The Cost Disease

The Economist:

HEALTH-CARE expenditure in America is growing at a disturbing rate: in 1960 it was just over 5% of GDP, in 2011 almost 18%. By 2105 the number could reach 60%, according to William Baumol of New York University's Stern School of Business. Incredible? It is simply the result of extrapolating the impact of a phenomenon Mr Baumol has become famous for identifying: "cost disease". His new book* gives a nuanced diagnosis, offerings both a vision of a high-cost future and a large dose of optimism. The cost disease may be incurable, but it is also survivable--if treated correctly.

To understand the cost disease, start with a simple observation: whatever the economy's average rate of productivity growth, some industries outpace others. Take car manufacturing. In 1913 Ford introduced assembly lines to move cars between workstations. This allowed workers, and their tools, to stay in one place, which cut the time to build a Model T car from 12 hours to less than two. As output per worker grows in such "progressive" sectors, firms can afford to increase wages.

In some sectors of the economy, however, such productivity gains are much harder to come by--if not impossible. Performing a Mozart quartet takes just as long in 2012 as it did in the late 18th century. Mr Baumol calls industries in which productivity growth is low or even non-existent "stagnant".

Posted by Jim Zellmer at October 14, 2012 2:30 AM
Subscribe to this site via RSS/Atom: Newsletter signup | Send us your ideas