How important is healthcare to the economy?
While you might not think they go hand in hand, it’s actually hard to overstate healthcare’s importance to economic growth.
Indeed, today almost one-fifth of the U.S. economy is driven by healthcare spending – compared with about 7% in 1970.
You can see that in the chart below (you can also see the significant bump in 2020 due to pandemic-related spending)…
Deloitte predicts that health spending will triple by 2040 – thanks in part to the aging baby boomer generation, who will consume more healthcare each year for the next two decades.
Spending on new health technologies – from groundbreaking drugs and medical devices to cloud-based health systems and services, all of which will improve health outcomes – will also be a part of that.
And Americans will continue to pay for these new health innovations. When a nation becomes rich and its basic needs like food and shelter are largely met, people tend to spend more on healthcare.
Plus, some 22 million Americans – or about 14% of all U.S. workers – are employed in the healthcare industry, according to the Census Bureau. The Bureau of Labor Statistics projects the healthcare and social assistance sector will create more jobs than any other industry between 2021 and 2031.
But there’s another vital link between healthcare and economic growth that we need to consider. It’s a link that has helped make countries in the West rich and will be critical for the entire planet over the next half-century.
It’s the connection between healthcare and interest rates.
The Link Between Fertility and Prosperity
When a nation’s healthcare for mothers and young children improves – causing child mortality rates to fall – the number of children that families choose to have also falls.
You can see that in U.S. data.
In 1850, the mortality rate of children under 5 was about 400 per 1,000 live births. So 4 in 10 children died before reaching the age of 5.
That same year, the fertility rate was 5.8 children per woman.
As the under-5 mortality rate fell dramatically over the next 150 years to just 9 per 1,000, the fertility rate also plummeted – to 2 children per woman.
Essentially, as parents became more confident that their children would live to adulthood, they tended to have fewer babies.
So what’s the connection with interest rates?
This is where it gets interesting.
When fertility rates across a society drop, the pool of available savings rises dramatically. Put another way, when families have fewer children, they have more money to save.
Due to the laws of supply and demand, when the supply of money available for borrowing increases, the price of that money – the interest rate – falls.
And easy credit – or the ability to borrow at low interest rates – is the mother’s milk of economic growth. Without it, ventures can’t be launched and companies can’t be started or expanded.
As a result of increased savings that didn’t need to be spent on children, the U.S. enjoyed gradually declining long-term interest rates, from above 9% in 1850 to about 2% a century later. After spiking in 1981 due to Federal Reserve rate hikes intended to tackle runaway inflation, they again fell rapidly, this time to less than 3%.
And the U.S. experienced unprecedented economic growth during the period, making it one of the world’s wealthiest nations.
But this phenomenon is not limited to the U.S.
In his fascinating book The Time-Travelling Economist: Why Education, Electricity and Fertility Are Key to Escaping Poverty, economist Charlie Robertson shows that there’s a direct correlation between fertility rates and interest rates – across all nations. When families start having fewer children, banking systems expand, credit is more widely available and interest rates fall dramatically.
“High lending only happens in low fertility countries,” writes Robertson, who is global chief economist at Renaissance Capital and a specialist on emerging market economies.
The connection between fertility rates and interest rates has been an important factor in the growth and prosperity that developed countries have enjoyed for a century.
And going forward, it will be important in low-income countries, where fertility rates remain high and populations are forecast to soar in coming decades. Delivering better healthcare in these countries – so that the vast majority of infants survive childhood – could bring down fertility rates and interest rates along with them, leading to more economic growth and less poverty.
It’s just one of the many connections between healthcare and prosperity. It’s also why allocating capital to healthcare technology and innovation can lead to healthy lives, economies and portfolios.