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The Cost Disease

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The Cost Disease

Why Computers Get Cheaper and Health Care Doesn’t

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Americans will soon spend 62% of their incomes on health care, but they will be able to afford it.

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Editorial Rating

8

Qualities

  • Analytical
  • Innovative

Recommendation

In 1966, economist William J. Baumol and his colleague William Bowen introduced their “cost disease” concept. Since then, their hypothesis, which explains why health care and education expenses always will always increase, while manufacturing costs will always fall, has proven accurate. Baumol says that their theory could “be the longest valid forecast ever to emerge from economic analysis.” He tracks why these fees constantly skyrocket – and it’s not the nonsense that poorly informed politicians spread. He also clarifies why people will continue to be able to afford health care and education. getAbstract recommends Baumol’s important, expert explanation to those seeking to learn why some costs rise while others fall, and how to extrapolate such costs to construct an idea of future expenses.

Summary

An Epidemic of Rising Costs

Medical fees, tuition fees and other expenses involving personal services are certain to outpace the rate of inflation and may go through the roof. This is because automating such services is almost impossible, and that is the primary symptom of the “cost disease.” These services require personalized human labor, impervious to automation, stable in productivity and closed to the kinds of innovations that reduce costs in non-service fields.

Education and health care are major areas of cost disease increases. Indeed, health care, which in 2005 accounted for 15% of the typical person’s income, will cost 62% of the average person’s income in 2105. Despite these soaring prices, most people will still be able to pay for vital personal services in the future. Rising incomes, improved productivity and ever-increasing purchasing power will keep health care and education, though ever more expensive, in reach, and government will not need to restrict these essential services.

The steady rise in productivity growth is a defining characteristic of manufacturing, due primarily to automation. Productivity growth is defined as a “labor-saving change...

About the Author

William J. Baumol, the academic director at the Berkley Center for Entrepreneurship and Innovation at New York University, is a professor emeritus at Princeton University.

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