Health Care and Shortstops

Baumol is an economist who is most famous for identifying Baumol’s Cost Disease in the 1960s. His observation is that although the economy as a whole becomes more productive with the advance of technology, not all sectors progress equally, and some don’t improve their productivity at all. For example, a 21st-century farmer feeds far more people than a 19th-century farmer. Likewise, a worker at a modern shoe factory makes more shoes than a 19th-century cobbler. But it still takes four talented musicians to perform a Beethoven string quartet, and they don’t do it any faster than they did in Beethoven’s day. String quartets have not seen a productivity increase. Nor has baseball.

The economic consensus of the 1960s said that wages were tied to productivity. If that were true, then classical musicians and shortstops would have seen their incomes crash relative to farmers and shoemakers, who would by now be vastly wealthier than the lowly performers of the New York Philharmonic or the Boston Red Sox.

In fact that didn’t happen, because in the long run the labor market has a supply side as well as a demand side. Asian workers can attest to that.  And, on the other side, every profession has to pay enough to induce talented people to make whatever sacrifices are necessary to enter that profession. But something has to give somewhere, so we see the productivity difference as inflation: The price of a New York Philharmonic or Yankee ticket is going to rise much faster than the cost of a loaf of bread or a pair of shoes.

Industries with a large component of personal service (e.g. health care) will not improve their productivity as quickly as other components of the economy and consequently inflation in those centers is inevitable. While health care has a large technical component, that technology--and growth--is on the outcome side rather than the productivity that leads patients to it.

Baumol decided that inflation in health care was inevitable, not because of profit motives of doctors or insurers or the inherent inefficiencies of socialized systems but by its very economic nature. If true, one wonders what the giant brained leaders will do to make the health care square peg fit in to traditional economic round hole. And what distortion that will create.