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Health-care costs are huge, and still rising. Based on current trends, in 2105 US health care will consume 62% of our national income.
And this is nothing to worry about.
How can this be? Relying primarily on simple logic and storytelling, NYU economist William J. Baumol lays out the answer in his new book, “The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t” (Yale University Press), by making us think about several other paradoxes. For instance:
How can it make more sense to throw out a TV rather than get it repaired?
Why is it that Broadway ticket prices can keep rising to astounding levels ($477 for “The Book of Mormon”), and yet people keep going to the theater? (Twelve million tickets were sold last season.)
And with tuition costs also exploding, how can it be that more Americans than ever are attending college?
These are all different ways of looking at the difference between labor-intensive industries and automated ones. Your TV can be made on an assembly line without much human involvement — but getting it repaired may require hours of intensely focused labor by the repairman who (unlike the Toshiba factory) must pay New York City rent, taxes and so on.
It’s simply built into reality that the costs of personal services such as repairs or live entertainment or health care or education must rise more quickly than inflation, and all efforts by government officials to correct this will fail, Baumol shows.
The problem isn’t that doctors, or for that matter Broadway musicians or college professors, are ripping us off. In the education industry, for instance, average wages have failed to keep pace with inflation. Your average literature professor is actually getting paid less (in real, inflation-adjusted terms) than he would have been in 1970.
The problem is that you can’t wring much more efficiency out of most of these things.
Manufacturing manages to keep producing efficiency gains. If factory workers are 4% more efficient next year, they can get a 4% raise and still be paid the same relative to their output. However, a string quartet can’t keep giving 4% more performances (at least not for very long). Nor can it perform a Mozart piece 4% faster. The string quartet’s musicians must get 4% raises just to keep pace with the factory workers. That means they must be paid more and more per unit of output.
It’s the same with doctors and nurses: They have to be there in person to deal with your illness. (Though more automation is coming.) Political types love to talk about how health care costs less in Europe, but they fail to point out that health-care costs are rising at about the same rate in Europe as they are here, for the inescapable reasons Baumol points out. Government-mandated cost controls in Canada, the UK and Germany have failed, just as they will fail in the US. Cost controls mainly succeed only in making people wait longer for care.
Back to that opening about how we’ll soon be spending 62% of GDP on health care. In 2005, Americans spent about $6,400 per person on health care, leaving about $35,400 for everything else. But our productivity growth in the parts of the economy that can be automated, such as appliances and agriculture, means that we enjoy seven times the purchasing power of a century ago. Tell your family to reduce consumption to one-seventh of what you’re used to: That’s how Americans lived in 1912.
Similarly, a century from now, if productivity merely continues to chug upward at 2% a year, we’ll be immensely wealthier than we are today. On current trends, we’ll be spending $213,000 each on health care — but we’ll have $130,000 to spend on everything else. That’s four times as much as we spend today.
Baumol is hardly a heartless free-marketer — he writes at length about the special burden the cost disease places on the poor and on the moral necessity of government arrangements to alleviate it.
But Baumol warns that a principal danger attached to health care and education is that the public outcry for affordability will cause more and more government meddling that won’t work. (See, for instance, how today’s young college graduates have more student-loan debt than ever, despite massive government “aid”).
However well-intentioned, government interference will stymie the innovation and productivity growth that will make us so wealthy that we don’t mind writing a $200,000 check for health care every year.
In other words, thanks to American innovators we’ll be fine, unless American bureaucrats get in the way.