[2] According to the CDC, there were roughly 31,000 deaths involving firearms (including homicides, suicides, and accidents), and  70,000 non-fatal injuries related to guns annually.

[3] Gun death rates peek in the 18-24 age range, and fall sharply after 30, according to the CDC (select Age under Output Group). Assume that the average person killed by a gun loses 35 years of productive life (from 35-70) . 35 years * US per capita income of roughly $40,000 equals $1.4 Million per person. No NPV adjustment is needed, because gun deaths are cumulative over time – last year’s gun deaths contribute to this year’s losses as well.

[4] This study concludes that the medical costs associated with firearms injuries were roughly $2.3B per year in 1994. Assuming a health care rate of inflation of 4% over the last 15 years (lower than the real rate!), this $2.3B equals $4B in 2009 dollars.

Posted on by praveenghanta 32

US debt to exceed GDP by 2010!

In Febuary, I predicted that US federal debt would exceed US GDP by 2015. It appears that I was too optimistic at that time.

The Obama Administration’s latest budget projections now show that the debt may exceed GDP as soon as 2010! This year’s deficit is expected to rise to $1.75 Trillion, raising the total debt from the current 11.2 trillion (4/9/09) to almost 13 trillion by year end. Next year’s deficit is projected to be in the trillion dollar range, driving the debt up to 14 trillion [1], which is roughly equivalent to 2008 GDP. Since GDP growth will be negative in 2009 and modest in 2010, it’s not unlikely that GDP and gross federal debt will be equal at the end of 2010 [2].

It looks like the budget situation may force decisions on big government programs like Medicare, Social Security, and Defense sooner than most expected – and likely sooner than the Administration would prefer. Here’s to the return (or beginning?)  of fiscal discipline!

[1] See Table S-9 in the White House Budget for FY 2010, showing gross debt of 14.078 Trillion for 2010.

[2] Table S-8 shows the White House’s economic growth assumptions, which are more optimistic than many mainstream economists’ assumptions. In fact, the table itself shows that both the CBO and private economists have lower growth projections than the White House (kudos for the honesty). The CBO estimates GDP at 14.6 Trillion for 2010, meaning that any further slippage in the budget cause the debt to surpass GDP.

Posted on by praveenghanta 6

Lowering Healthcare Costs: Supply and Demand

Most discussions around healthcare these days focus on covering all Americans, and on lowering healthcare costs. President Obama has recently focused on the second issue, noting that ballooning healthcare costs could cripple the federal government’s finances and kill economic growth. But how can healthcare costs be reined in? In the partially private US healthcare system, prices are still somewhat subject to the law of supply and demand. Healthcare prices (and therefore costs) can thus be lowered by either reducing demand or increasing supply. Here’s a quick list of ideas:

Increasing Supply:

1. Increase the number of medical professionals. Unemployment among healthcare professionals remains near 1%, far lower than any other field. Increasing the number of medical, dental, and nursing school seats in the US will increase supply over time, creating more balance in the healthcare work force and driving down wage increases.

2. Shorten the length of medical school. Doctors in the UK and other countries finish their medical education in six years or less before going on to training programs (residency), while US doctors spend eight years between college and medical school. Accelerated six year medical programs exist in the US, and there is no evidence that their doctors’ education suffers as a result. Shortening medical, dental, and pharmaceutical programs to six years will increase the supply of practitioners, and decrease the starting salaries they demand since their schooling and debt burden are lower.

3. Doctors aren’t needed for routine healthcare. Nurse practicioners, midwives, pharmacists, and other medical providers can provide much of the routine care needed. National laws (or at least guidelines) making it easier for these practitioners to do their jobs will further increase the supply of qualified medical professionals, driving down prices.

4. Warranties on Medical Care. While pay for quality has been heavily discussed, it is quite difficult to measure and implement in practice. It’s far easier to require warranties on procedures, so that medical providers must provide care free of charge when issues as a result of mistakes during a procedure. Medicare could put this in place, incentivizing the industry to move towards higher quality.

Decreasing Demand:

1. Measure cost effectiveness of treatments within Medicare. As long as Medicare pays for healthcare by quantity, without any regard for cost-effectiveness, expensive and marginally effective treatments will continue to drive health care inflation. Patients should be given the option to pay for treatments that are not cost-effective, should they desire.

2. End employer health care tax deduction. As I’ve previously discussed, this $250B+ subsidy inflates demand, causing price increases for all, including those without insurance. Removing this subsidy would decrease health care spending by up to 10% [1], and could provide funding for other initiatives including universal health care or deficit reduction.

3. End tax breaks on medical goods and services. Sales taxes are generally not levied on healthcare products like the $285B pharmaceutical industry, providing them with a $20B subsidy relative to other goods [2]. Property taxes and income taxes are not collected on many not-for-profit hospitals, though some generate significant income and serve very few uninsured patients. Ending these subsidies would further reduce demand and prices.

4. Enact consistent end-of-life guidelines for Medicare. 27% of Medicare spending (almost $100B) is incurred for patients in their last year of life. While higher costs towards the end of life are expected, there are wide variations in spending in different regions of the US. Enacting a consistent set of guidelines which emphasizes palliative care would help decrease end-of-life healthcare demand.

Why doesn’t this list mention the approaches typically touted like electronic medical records, administrative efficiencies, and the like? Unfortunately, while efficiency improvements would result in one-time reductions in cost, they would not change the supply-demand fundamentals of the US healthcare delivery system. The solutions mentioned above would address these issues, creating permanent decreases in healthcare costs while potentially expanding availability.

[1] $250B is slightly more than 10% of healthcare spending in the US today, so eliminating this subsidy would reduce spending by that amount at most. In practice, the reduction would be somewhat less, since falling prices would cause some offsetting increase in healthcare consumption.

[2] Assuming a 7% sales tax (most states’ sales tax is higher), 7% of $285B is roughly $20B.

Posted on by praveenghanta 1