New Ideas About Human Behavior in Economics and Medicine, Peter Orszag, Director of the CBO, October 16, 2008

The current economic crisis emerged because as a nation we have been consuming more than we have been producing, and borrowing the difference. Poorly thought through banking regulations made credit too easy, and millions of Americans borrowed against their homes to finance consumption. Because economic growth depended on the “American Consumer”, policymakers rationalized, denied, and delayed addressing the problem. Home prices rose, borrowing rose, people used rising home prices to service debt and to consume. The resulting credit bubble burst, as every credit bubble does, deflating the assets of millions and costing millions more their jobs, their homes, and their security.

Beyond the housing credit bubble, a bigger fiscal challenge looms: Productivity in our economy is fundamentally shifting due to the demographics of an aging population. As baby boomers retire, our economy shifts further in the direction of producing less while consuming more, especially in health care. It is possible that technology will improve productivity, and people may postpone retirement. On the other hand, health care costs may rise faster than projected because of the epidemic of obesity and resulting chronic illness. In any case, there is little doubt that current spending trend is not sustainable.

When the next economic crisis hits, we will look back and see that despite clear warning and plenty of hard data, policymakers had delayed, denied, rationalized and obfuscated any meaningful reform to our currently ill-thought out health policies that already fuel over $2 trillion a year in health care spending.

At an institutional level, incentives must be changed to encourage more efficient models of chronic care. Half of health spending is the result of chronic illness. Complications can be prevented through better monitoring, management and prevention, yet we are painfully slow to implement policy changes that could accelerate innovation and adoption. At an individual level, baby boomers need accelerated innovation in technologies, products, and services that help them keep physically and mentally fit in order to stay productive longer in a highly competitive global information-based economy.

It is a law of nature that anything unsustainable must and will change. The only question is whether or not we will make the changes proactively and thoughtfully, or the changes will be imposed on us painfully and in a crisis. Recent CBO reports contain a glimmer of hope: Because a substantial part of health care spending is driven by human behavior, these are not fixed costs. How doctors practice medicine, or how patents communicate with doctors, and how we live our lives are all major factors in the future trend of health spending.

Many of the same factors that can reduce health care spending, like healthy lifestyle choices and continuous learning that promotes brain fitness, also enable us to be more productive in the global economy. The next financial tsunami is not inevitable but perhaps we can do something about it.