Why do healthcare and education keep getting more expensive while electronics get cheaper?

Two receipts

Every reader has run this experiment without meaning to. One receipt is a pleasure to read: the television is bigger, sharper, and cheaper than the one bought ten years ago, the phone does what a studio once did, the software that came boxed now arrives free. The other receipt arrives monthly and reads like a ratchet: the daycare bill, the tuition installment, the hospital statement with its own arithmetic dialect. Wages sit somewhere between the two, which is precisely why both receipts feel personal. The question people ask about all this usually comes out in one breath, why does everything only ever get more expensive, except the electronics. This book splits the breath in two. Why the whole price level drifts upward, on purpose, at about 2% a year, is monetary machinery with its own home in Volume II: History, in the chapter on central banks and why they aim at 2% inflation rather than zero. This chapter takes the stranger half, the scissors: why, inside any overall drift, the classroom and the clinic climb relentlessly against the paycheck while the television falls against everything.

The scissors, measured

The pattern deserves to be established as fact before it is explained, because its size surprises even people who feel it. The figure below indexes six American price and wage series to their 1998 level and lets them run for twenty-six years. College tuition and fees end at three times their starting point. Daycare and preschool end at 2.6 times; medical care at 2.3. The median worker’s weekly earnings, the blade the reader stands on, multiply by 2.2, just under medical care and well under the classroom. Below the wage line the other blade opens: computer software falls to a quarter of its 1998 price, and televisions, quality-adjusted, fall to about a fiftieth. These are nominal series, so the top group is climbing partly with the general drift the History volume’s central-banking chapter explains; the scissors is the gap between the blades, and no choice of deflator closes it.

Before the mechanism, notice what the figure does not show. It does not show a general failure of markets to discipline prices; the bottom half of the chart is markets disciplining prices as hard as prices have ever been disciplined. It does not show wages failing to grow; the ink line more than doubles. And it does not single out America’s famous villains, since the same relative drift shows up across rich countries with utterly different insurance systems, university funding, and drug-pricing politics; Baumol’s late survey of the evidence traces the pattern across the OECD (The Cost Disease, 2012). Whatever explanation the reader adopts has to produce this exact signature: relentless, decades-long, spread across every service where a person attends to a person, and indifferent to who owns the till. Conspiracy is a poor fit for a pattern that polite Denmark and litigious America share. Arithmetic fits.

The quartet that never speeds up

The arithmetic was written down in 1966 by William Baumol and William Bowen, in a study of a sector with no insurers, no administrators, and no government in sight: the performing arts. Their observation has become the standard teaching case because nothing about it can be blamed on anyone. A string quartet written in Beethoven’s lifetime required four players and some forty minutes then, and requires four players and the same forty minutes now; as Baumol later put the general point, a half-hour quintet calls for two and a half player-hours, whatever the century. Two hundred years of industrial revolution have multiplied what a factory hand produces per hour by orders of magnitude and have not shaved one minute from the quartet. Yet the quartet’s players are hired out of the same labor market as everyone else. When productivity growth elsewhere pulls wages up economy-wide, the concert hall must pay musicians something resembling what those same capable people could earn in the productive sectors, or lose them. The cost of a performance therefore rises, decade after decade, without a single person in the hall doing anything worse, lazier, or greedier than before. Baumol and Bowen called it a productivity lag; later usage renamed it the cost disease, a name Baumol himself came to embrace, and the name stuck because the pattern behaves like one: chronic, progressive, and nobody’s fault.

Where the labor is the product

The quartet is not a curiosity. It is a template, and the reader’s costliest bills fit it with almost no forcing. The purest case in a modern household, named deliberately here because it is where young families feel the scissors first, is childcare. What a parent buys from a daycare is attentive adult hours per child, full stop; the attention is not an input to the product, it is the product. Regulation fixes adult-to-child ratios in most jurisdictions, prudence would fix them anyway, and so output per caregiver-hour is pinned roughly where it was a generation ago while caregivers’ wages must track an economy that got richer around them. The result is the second-steepest rising line in Figure 7.1, a price that multiplied by 2.6 while the median wage multiplied by 2.2, in a sector of thin margins, modest pay, and no lobby worth fearing. Anyone whose theory of dear services requires a villain should sit with the daycare case for a minute: it climbs without one.

