In Search of the Next Economy
Will you still need me, will you still feed me, when I’m 64?
Will you still need me, will you still feed me, when I’m 64?
By Ian Morrison
The global economic boom of the last quarter century got found out in the meltdown of the last two years. It was fun while it lasted, and it sustained unprecedented (and some would argue, wasteful and unnecessary) growth in the health care sector. The old global economy was predicated on Asian toil and savings subsidizing American self-indulgence, gluttony and sloth. Bankers made out like bandits creating esoteric and highly lucrative instruments to facilitate the to-ing and fro-ing of cash. The rest of us just got older, fatter and more stressed out as we worked too hard and then collapsed in an overleveraged heap.
Health care reaped the rewards of global growth by skimming an ever larger share “off the top” of corporate profits, government revenues and household incomes. No one complained because we had houses and pickups and jet skis and Applebee’s, and when we overindulged we had fancy stents and well-heeled hospitals fixing our failing corpus. That game is so over.
Understanding the Global Economy before 2007 in 10 Easy Steps
I am not a card-carrying economist, but I know enough to be dangerous. Really smart people (whether true economists or not) have thought long and hard about what has happened in the global economy. (I particularly like the work of Harvard historian, and fellow Glaswegian, Niall Ferguson, whose Ascent of Money was a wonderfully insightful review of recent economic history, especially his concept of Chimerica, the intricate co-dependence between American investment and consumption, on the one hand, and Chinese production and saving, on the other.)
Drawing on the work of these smart people, here is my simple-minded take on how the global economy worked prior to the meltdown, in 10 easy steps.
1. Hard working people in communist countries (e.g. China, Vietnam) made good, cheap products and exported them to America at a profit.
2. They saved as much money as they could (like 30 percent of their income; before the meltdown, the U.S. savings rate was zero).
3. They loaned their money to U.S. banks and government.
4. Our banks leveraged the money 30 to 1 and loaned it to Americans to buy big houses we couldn’t really afford.
5. Many Americans (and a lot of immigrants) were fully employed building these houses, cleaning them, and selling mortgages and title insurance.
6. Some Americans worked as nurses, doctors, teachers, waiters or cooks because they weren’t any good at real estate or construction.
7. The rest of Americans were prison guards or gave PowerPoint presentations to each other.
8. We all had jobs, we all could borrow money to buy stocks and more houses, and there was great demand, so the value of the houses and the stocks kept going up; and because we all felt rich…
9. We got to borrow even more money so that…
10. We filled our houses with good, cheap products made by hard working people in communist countries.
As we say in Glasgow, this is half-joking, full serious. We have been on a consumption binge fueled by asset inflation. This binge was a product of cheap U.S. money, unrealistically loose credit, supported by artificially high Asian savings rates buoyed by artificially low foreign exchange rates. Add lack of government oversight and a global financial market that rewarded speculation, leverage and trading over prudence, parsimony and sustainability, and you have a recipe for financial disaster.
We know the story:
• $6 trillion of home equity wiped out since 2005 (with all the hopes, dreams and economic security that the home equity represents);
• reduction in stock values to a new normal Dow at 10,000 with lackluster growth anticipated;
• national income growth stalled, personal income declining and in turn, government tax revenues at federal, state and local level in severe deficit;
• massive credit card balances for working families left unpaid or unpayable;
• lack of demand for goods and services, because working families can’t afford Applebee’s, or nail salons, or prescription drugs, or doctors’ visits, or elective surgery;
• now the Europeans are seriously belt tightening because of their own profligacy and government spending, further crimping global demand; and
• 14.6 million unemployed, millions more underemployed, and millions more with reduced work hours, furloughs, elimination of overtime and, in an increasing number of cases, an absolute reduction in wages for those who have jobs.
The contraction of employment and the asset devaluation has touched almost everyone, from rich retirees to highly trained professionals like lawyers, accountants and techies, to teachers, firefighters and the waitress at your local diner.
