The Cost Disease | William J. Baumol

Summary of: The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t
By: William J. Baumol


Embark on a journey to uncover the factors behind the soaring costs of personal services such as healthcare and education with ‘The Cost Disease’ by William J. Baumol. The book sheds light on the challenges faced by these sectors and underscores the reasons behind their resistance to automation. Delve into the concept of cost disease, explore the stagnant and progressive sectors of the economy, and comprehend how productivity plays a key role in shaping these trends. Moreover, examine how incomes, improved productivity, and ever-increasing purchasing power can keep health care and education affordable even when prices skyrocket.

Personal Services and the Cost Disease

Personal services, such as healthcare and education, are susceptible to the “cost disease” – a phenomenon where the cost of services that require personalized human labor and are resistant to automation increases with no increase in productivity. This is in contrast to the manufacturing industry, where automation has allowed for significant gains in productivity and reduced costs. Despite the steady rise in costs, rising incomes and improved productivity will ensure that essential services remain accessible to most people. However, expenses involving personal services will continue to outpace the rate of inflation, and healthcare is predicted to account for 62% of the average person’s income in 2105. While automation and innovation can’t be applied to personal services, manufacturing will continue to evolve, lowering prices for goods like cars and computers. Overall, the cost disease is a persistent and dramatic issue, but it won’t force us to give up our usual consumption patterns.

The Cost Disease of Services

The lack of productivity growth in personal services causes their costs to rise, a phenomenon known as the cost disease. Sectors like healthcare and education fall into this category and face steady cost increases, while the progressive sector featuring manufacturing and technology decreases in cost. However, an increase in productivity will lead to increased purchasing power and living standards. The rise in purchasing power comes at a cost as terrorists can easily acquire goods such as weapons, and cheaper automobiles add to environmental degradation.

The Misconception on Cost Escalation

The rising cost of healthcare and education is a looming danger that few politicians and economists understand. Despite evidence supporting the theory of cost escalation, many wrongly attribute it to greed on the part of doctors and educators. The reality is that citizens may not be able to secure fundamental benefits due to this political fiction. An average American family from 1900 could only afford one-seventh of the amenities that families currently enjoy.

The Cost Disease

The cost of college in the US has risen by 6% annually since 1980, and at this rate, it will cost nearly $200,000 a year by 2035. This increase in price is not exclusive to the US, but a problem faced by all nations. The price hike affects essential services like health care and education. However, society will still be able to afford these services in the future. Government leaders must understand this “cost disease” to develop relevant policies and programs.

The Future of Healthcare Costs

The United States can economize in the health care sector by following the examples of other nations. Many countries are holding the line on health care prices by saving money in non-care areas, like supplies and routine services. Some midlevel economies such as Colombia, Mexico, Thailand, and Ghana are now taking similar paths. Ghana started its National Health Insurance Scheme in 2004, funding local health insurance programs with 2.5% of the national value-added tax. The share of GDP spent on health care rose only from 7.2% to 8.3% from 2000 to 2007, and by 2010, the plan covered half the population for 95% of generally reported health issues. The US health care system has some cost-savings options such as using sophisticated business services and new programs to communicate efficiently between medical professionals. According to the book, “there exist substantial opportunities for cost reduction in health care without damage to either the quality or the quantity of care.”

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