Education is the same product at larger scale. A teacher in front of a class delivers attention divided by the number of pupils; cutting the divisor is called quality, and raising it is called decline, which is another way of saying that parents, regulators, and the sector’s own definition of quality do not permit it to take productivity gains the way a factory does. Healthcare is the partial case: astonishing productivity growth in what medicine can do, delivered through irreducibly human hours at the bedside, the clinic, and the operating table. The parts of medicine that behave like manufacturing, generic pills by the billion, lab panels by the machine, have seen manufacturing-style price behavior; the parts that consist of a trained person’s undivided time have seen quartet-style price behavior, and the bill mixes the two. Even the barber and the veterinarian, sectors with no third-party payer at all, drift upward on the same tide, which is the cleanest everyday evidence that the tide is real.

What the disease does not explain

An honest home for the cost disease has to mark its edges, because the mechanism explains the slope of the reader’s bills better than it explains their level, and three other forces stack on top of it. The first is that the product itself changes. A hospital in 1998 could not sell what a hospital sells now; part of medicine’s price climb buys genuinely new capability, and the health economist Joseph Newhouse’s long-standing reading attributes the bulk of long-run medical spending growth to technology rather than to Baumol’s wages. The scissors and the new machines are complements, not rivals, as explanations. The second is administration. One accounting, by Steffie Woolhandler, Terry Campbell, and David Himmelstein in the New England Journal of Medicine, put administration at 31% of US health spending in 1999 against about 17% in Canada, the shares taken of the spending categories the study could measure, retail pharmacy sales excluded, a construct and comparison others in the field contest, but nobody contests the direction: complexity of billing is a real American surcharge stacked on the universal drift. The third is market power. Where hospital systems consolidate into the only game in a region, the moats chapter’s toll logic applies to care exactly as it applies to cable, and part of the bill is toll. The discipline this chapter asks of the reader is sequencing, not either-or: the cost disease sets the baseline that would exist under saints; administration, technology, and moats decide how far above the baseline a particular country or hospital sits.

Living with a chronic condition

Baumol spent his last decades insisting on the half of his result that never makes the headlines: the disease is survivable, by construction. The same productivity growth that inflates the quartet’s ticket is what makes society rich enough to buy the ticket anyway; if wages are rising with productivity, then care, schooling, and performance are claiming a growing share of a much faster-growing pie, and the arithmetic that produces the scissors also produces the means to afford it. His 2012 book made the point with deliberate bluntness: computers get cheaper, healthcare does not, and a society that understands why can have both. The consolation is real and it is also incomplete, in a way the reader’s own budget has probably already noticed. The falling blade of the scissors is dominated by things a household can defer or skip; the rising blade is the floor of an ordinary life, the childcare that makes work possible, the schooling, the care of the old and the sick. When essentials inflate fastest, measured income growth and felt prosperity part company, and that wedge, what it does to the paycheck’s purchasing power and to the politics around it, is the subject of Volume IV: Work, in the chapter on why paychecks do not feel like the growth headlines.

One more consequence follows, and it hands the volume its next question. Prices that rise relentlessly, for reasons this chapter has shown to be structural, generate demands that somebody do something, and the something governments most readily do is subsidize: tuition support, care subsidies, price supports for whichever constituency hurts loudest. Subsidies drawn against structural tides do not repeal them, but they do create constituencies, and constituencies, once created, have a remarkable property: they outlive the conditions that justified them. Why that happens with such regularity, and what it costs the many to keep paying the organized few, is the next chapter.