Health care was not unscathed in the economic meltdown. As we forecast in “Meltdown,” a column published in the depth of despair in January 2009, health care did take significant hits in terms of patient volumes, Medicaid reimbursement rates, rising uninsured, increasing bad debt loads and difficulty accessing capital. (Indeed, the latest figures just released for 2009 show that the number of uninsured grew by 4.4 million in 2009 to an astonishing 50.7 million. A full 7 million people lost their employment related health insurance, in 2009. Had it not been for expansions in Medicaid enrollment and SCHIP the total uninsured would have skyrocketed further. What is perhaps most alarming is that over half of those who became uninsured in 2009 had household incomes over $50,000 per year). But despite all this economic turmoil, total health care spending continued to grow, albeit more slowly, and employment in health care continued to grow continuously over the last year. From June 2009 to July 2010, according to the Bureau of Labor Statistics, health care employment grew by 231,000 jobs from 13.54 million to 13.77 million. Hospitals alone added 35,000 jobs, one of the few bright spots in the whole economy.
The Obama administration deserves a lot of credit for avoiding the economic Armageddon that was perilously close to happening. But, despite the stimulus package and the happier news at GM, and the oil leak being capped, we are all still a bit worried about the massive deficit and, more troubling to the average citizen, the lackluster job and income growth prospects as far as the eye can see. We are all in search of the Next Economy.
In Search of the Next Economy: The Global View
The Global Economy is not over. But it might be different in the future. Here are some ideas of how the Next Economy might work from a global perspective:
China and India grow up. If China were to allow its currency to strengthen and the Chinese consumed more at home, we might all be better off. For example, according to the New York Times on July 22, 2010:
“In the first half of this year, G.M.’s sales in China rose 48.5 percent from a year earlier, and for the first time ever, the automaker sold more vehicles in China than in the United States…. G.M. sold nearly half a million Buicks in China last year, almost five times the brand’s sales in the United States.”
Internal domestic consumption growth in China can make America better off. Similarly, the India market has huge opportunities to grow as its population surges past China in the decades ahead.
Europe smartens up. Europe is biting the bullet. From the PIGS (Portugal, Ireland, Greece, Spain) to the once business-like United Kingdom, the deficit issues are enormous. On a recent visit to Ireland, I witnessed the carnage of a burst bubble. While outwardly prosperous and perpetually cheerful, the Irish have been through an economic rollercoaster that has seen deficits rise to a high of 14.3 percent of GDP in 2009, GDP fall by 7 percent in 2009 and property values down by 30 percent. In Dublin’s tony Merrion Square area, every second elegant Georgian doorway has a To Let (For Lease) sign, and the brass plaques of the former tenants portray a cadre of hedge fund managers, property speculators and assorted economic hangers on, vaporized as the bubble burst. (I should say that Ireland has still extraordinarily expensive real estate; a modest little bungalow in the suburbs of Dublin might still list at 1.5 million euros!) While growth is now essentially flat in 2010, the Irish remain cheerful, charming and convinced of happier times ahead, but they are in a very deep hole, with total debt at 997 percent of GNP in 2009 compared with the United Kingdom at 409 percent; United States, 93 percent; Canada, 62 percent; India, 20 percent; and China, 7 percent.
Throughout Europe, governments (including the recently elected Conservative–Liberal Democrat coalition government in the United Kingdom) are tackling their deficits by raising taxes and cutting public spending and by taking really tough steps for Europeans (including reducing public pension schemes, cutting services and pairing back public sector employment). If the French are taking on pension entitlements, you know it’s serious! The trick will be not to overdo it and contribute to a worldwide, double-dip Grand Recession. In the long run, generous health and pension costs will have to be paid for through the toil and taxes of young immigrants from within the European borders and beyond, who will be needed to sustain economic growth in the European Union.
Africa wakes up. Following a superbly organized World Cup, South Africa was seen by the world as a modern, sophisticated nation. The whole of Africa may have an opportunity to come into its own in the next two decades and climb out of the post-colonial malaise of corruption, political and tribal infighting, and crushing poverty and disease. What if China chose to subsidize African growth and consumption instead of American, in exchange for access to Africa’s natural resources: What would the global economy of 2050 look like? We might find out in the decades ahead.
Latin America turns up. The Latin American miracle is that it has not collapsed in its last 50 years of economic turmoil. Progress is being made through a weird combination of petro-socialism (such as Venezuela), narco-autocracy as in Colombia, and good old-fashioned industrialization in Brazil and Argentina. A growing middle class market and a lot of natural resources make all of Latin America another natural target for Asian investment and economic partnership.
