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Brooks Wilson's Economics Blog: Baumol, Cost Disease, and Health Care

Wednesday, January 20, 2010

Baumol, Cost Disease, and Health Care

Greg Mankiw (Baumol's Cost Disease) links to a New York Times interview of William Baumol by David Herszenhorn and calls it a "nice discussion."   I agree.  Even the title is a good and provides an accurate synopsis: "For Ailing Health System, a Diagnosis but No Cure," (January 17, 2010).  Baumol delivers his prior beliefs.
Let me say first of all that I am a strong supporter of the general notion of the president’s health care proposals.
Baumol is concerned that political supporters of reform have exaggerated its benefits and explains why "cost disease" will cause health care costs to rise faster than the rate of inflation.  Baumol speaks through Herszenhorn. 
Dr. Baumol and a colleague, William G. Bowen, described the cost disease in a 1966 book on the economics of the performing arts. Their point was that some sectors of the economy are burdened by an inexorable rise in labor costs because they tend not to benefit from increased efficiency. As an example, they used a Mozart string quintet composed in 1787: 223 years later, it still requires five musicians and the same amount of time to play.

Despite all sorts of technological advances, health care, like the performing arts, suffers from the cost disease. So do other public services like education, police work and garbage collection. While some industries enjoy sharp increases in productivity (cars can be built faster than ever, retail inventory can be managed better), endeavors like health care are as labor-intensive as ever.

And yet, wages in health care grow to match wage increases in the broader economy. (Imagine trying to pay today’s violinist the same as a counterpart in 1787.)

All of this happens invisibly, but the proof is in the budget ledgers of local, state and federal governments. Cost disease helps explain why low-income Americans can now afford flat-screen televisions that were out of reach a decade ago, but health insurance that was unaffordable in January 2000 remains unaffordable in January 2010.
I am not sure that I like the example of hiring string quintet now as compared to hiring them in 1787 compared to today.  Sure in would cost more to hire live performers today, but I could also purchase a CD produced by the best quintet in the world and for a small price. 

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