“Nearly everyone agrees that there is something sick about the American health care system, especially when it comes to the seemingly out-of-control rise in costs.
While Democrats and Republicans continue to fight over the remedy, there is one man who can claim to have rendered a specific diagnosis and — more than 40 years later — he wants lawmakers and President Obama to know that there probably is no cure.
What afflicts the American health care system (and those of other industrialized nations) is called Baumol’s cost disease. It is named for William J. Baumol, an economist at New York University, who turns 88 next month. And it explains why health care costs will almost certainly continue to rise faster than general inflation, and why Democrats might not want to set expectations too high when it comes to their health care bill.
…
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.
At the same time, demand for health care never lets up. …
“We do now have robots performing surgery, but the robot is under constant supervision of the surgeon during the process,” Dr. Baumol said. “You haven’t saved labor. You have done other good things, but it isn’t a way of cheapening the process.”
Recent research, including a December 2008 study for Centraal Planbureau, the Netherlands Bureau for Economic Policy Analysis, has found that Baumol’s cost disease continues to be a major factor in rising health costs around the world.”
David M. Herszenhorn, “For Ailing Health System, a Diagnosis but No Cure”, The New York Times (17 January 2010).
http://prescriptions.blogs.nytimes.com/2010/01/17/an-economist-who-sees-no-way-to-slow-rising-costs/
David M. Herszenhorn is a reporter for the New York Times.
William Baumol (1922-) was for many years a professor at Princeton and New York universities. He made contributions in many areas but is best known for the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, and Baumol’s cost disease. A major influence on Professor Baumol was Joseph Schumpeter, and he claims that the object of his lifetime work was to develop a place in economic theory for Schumpeter’s entrepreneur.
In his 1967 article, Professor Baumol used the Mozart String Quintet note that the productivity of Classical music performers has not increased in 200 years since it takes the same number of musicians today and the same amount of time to play the quintet as it did in 1787. The article Baumol published was entitled “Macroeconomics of Unbalanced Growth”, and it looked at the effects of automation on the U.S. economy.
At the time (and continuing today), the U.S. was undergoing a revolution of factory automation where the introduction of new technologies and processes was raising productivity in many lines of manufacturing production. Other sectors, however, such as education, health services, and government services, among many others, were more labor-intensive, and there was less scope to substitute new technology-embodying capital for labor. Consequently, these sectors did not experience much productivity growth. As a result, costs and prices (and total income and employment) tended to fall in those activities conducive to technological progress and generating productivity advance (such as manufacturing) while costs and prices remained relatively high in non-manufacturing sectors (especially services).
While many people who work in high-productivity growth sectors such as manufacturing lose their jobs to automation, those that remain are paid more and average incomes rise. The huge and growing output of manufactured goods resulting from the growth in productivity tends to saturate the market for these products and the income elasticity of manufactures falls with time.
In contrast, in the more service-oriented sectors productivity gains are difficult to realize. Workers in these sectors nonetheless experience rising wages because they have the option of working in other occupations, and will leave if they are not adequately compensated. Many of these workers are also highly educated and would be difficult to replace should they resign. This also tends to keep their wages high. Finally, the service sector also benefits from a high income elasticity of demand as people choose to spend their rising incomes on health care, education and other labor-intensive services where productivity gains are difficult to generate.
Health care costs are high and rising because they involve high labor skills and personal attention and cannot be easily reduced by spreading the costs over more people. Like a Mozart string quintet, a certain number of workers are involved and the time taken to treat a patient, like the time it takes to play the music, is fixed. (But, let me note, that while it costs the same to produce the music, with recorded music it is much cheaper to consume it than in 1787, as it can now be replayed at almost zero marginal cost. Unfortunately, this is not the case with health care.)
It is a mistake for Congress and the Administration to imply that public policy can do much to reduce health care costs or the general efficiency of the health care sector. It can’t.
Thanks to Greg Mankiw for the pointer to this article.
No comments:
Post a Comment