Islam wants up. There are about a billion Muslims in the world, and most live in economically repressed nations. Some citizens, like the Saudis and Kuwaitis, get bought off by their oil-rich leaders, while migrant workers from Pakistan do all the hard work. Other Islamic countries—Iraq and Afghanistan come to mind—struggle economically and remain horrible examples of corruption, inequity and inefficiency. Countries like Turkey (not without its own problems), which is secular in government and mostly Islamic in the private lives of its citizens, represents, perhaps, the best possible example of how Islamic nations can embrace freedom, democracy and markets without losing face or faith.
The United States ’fesses up. And we in the United States, yes, we need to ’fess up. We need to ’fess up that lower taxes means higher deficits. And that Proposition 13–like tax provisions, and the tax deductibility of mortgage interest, may be great if you have them as individuals, but as a society, they are luxuries that we cannot afford. And that most government spending at the state and local levels goes to health care for the poor, education and prisons, and no one wants to cut these programs. But that, in turn, generous public sector pensions and health benefits for workers in those sectors are unsustainable. And finally, that rising health care costs are the primary threat to long-term budget deficits, not because of more old people, or more poor people, or more covered people under Obamacare, but because of the continuously rising intensity, and thus costs, of medical services for people in public programs. And before you say, “Well, shift them to private programs,” the problem is that private programs are even more costly, and most people can’t pay for them anyway; it’s all too expensive, and most of us need a subsidy. Unless we change the way we do what we do.
In Search of the Next Economy: The U.S. View
Look, it’s really not that bad. I believe in the United States and the energy and ability of its people to create a better life. I also believe that the Chinese and the Indians and the Brazilians and the Russians and the Turks and the Estonians want that, too, if you give them half a chance. It will all work out in the end. Trust me.
Let me offer one view of how the U.S. economy may reshape itself over the next decade, and what it means for health care. The economy may be composed of a number of very different sectors:
The ultra-productive, high-performing, globally competitive economic base. There is emerging a high-performing, ultra-productive economic base in the United States that takes ideas, knowledge, innovation, branding, marketing and technology and turns them into profits on a global basis. Think Microsoft, Oracle, Google, Apple, Intel, Cisco and Salesforce.com, but also think P&G, Coca-Cola, Amgen and Pfizer. Along the way, they create a lot of profit and a few jobs. Not a lot of jobs though, as most of these global high fliers manage global webs of production and distribution, and we consumers could care less where our iPad was made as long as Steve Jobs and his friends designed it. These companies primarily create profit and wealth, not jobs and incomes.
The new free-basing experience economy sector. Joe Pine and Jim Gilmore coined the term “the experience economy” a decade ago and wrote a great book about it. But a new variant is emerging based on a free base, as Chris Anderson (formerly of Wired magazine and now of TED) artfully predicted.
For example, Facebook has more than 500 million members. It is privately held, but if it IPOs, as it might in the next year, its market cap could be stratospheric. Does it make money? Who knows? Who cares? But with 500 million users spending endless hours a day saying “Wassup?” to each other, it has got to be worth a lot. It employs a few hundred people and occupies a few hundred million more.
Another good example is a start-up company called Bleacher Report that my son works for in San Francisco. It is a sports fan–based website. Fans create content for free: Wannabee sports journalists lying on their couches in Wisconsin work very hard writing articles and creating other content. They do it for nothing more than exposure. Bleacher Report gets upward of 14 million unique visitors a month, and they are now in the top 150 websites on the planet. They do have employees and real offices and smart engineers and server contracts all paid for by Venture investors, and increasingly by advertisers. Like most Silicon Valley start-ups, much of their office technology infrastructure is free: Google docs, G-Mail, G-Chat and the like. The good news for health care is that, like most Silicon Valley start-ups, the company offers generous health benefits; the bad news for health care is that virtually no one in the company is over 30, and there are only two girls.
