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Human capital

Human capital

Idaho Freedom Foundation staff
December 19, 2018

By Dr. John M. Livingston | Special Adviser on Medical Policy

“Human capital” is defined as the knowledge, skills, and other attributes acquired by individuals during their lifetimes, and used to produce goods, services, and ideas. It is what you would be left with if someone were to strip you of all your worldly goods and assets. All that would remain would be your skills, energy, creative talents, and entrepreneurial spirit. Those people who were either blessed or who developed their own human capital would be able to easily recreate their utility and make a living if everything else was taken from them. Compare Bill Gates or Russell Wilson to a high school dropout who has no natural talents or an avenue for creating a skill set that would make himself sufficient.

Since I retired five years ago, after practicing general and trauma surgery for 40 years—16 of those years in the Navy, I have tried to understand who is poor, why are they poor, and how can we help individuals and families out of poverty. Four books have spoken profoundly to me on poverty: the Bible; J.D Vance's "Hillbilly Elegy;" Sir Michael Marmot's "The Health Care Gap;" and, "The Koreans” by Daniel Beason.

Economists and public health professionals often times speak around each other. Both have much to offer in the debate regarding issues of population health and how to distribute scarce resources.

In the “Health Care Gap,” Dr. Marmot states:

1. "There is a stronger correlation between poverty and poor health than there is to poor health and access."

2. "Traditional methods of improving health care have emphasized access, technical solutions and changes in behaviors of individuals … but these methods only go so far, what really matters is creating conditions for people to have control over their own lives."

A perfect example of the second statement is documented in Michael Breen’s book, "The Koreans." In several well documented stories Breen reminds us that prior to the Korean War in 1949, the average annual salary of a worker in Korea—North and South—was $2,000 in today's dollars. Over the past two generations, as of 2015, the average worker’s salary in North Korea has stayed the same—$2,000 annually, but the average worker’s salary in South
Korea has risen to $62,000 per year.

By any measure World Health Organization numbers tell us that people living in South Korea live longer, healthier lives, have seven times lower neonatal fatality rates, are less likely to die of communicable diseases or malnutrition—remember that in 1997, two million North Koreans starved to death, but higher rates of dying from cancer—a diagnosing discrepancy is noted in the footnotes to this information.

This is just one example of how when people are able to provide for themselves they are more likely to live long, healthy lives.
What is actually happening in the Koreas? Is there better access to healthcare providers in one country versus the other? Absolutely yes. There are three times the number of doctors on a per capita basis in North Korea than in South Korea! The same numbers apply to countries like Cuba and Venezuela.

The average lifetime expectancy in South Korea is 13 years longer than in North Korea and approaches our own in the USA—82 years.

There are also more public health clinics in North Korea than South Korea.

Access to medications is substantially less and modern medical techniques in surgery, anesthesiology, and neonatal care are not as available to sick patients, but most importantly immunizations, access to clean and nutritious food, and clean air is less available in North Korea even though the production of electricity for heat, lighting, and manufacturing is much greater in South than North Korea---Please refer to the attachment below.

What happened in the Koreas after the Korean War that made such a difference?

It is my belief that the investment and subsequent reliance on human capital and the resultant economic growth provided individual citizens the means to provide for the needs of themselves and their families will and can do more to provide opportunities for good health, than any subsidy that acts as a counterbalance to economic incentives that would lift people out of
poverty and into better healthcare outcomes.

In Genesis 1:2 we come to understand that the physicality and materiality of the world are both equally important parts of God's creation. God worked hard to create the world. We are directed to work hard in taking care of his creation. There are well more than 100 passages in the Bible and my Catholic Catechism speaks directly to our obligation to be our brother's keeper and of the sanctity of work. But we are called on to provide for the spiritual needs of the impoverished, as well as their physical-material needs. Incentivizing another person to not be part of the work of God's creation is just as bad as turning one's back on someone in need. And nowhere in those over 100 verses do I find that it is an obligation of government to be the conduit of charity—quite the contrary when Jesus talks to the tax collector and the soldier he limits their activities to supplying their own individual needs and to discharge the rest to the poor not in the form of redistribute income, but rather as a gift from the giver to the receiver to which God is a party—"What you do to the least of my brethren you do unto me."

Did Paul speak to the inappropriate application of charity to those in Thessalonica who didn't work? Was he more worried about what happened to them spiritually by not being part of God's creative process or was he worried that they would go hungry?

In economics, incentives always work better than taxes or tariffs, or misapplied subsidies. The unintended consequences of an evolving welfare state are now being played out in such disparate economies as Venezuela and France.

I believe, for the most part, the problem comes down to this: Many government programs, including welfare, farm subsidies, and local government tax breaks for businesses coming into their communities, are all short term investments. Heck, even the Medicaid expansion proponents talked about the "new money" coming into Idaho. Politicians have a short-term horizon, they are up for reelection every two, four, and six  years. They want their constituents to see that they are doing something and they only have a short time to produce results so they can continue getting votes and stay in office.

Economists, farmers, housewives, and small-business people have a longer-term horizon. Allow me to give an example.

The $450 million “new dollars” coming into Idaho in the next four years will either be paid for with taxes or by increasing federal debt by issuing Treasury Bonds—with an added interest payment. Interestingly, today, our spending on federal-debt interest is approaching the federal government’s Medicaid cost: $550 billion annually.

So, let's get back to economic growth. Since the Great Society programs were introduced in 1965, America’s gross domestic product has grown an average of two percent per year. Today, a family of four in our country makes about $60,000 annually---in today's dollars the same as a family of four in South Korea. In 1965, that same American family made in today's dollars about $55,000 per year-----$3,300 of those increased salary payments have come under Donald Trump incidentally when GDP growth was over 3.5 percent. Today our GDP is a little less than $20 trillion per year, but had GDP grown at a 4 percent rate by keeping our taxes paid to all levels of government at 23% of income instead of today at 42 percent of income our family of 4----and counting for inflation, would be making $200,000 per year and GDP would be at $50trillion per year. Revenues to all levels of government would be at 23 percent of a $50 trillion GDP would $14 trillion instead of 42 percent of $20 trillion that equals $8.4Trillion.

This is the difference between a short-term investment by our government, and a long-term investment in a family or an individual, or company's future. Consumption, production, and investment would be increased by the long term private investment as opposed to the short-term government investment.

A classic example of a long-term opportunity cost paid for by short term political expediency.

One final comment on human capital and how it affects healthcare and public health. One of the fallacies of poverty is that people are poor because of rapid population growth----truly a public health problem. Since the early 60s, the WHO and other charitable groups have been trying to blunt the overpopulation problem by providing birth control pills to young women. This was indeed a big problem in South Korea during the early stages of its economic revolution. It was recognized after a time that in Taiwan and South Korea the cost of having and raising children was low. It was realized that the best way of stopping population overgrowth in South Korea and Taiwan was to provide better economic opportunities for women. This of course requires an economic investment in education, not health clinics. Taiwan took the lead. Taiwan doubled the number of girls graduating from high school from 1966-1975. At the same time the birth rate was cut in half. In the Western developed world where women have been given new
economic opportunities—their individual human capital has been increased, birth rates have fallen to below replacement levels.

A public health problem with an economic solution. Improve the value of intrinsic human capital and public health improves.

We must make sure that those living on the margins through no fault of their own are taken care of. Historically even today this is done best by the private sector. In 2016, 35 million people were taking care of 55 million senior citizens living at home at an estimated savings of $550 million/year, almost exactly what the Feds pay for Medicaid. If we were to reconcile this cost on the public ledger would we be able to pay for the long term investment in future human capital?

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