The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t, William J Baumol, Yale University Press, Pp 249, $ 30.00
THE exploding cost of health care and tuition fees are a source of widespread alarm, says well-known American economist William J Baumol while explaining the causes of these seemingly intractable problems. How will these increases affect us? This is proved through a straight forward calculation which shows that if health care costs continue to increase at the rate they have in the recent past, they will rise from 15 per cent of the person’s total income in 2005 to 65 per cent by 2105.
Rapid productivity growth in the modern economy has led to cost trends that divide its output into two sectors – “the stagnant sector” and “the progressive sector”. Since the Industrial Revolution, labour-saving productivity improvements have been occurring at an unprecedented pace in most manufacturing activities reducing the cost of making these products even as workers’ wages have risen. Productivity growth is thus defined as a labour-saving change in a productive process so that the output supplied by an hour of labour increases presumably significantly. Over time, the goods and services supplied by the stagnant sector grow increasingly unaffordable relative to those supplied by the progressive sector. Chapters 2 to 5 show that the rapidly increasing cost of hospital stay and rising college tuition fees are prime examples of persistently rising costs in two key stagnant-sector services, health care and education.
Despite the ever-increasing costs, stagnant-sector services will never become affordable to society because the economy’s constantly growing productivity simultaneously increases the country’s overall purchasing power and makes for ever improving overall living standards, The author analysis the increasing affordability and the declining relative costs of the products of the progressive sector, including some products we may wish were less affordable and therefore less prevalent, such as weapons, automobiles and other mass-manufactured products that contribute to environmental pollution.
The declining affordability of stagnant-sector products make them politically contentious and a source of disquiet for average citizens. But paradoxically, it is the growth in the progressive sector that poses a greater threat to the general welfare by stimulating such threatening problems as terrorism and climate change.
The book argues that some of the gravest threats to humanity’s future arise from the falling cost of these products, rather than from the rising costs of services like health care and education.
(Yale University Press, London; www.yaleup.co.uk)