But the best example of this new free-base experience economy is Zynga. It makes games for Facebook and gives them away free. For instance, according to the New York Times of July 24, 2010:
“In FarmVille, its most popular game, players tend to virtual farms, planting and harvesting crops, and turning little plots of land into ever more sophisticated or idyllic cyberfarms. Good farmers — those who don’t let crops wither — earn virtual currency they can use for things like more seed or farm animals and equipment. But players can also buy those goods with credit cards, PayPal accounts or Facebook’s new payment system, called Credits. A pink tractor, a FarmVille favorite, costs about $3.50, and fuel to power it is 60 cents. A Breton horse can be had for $4.40, and four chickens for $5.60. The sums are small, but add up quickly when multiplied by millions of users: Zynga says it has been profitable since shortly after its founding.”
You think I am kidding, right? People buy virtual chickens and tractors with real money so they can play a game on Facebook.
Zynga has 1,000 employees, up from 375 a year ago, and 400 current job openings. The company has been valued at $4.5 billion and has the backing of Silicon Valley’s Venture elite companies such as Kleiner Perkins.
Maybe there is an opportunity providing virtual health care to the virtual farmers?
Market-based meritocratic Maslowian economy. Most Americans will work in a market system of exchange, meeting basic needs through labor. The more you make, the higher up the Maslowian needs pyramid you will get. It will be meritocratic based on value creation, which in turn will largely be dependent on education levels. For example, in the depth of the recession H1 Visa slots available for engineers from abroad with bachelor degree qualifications remained unfilled because there was no demand, whereas masters degree level requests for visas were oversubscribed. Folks will be working tables at Applebee’s serving other folks who work tables at Applebee’s, where they will likely be paid more in the form of health benefits than they earn in the form of wages. Smart bankers will still be buying big boats if they have really added value to companies and to shareholders. But they will be taxed more progressively, as the tax cuts expire, to pay for health and education programs for those who want to work their way out of waiting tables, and for the health programs of those who remain through choice or circumstance.
Gigantic Keynesian sector. The health care, education and criminal justice systems represent a gigantic Keynesian sector that employs large numbers of people mostly supported by federal, state and local taxes. These sectors will offer solid, though not spectacular employment opportunities, shielded as they are from the worst sting of global competition, by virtue of the fact that they are geographically bound social services. But in the future, employees of the organizations will have more modest pensions, skinnier health benefits, less overtime and lower income growth, though they will have more economic security than most.
Freelancers. Liberated from job-lock, working forever to pay the bills, and forced out by restructuring and realignment in corporate America, armies of baby boomers will drift through the next decade eventually into Medicare but buying health benefits through insurance exchanges on the way. The individual market for health insurance purchased through exchanges will grow much further if employers decide to exit health benefits and send the employees to the insurance exchanges. It is unlikely to happen immediately, but a decade from now, it could be very different. For example, assume health insurance exchanges get established properly and work effectively from 2014 on. Assume further that the Cadillac tax comes into force in 2018 as planned, providing a major incentive for employers to opt out. Under these assumptions, and if employers feel morally freed to send their employees to the exchange (with some more generous employers giving employees a cash inducement, but other less generous employers giving employees simply an apology), then many employers may exit health benefits altogether, creating a massive shift to those plans sold through the exchanges.
The luxury sector. There will still be basketball stars, and entrepreneurs, and wealthy families, and smart lawyers who live in luxury. It won’t be as good as the Bush years, but it will still be good to be rich. No matter what happens to the overall economy, there will be a lot of rich people in the United States (many of them non–U.S. citizens), and they will want and demand the best possible health care that money can buy. Problem is, there are not enough of them to go around, so competition for the luxury set will be fierce.
Change Or …
It might all sound a bit depressing, and it is certainly more austere. But it could turn out to be a bit fairer, more meritocratic, less capricious and more sustainable than the economic boom we went through.
If health care leaders think they can survive and thrive in the decade ahead by focusing solely on the privately insured, then you have to ask: Where exactly are those privately insured going to come from in the Next Economy? And how rich will there insurance coverage be?
No matter what, health care leaders need to prepare for the Next Economy by making their health systems high performers: delivering superior quality at competitive costs. Health systems must also learn to survive and thrive on public payment levels, competitive private sector pricing, and most importantly, changing how they deliver care. Do that and you will still be in the phone book in 2050 (at least on my iPad), and I will friend you on Facebook.