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What energy efficiency tells us about healthcare

In a recent post, Mark Perry noted that last year "America had the most energy-efficient economy in US history." He has a nice chart showing how much less energy (total energy) it takes today to produce a unit of GDP. This is such a big, untold story that I thought I would piggyback on his post and highlight how much less crude oil and petroleum products it takes to produce a unit of GDP, and what this tells us about a potential solution to the problem of healthcare. 

This first chart shows that U.S. economy consumed the same amount of oil last year as it did in the late 1970s. This, despite the fact that the economy today is 133% larger than it was back then. The U.S. economy has more than doubled in size over the past 33 years, but it consumes the same amount of oil.

This next chart shows the ratio of oil consumption to GDP. From the peak in the early 1970s, U.S. oil consumption per unit of output has fallen by an astounding 61%. 

The other nice thing to note on the energy front is that U.S. crude oil production has jumped 47% in the past four years. In the past year alone, crude production is up by almost 20%, thanks mainly to new fracking technology. Crude production is surging, but our consumption of crude is not, thanks to ongoing gains in energy efficiency. 

All of this is symptomatic of a very dynamic economy. As the above chart shows, the real price of crude oil is very expensive from a long-term historical perspective. Rather than suffocating the economy, very expensive energy has sparked incredible conservation efforts, technological innovation (e.g., fracking) and efficiency gains, with the result that energy today consumes just under 6% of the average person's consumption, a little less than the average of the past 50 years.

The point here is that over time our economy responds very impressively to changing prices and fundamentals. There are lots of headwinds working to slow economic growth in recent years (e.g., government spending as a % of GDP is relatively high, regulatory burdens are exceedingly high, many millions have dropped out of the labor force, corporations are reluctant to reinvest their profits, and Obamacare threatens to disrupt almost one-sixth of the economy), but that's not a reason to give up hope.

This last chart highlights the huge contrast between spending on healthcare and energy. The energy market is largely deregulated, and responds dynamically, as shown in the previous charts, to rising prices. The healthcare market, in contrast, is highly regulated and distorted by the tax code (which only allows employers to deduct healthcare costs, thus resulting in a system where almost no one pays for their healthcare expenses out of pocket—otherwise known as the third-party payer problem), and it has not responded at all to rising costs. Because of oppressive government regulations and regulatory structures, the healthcare industry has not been able to innovate or implement the kind of efficiencies that the energy market has. Market forces are suppressed, and innovation therefore has been largely suffocated.

If we want real improvement in healthcare, we need to restore market forces to the healthcare market. A few examples: Change the tax code so that everyone can deduct healthcare expenses. Encourage employers to turn the choice of healthcare coverage over to the employee—if everyone bought their own policy, the portability "problem" would cease to exist. Allow insurance companies to compete by selling policies across state lines. Eliminate government-mandated benefits which inflate policy costs and discourage innovation and consumer choice. 

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