The Next Globalization

The biggest challenge of globalization isn’t trade. It’s reining in health care and energy costs—and preparing American workers and business to compete.

Intense competition has less welcome effects, however, when sharply rising costs hit companies with limited leeway to raise their prices. In America, the main culprits are health care and energy, whose costs to employers each have more than doubled in the past six years. As the intense competition engendered by globalization has made it harder for companies to pass along these higher costs in higher prices, they have cut other costs, particularly jobs and wages.

For decades now, presidents of both parties have done little to tame health care or energy inflation, although Jimmy Carter tried in energy and Bill Clinton in health care. Yet if the next President aims to preside over a period of upward mobility for most people, he will have to do better; and fortuitously, other developments will increase the political pressures to do so. Already, the public’s growing concerns about climate change and this year’s sharp increases in energy prices are ratcheting up concerns about making everything more energy efficient and expanding the use of alternative fuels. The first steps could be relatively easy–raise fuel-efficiency standards and provide additional tax breaks for more energy efficient technologies. These steps will raise some initial costs, since more fuel-efficient automobiles and appliances usually cost more; but over time, they also produce energy-cost savings and could make the households and businesses that adopt them less vulnerable to future oil price hikes.

The harder steps will involve changes targeted specifically to climate change, because a commitment to reduce greenhouse gas emissions necessarily will involve even higher energy prices for the carbon-intensive fuels used in electricity and transportation. Whether the next president adopts the cap-and-trade approach promoted by both Barack Obama and John McCain or the carbon-based tax that most economists favor, his final strategy almost certainly will involve cushioning the impact of those higher prices by recycling the revenues raised by a carbon tax or by auctioning emissions permits for tax relief.

The effort to slow fast-rising health care costs could also get a big political boost from the need to keep Medicare solvent over the next decade, as tens of millions of baby boomers become eligible. The ultimate sources of Medicare’s financing problem are beyond anyone’s control, as the historical anomaly of a baby boom followed by a baby bust leaves us (and every other advanced country) facing, year after year, rapid increases in the numbers of Medicare-eligible elderly people and much smaller increases in the workers who pay most of the taxes to finance it. And here as everywhere else in the world, the most expensive common medical problems, heart disease and cancers, are highly concentrated in people of the age covered by Medicare.

This historic demographic shift would be more manageable, but for one of globalization’s side-effects. By driving faster growth and rising incomes in much of the world, globalization has expanded the market for new medical treatments and technologies, which in turn has increased medical R&D and accelerated the pace of medical advances. The catch is that these advances are typically very expensive, especially in the United States, where health care prices are not government-controlled. Less than 10 years ago, for example, the two principal drugs for colon cancer cost about $500 per regimen and extended people’s life spans by an average of eight months. With recent advances in chemotherapy, colon cancer patients now receive new treatments that extend life for an average of 13 to 20 months, at a cost of $300,000 to $500,000. Similarly, deaths from heart attacks are down by half since the 1980s, mainly because surgery for heart attack patients and the real cost per-patient are both up by more than 50 percent. And after a decade of breakthroughs in genome sciences, a new industry of biologic treatments has produced some 300 candidates in second- or third-stage clinical trials, with biologic treatments priced on average 20 times as much as traditional pharmaceuticals.

The next President’s health-care agenda will likely start not with these cost issues, but with universal access to insurance coverage for non-elderly Americans. But while universal coverage is a social goal beyond debate, the roots of the problem lie in decades of fast-rising costs, and whatever politicians promise, achieving universal coverage will further raise national costs. If a new president wants to bring about changes that Americans will still believe in in a few years from now–in both health care and wages and jobs–he would be well-advised to use the occasion of phasing-in universal access to advance other measures to slow those rising costs.

And the costs are significant: 16 percent of national income to health care, compared with 11 percent to 12 percent in France and Germany, where quality and outcomes are comparable. Driving this disparity is the fact that virtually every government but the United States strictly controls most prices and wages across health care. While such an approach would be alien to American political and economic culture, Americans do respect efforts to control costs, and much stricter cost controls would be easier than some expect. The 2008 Dartmouth Atlas of Health Care study, sponsored by the Robert Wood Johnson Foundation, tracked the care and cost of Medicare patients with nine serious chronic conditions. Among five of the nation’s top medical centers, the Mayo Clinic and the Cleveland Clinic Foundation produced the same outcomes in comparable patients for at least one-third less than Johns Hopkins Hospital or the UCLA Medical Center. To realize similar savings, the next President should create a national institute to identify best-practice cost controls and persuade Congress to mandate that hospitals and clinics receiving federal funding adopt them.

Capital and Crises

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