The opioid crisis has been emerging more and more into the national consciousness. With the President again stating last week, and again today, that he would formally declare the crisis a national emergency, concern has officially reached the highest office of the land. In terms of lives lost, opiate overdose deaths from prescription and illicit drugs now approaches, and by some estimates exceeds, the number of highway fatalities each year. And the numbers continue to rise: The Centers for Disease Control (CDC) report a three-fold increase in fatal overdoses from 2000-2015. The preliminary data from 2016 shows the trend is only accelerating with a 22% increase over 2015.
The human costs on families and communities troubles me a great deal, but as an investment manager, one of my responsibilities is to look with a dispassionate eye at long term trends that could create weaknesses in the economy, and therefore potential threats to investment opportunities. The financial burden of addiction is substantial. A CDC study published last year estimated the economic burden resulting from the abuse of, dependence on, and overdose from prescription (not illicit) opioids to be $78.5 billion in 2013 – and surely that number grows as the epidemic spreads.
In a previous Market Commentary this month, I mentioned the number of people who have left the labor force in the past decade, in relation to inflation. In 2007, 66% of the civilian population over the age of 16 was working or actively seeking work. By 2013, that number had dropped to 63%, where it has remained, give or take a few tenths of a percentage point. In purely economic terms, growth depends on either more hours of labor worked or increased labor productivity. At its simplest, the real GDP of a country is the hours work multiplied by labor productivity. The fewer people in the labor force, the less the economy can grow. A study by economist Alan Kreuger of Princeton University this year estimates that 20% of the drop in labor force participation is due to opioid use and abuse.
Of course, when we get away from textbook definitions and look at the real world, there are exceptions to everything. We don’t want 100% labor force participation as a society – we want people of working age to go to college and graduate school; we want those who have had a fulfilling career to be able to retire if they choose; and we want families to have the financial means for only one spouse to have to work if they choose. While in economic terms, all three of those conditions can be a drag on current GDP, they also serve a societal good, and in the case of education and families, the investment made in the human capital of children and young adults reaps tangible economic benefits in the future. Indeed, a case can be made that retirement has positive economic impacts as well: by investing in a retirement account, a worker has injected capital into the economy for investment in productivity. Clearly, however, there are no benefits resulting from the loss of productive labor, and productive citizens, to addiction.
Another aspect of this epidemic is that there is a disproportionate impact on rural communities and it threatens to create deeper divisions within our social fabric. It is well documented that much of the wealth and income in this country are, to some extent, geographic. When we put maps side by side of labor force participation rate and prescription rates for opioids, a frightening correlation appears. Where the labor participation rate among prime working age men, age 25-54 is the lowest, the prescription rate for opioids is likely higher. For example, the deep red of opioid use in Appalachia, the Mississippi delta, rural Northern California and Oregon on the CDC map corresponds tightly to the deep blue of low labor participation on the Census bureau map.
Source: Centers for Disease Control
Source: US Census Bureau
The disparities in the labor market between rural and urban areas have drawn the attention of the Federal Reserve. In a speech last month, Governor Lael Brainard noted “it is striking that in larger metro areas, the labor force participation rate for prime-age men has recently retraced much of the decline experience during the recession, while in smaller metro and rural areas, [it] remains well below its pre-recession levels.” Governor Brainard cited Professor Kreuger’s work, noting increases in opioid use have kept people out of the labor force.
The changing face of the American economy threatens to create “two Americas”. The rural and exurban regions of the country have been disproportionately affected by changes in the economy, as they tend to be more dependent upon manufacturing and extraction industries. Nations with emerging economies tend to have a comparative advantage in those industries, while America creates jobs in services and technology — jobs for which the industrial workforce is not trained. Not coincidentally those same areas with the largest job losses correspond to the areas of the highest prescription rates for painkillers, and the highest rates of addiction. Opioid abuse is both a cause and an effect of regional changes and imbalances in the economy.
The long-term costs of healthcare in communities decimated by addiction is not one the country can easily afford. The epidemic’s contribution to the decline in labor participation makes the challenges of growth with an aging population and increasing wealth gap even more difficult to overcome. As long-term investors, we track the impact of these trends because they can potentially impact economic growth and investments.