40% of income on healthcare in 2100 isn't so bad, plus a rumination on growth over time

This is quite interesting:

..we react inappropriately to future extrapolations, because we project them onto our own situations--we ignore the fact that the changes in income shares devoted to a given product arise from economic growth. It is true that I cannot afford to spend 40% of my income on healthcare. It was equally true that my great-great grandparents could not afford to spend a third of their income on housing, and another half on clothing, manufactured good, transportation, and services--Land o' Mercy, everyone in the future is going to starve to death!!!

Obviously this is ridiculous. I am not consuming less food than my ancestors; I am consuming more. (Too much more, according to the waistband of my favorite pants.) But my income is vastly higher than theirs in real terms, so that the food I consume is 10% of my household budget, rather than 50%. Similarly, our descendents in 2100 giving over 40% of their income to health care (if indeed they do), will not be skimping on housing, transportation, clothing, entertainment, or what have you. In all probability, they will be consuming more of everything than I do, except maybe energy and housing. It's just that they'll be devoting a large share of their extra income to health care. This prospect doesn't worry me. And it probably won't worry them, other than the way it (mostly) worries us: because we'd always like everything we consume to cost less, and be more equally distributed.

This time view relates to a thesis I've been thinking about but haven't quite settled on how to express persuasively...here's my draft:


Lefty progressives do not account well for growth over time. Learned ones know that the income pie is not fixed and will grow over time, but they are nonetheless obsessed with distributing it more equally in the here-and-now. In short they want their government to redistribute more food, housing, health services, and educational assistance from the haves to the the have-nots.

As a simplified concrete example, suppose there exists an initial Society A with 1000 total "points" of wealth that is stratified into the bottom 80% of population, called the "lower class", and the richest 20% being the "upper class" The wealth is distributed like this:

Lower class--80% population, 20% of wealth (200 points total)
Upper class--20% population, 80% of wealth (800 points total)

Now suppose a progressive unconcerned with growth looks at this and devises an economic policy that will immediately result in Society B:

Lower 80% class--40% of wealth (400 points total)
Upper 20% class--60% of wealth (600 points total)

Nice work, right? The lower class is twice as well off, and the net wealth of the upper class is a respectable 75% of what it started out as. This is a "fairer" society, right?

Yet the picture isn't so rosy if we introduce growth over time to the equation. For a real-world example, according to this video at time 1:33 over last 30 years (since Ronald Reagan) the US economy has averaged 2.9% annual growth. Over the same time, the French economy has averaged 1.9% annual growth. How much difference does 1% make?

Let's apply this growth rate to our initial 1000 wealth points over a period of 100 years...

1000 * (1.029 ^ 100) = 17430 total points of wealth for a US-like economy
1000 * (1.019 ^ 100) = 6560 total points of wealth for a French-like economy

As you can see, after 100 years the US-like economy is now 266% of the French-like economy's wealth! Let's apply these figures to our Societies A and B:

Less egalitarian Society A:

Lower 80% class, 20% of 17430 wealth points = 3486 wealth points.
Upper 20% class, 80% of 17430 wealth points = 13944 wealth points.

More egalitarian Society B:

Lower 80% class, 40% of 6560 = 2624 wealth points
Upper 20% class, 60% of 6560 = 3936 wealth points

Obviously, given the choice, the vast majority of sane people should prefer the wealthier, higher-growth Society A--even though B is more egalitarian.

But progressive liberals, with their distaste for measures of growth and GDP per capita, have lost sight of this.

Note that in my example here, the higher-growth society was the control group and the lower-growth society became more egalitarian. Since 1980, the US has actually become less egalitarian (i.e. the rich are richer). But the point is the same--relatively less egalitarian societies have higher growth.

Here's a video of Margaret Thatcher saying the same thing:



Update 8/22/2009: This chart from a Belgian think tank is also illustrative: