Health and Human Capital: The Inaugural T.W. Schultz Lecture^†

Health, as reflected in life expectancy, has increased dramatically globally and especially from 1890 to 1950. For example, the life expectance at birth in the United States in 1890 was 42.5 years. By 1950, it had increased 25.5 years to 68 years. Life expectancy increased 21.5 years in the Scandinavian countries, 21 years in the United Kingdom, and 20.5 years in France. The gain was only 15 years in Japan because it was a poorer country at that time.

Since 1950, life expectance has increased much more modestly, by 11 years in the United States, 8.5 years in Scandinavian countries, 8 years in the United Kingdom, 12.5 years in France, but by 24 years in Japan. During the first half of the twentieth century, infant mortality rates fell significantly and deaths from many infectious diseases, such as diphtheria, tuberculosis, cholera, and influenza, were dramatically reduced. Improved health across the age spectrum, but especially for those fifty-five years and older, has helped increase life expectancies. For example, between 1954 and 2000, U.S. mortality from heart disease—which remains the most common cause of death—fell by more than two-thirds.

Along with the “quality” of health, Americans' expenditures on health care have increased faster than in any developed country. Between 1960 and 1998, real ($1966) per capita expenditures on U.S. health care increased from $679 to $4,030, or at an annual rate of 4.9%. Over the same period, per capita incomes grew at 2% annually. By 1998, U.S. health expenditures accounted for 12.9% of national income—far more than any other country and roughly 60% more than all other Organisation for Economic Co-operation and Development (OECD) countries (Murphy and Topel, 2003b).

The United States is also spending much more on medical research than any other country or all European Union (EU) countries combined. In 1995, U.S. health research and development (R&D) spent $36 billion from private and public sources, of which $13 billion was funded by the federal government. Federal expenditures grew rapidly to roughly $35 billion in 2004. In contrast, the EU spent only one-tenth of this amount, but had 25% more people. A central question is whether extraordinary U.S. commitment to medical research has been worthwhile.

I draw upon the Murphy and Topel (2003a) and Becker, Philipson, and Soares frameworks for valuation of any given improvement in life expectancy. The model computes the value of added longevity as the change in the expected discounted present value of lifetime utility. An equation showing an individual's willingness to pay to reduce the contemporaneous annual probability of death, by for example 1/1,000 (1/10), is central to the computation. Key parameters are the life cycle path of annual full consumption (say roughly four times per capita annual consumption), the market real rate of interest (e.g., 3.5%), and the value of the ratio of utility to the marginal utility value of full consumption, which is taken as a constant in some discussions (say 2.9). Becker, Philipson, and Soares take a related but a little different approach to measure the value of life.

Over 1970 to 1998, the reduction in death rates is concentrated at ages 55+ for men and 65+ for women. Using data from vital statistics on death rates from all causes by age and sex (National Center for Health Statistics), we compute economic value of the observed improvements in life expectancy from all sources over 1970–98. Improvements totaled $200,000 for males at birth—$100,000 for 1970–80, and $50,000 each for 1980–90 and 1990–98 (see Murphy and Topel, 2003a, p. 55). Because these health improvements were concentrated late in life and we are using a discount rate of 3.5%, the value peaks at approximately 50 years of age and not at birth. For example, at 50, the value of the 1970–80 health improvements is roughly $150,000, 1980–90 health improvements, $120,000, and 1990–98 is roughly $100,000 for a cumulative total value of about $370,000. Comparable valuations for women are smaller but show similar patterns (Murphy and Topel, 2003a, p. 56).

The aggregate gain in wealth due to reduced mortality over 1970–98 is $45.6 trillion for men and $26 trillion for women. The mortality gains in the 1970s are the largest, totaling $21 trillion for men and $15.8 trillion for women. The total gain across both sexes and all years is $72 trillion, which translates into a gain of about $2.6 trillion per year. By comparison, real GDP over this period averaged about $5.7 trillion. If we include the increased value of life as generated by greater longevity from 1970 and 1998 into the national income measures, it would increase real output over this period by roughly 50%. These numbers also are comparable to Nordhaus' calculations (p. 27).

Increased longevity comes from many sources, including improvements in medical knowledge and public health, new drugs and treatments, changes in life styles, and greater access to health care. Some of these improvements in health knowledge and technology have been transferred to other, including poor countries of the world. We can do some income comparisons taking into account the likely value of increased longevity elsewhere, using a full-income measure (3–4 times capital consumption). We assume that the average value of life in a country is proportional to the average value in the United States times the ratio of per capita income in that country to the U.S. per capita income. Regressing the rate of growth of real per capita full income for 1960–2000 on the log 1965 value of full income for more than 100 countries reveals significant convergence of full income across countries. In particular, the rate of convergence is much faster for full income adjusted for gains in life expectancy than for per capita real cash income (Becker, Philipson, and Soares). This suggests that international spillovers of medical knowledge are significantly greater than other sources of economic growth, e.g., nonmedical technology transfers.

Although expenditures on human health including medical R&D are large, a key question is whether we are spending too little or too much. The numbers that I showed above for the United States from the value of enhanced longevity certainly greatly exceed medical costs. But let us take a world perspective on health benefits and cost by examining the potential loss of life due to pandemics. In the 1918–19 world flu pandemic, 2.8% of the world population died. If there was a world avian flu epidemic of a similar scale, roughly 168 million people would die. The ratio of world GDP per capita to per capita U.S. GDP in 2004 was 0.22. Using the $3 million life lost based on U.S. data, a rough estimate of a world avian flu pandemic is $3 million × 0.22 × 168 million people or $111 trillion. Thus, the potential wealth loss of an avian flu pandemic is staggering. One can conclude that we are most likely underinvesting in R&D to reduce the probability of this pandemic event occurring.

In conclusion, what is the answer to the question of why we spend so much on medical knowledge, medical care, and change in lifestyles? It is mainly because saved lives are so valuable.