Greg Mankiw posted a recent article by Bob Fogel on the causes of rising healthcare spending. This motivated Daron to write to Greg to mention our paper (as well as Amy's related work) which both suggest that rising income may not necessarily be primarily responsible for the recent growth in health spending. Greg kindly posted the (very good) e-mail and also gives a nice, thoughtful response:
Beyond a large income elasticity and the effects of incentives Daron
describes, there is a third logical possibility to explain a rising
healthcare share of GDP: an expansion in the range of products
available to the consumer due to exogenous technological change. As
doctors figure out new and better ways to prolong and enhance life, we
may rationally choose to buy these products. It might be tempting to
view this effect as a large income elasticity (which is perhaps what
Fogel is doing), for the technological change raises real incomes as
well as healthcare spending. But the resulting parameter is not a true
income elasticity, which measures how much more healthcare we buy if
income rises while the range of products is held constant.
