Health Spending and First Quarter GDP: What Happened?

by John Graham,

A couple of months ago, I noted that the only thing growing in the stagnant economy in the first quarter was health spending. Further, another source suggested that most of that spending was from Medicaid, a welfare program. Such “growth” is not really good for the economy.

The final estimate of real first quarter Gross Domestic Product (GDP) has thrown everyone for a loop, reporting an annualized decline of 2.9 percent. It was a huge revision: The previous estimate was that first quarter GDP had declined by only one percent.

The huge error in the earlier figure was almost entirely driven by a poor estimate of the effect of ObamaCare by the Bureau of Economic Analysis (BEA). … the BEA thought that ObamaCare enrollees would immediately start consuming lots of medical services. In fact, consumption of health services declined in the first quarter.

And figuring out ObamaCare’s impact on the economy is only going to get more difficult:

Analysts expect the contribution of health care to the overall G.D.P. to be bumpy and unpredictable in the quarters ahead because of uncertainty about the law.

“Looking forward, the volatility in the measurement of health care services represents a risk to our G.D.P. forecasts,” Doug Handler, chief United States economist at IHS Global Insight, wrote in a note. “Since this volatility is not business-cycle related, its impact should be heavily discounted in assessing the general health of the economy.” (NYT)

Maybe it’s a conspiracy, like the IRS targeting nonprofits with names that sound like “Tea Party”. Tyler Durden at ZeroHedge thinks that the Department of Commerce has simply deferred billions of dollars of health spending to the second quarter, predicting that the second quarter’s GDP growth will be reported at over five percent. Presumably, this will help the President’s party in the November elections.

what we need to remember is that the BEA’s GDP estimate is a set of accounts (and a poor one, according to Austrian-school economists), not a description of cause and effect.

Changes in the rate of economic growth drive changes in the rate of consumption (including health care), not the other way around. Recent research indicates that changes in GDP, lagged up to four years, explain about two thirds of changes in health spending.

So, ObamaCare is having an effect: It is creating uncertainly and increased government control of society, which holds down economic growth. In turn, that suppresses consumption, including health care.

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