The great economist Baumol threw out the “cost disease” half a century ago this concept. At that time, the United States was experiencing unprecedented gold growth.
However, from government officials to economists to the general public, “cost disease” is full of out-of-context misunderstandings, making it difficult to make a comprehensive and correct diagnosis and treatment. Fortunately, the Chinese version of Baumol’s book “Growing Trouble: Baumol’s Disease and Its Response” was published in time, which may help stop the spread of specious and dangerous perceptions.
1. The essence of cost disease: the trouble of unbalanced growth
There is no denying that cost disease is an annoyance. In 1817, it took four people to share the stage for eight minutes to play a Mozart quartet; in 2017, it still takes four people to share the stage for eight minutes; in another 100 years, it will probably still take four people to share the stage for eight minutes. However, the performers on stage obviously no longer receive equal pay, and their wages will inevitably rise significantly. From an industry perspective, this is a cost increase without efficiency improvement as a basis. Almost all labor-intensive service industries, ranging from haircuts and express delivery to education and medical care, are facing the trouble of “rising costs” and are even considered “stagnant sectors” based on this.
Further, cost disease is a growing pain. The rise in wages of musicians, barbers, couriers, teachers, and doctors is solidly supported by the leap in purchasing power brought about by the increase in productivity of the entire society, and is completely affordable. Thinking back to before the industrial revolution, productivity increased slowly and purchasing power increased extremely slowly. People’s living standards remained stagnant for a long time, and the “cost disease” was out of the question. The Industrial Revolution became the first turning point for a leap in productivity in human history. Marx lamented in the Communist Manifesto, “The productive forces created in less than a hundred years are more than the total productive forces created by all previous generations. Even bigger.”
Today, we have experienced three great technological revolutions, and a new wave of technological revolution is also in the ascendant, and the productivity of the whole society has been improved unprecedentedly. “The unit labor output of almost every commodity is increasing, and the unit labor output of no commodity is decreasing, so more things can be provided for public consumption.” Baumol mentioned in the book, “Most of all Conservative estimates indicate that the per capita purchasing power in the United States in 2010 was approximately seven times that of its ancestors a century ago.” In other words, the average American family in 1900 could only afford the food, clothing, and household items that the average American family enjoys today. One seventh of housing and other facilities. The “increased purchasing power” brought about by the improvement of the productivity of the whole society makes us “willing and able” to consume these personalized services with “increased costs” because they can maintain a high quality of life.
More essentially, cost disease is the worry of unbalanced growth. From the perspective of the whole society, productivity has improved, but some sectors must have improved quickly because machines can replace labor, such as manufacturing; but some sectors have improved slowly, or even not at all, such as the service industry, because these sectors cannot Replacing labor with machines often requires face-to-face interaction between service providers and consumers. This imbalance is an inevitable phenomenon in growth and is not necessarily a “pathological condition”. “The growth rate of labor-saving productivity is uneven, and the growth rate of certain production activities must be lower than the average.” In fact, Baumol’s seminal paper proposing the concept of “cost disease” was titled “Imbalance “Macroeconomics of Unbalanced Growth” (Macroeconomics of Unbalanced Growth), but people firmly remember Baumol’s cost disease, but inadvertently ignore Baumol’s key points.
To sum up, Baumol’s cost disease is neutral in nature. It is precisely the productivity improvement in fast-growing sectors that fills our pockets to a certain extent, giving us “spare energy” to spend money on, so as to purchase slow-growing sectors. products and services, which is not a bad thing.
2. Counterproductive: The danger of unreasonable “diagnosis and treatment”
The understanding of “cost disease” determines the strategy to deal with “cost disease”. Unreasonable “diagnosis and treatment” often brings invisible dangers.
Taking medical care as an example, what most people see is that medical expenses have increased more rapidly with economic development. In 2005, U.S. health care spending accounted for 15% of U.S. GDP (gross domestic product), and it may rise to 62% in 100 years.
This number is astonishing!
After the shock, misunderstandings followed. Unwise “policy prescriptions” often turn “cost diseases” into more serious problems. If we cannot correctly understand that the increase in this share is caused by “cost disease” and is a neutral phenomenon in economic growth, we will often look for other explanations, such as corrupt hospital management and incompetent doctors.
The corresponding policy prescription is to control the “cost” of the “cost disease” and compress the medical budget on the supply side, leading to a decline in the quantity and quality of these services, which in turn affects the improvement of human capital and productivity in the entire society.
What can be seen is that the rising service “costs” have been “controlled”, but what cannot be seen is that more considerable potential development “benefits” have been sacrificed.
But how easy is it to “see the invisible”? Because “opportunity cost” is something that has not been chosen or given up, it will never become a reality and is not easy to “see”. Most people tend to believe that seeing is what you see, and “seeing the invisible” is just a trick of economists.
3. Pay attention to the asymmetric impact on the poor
As a society as a whole, the “cost disease” of labor-intensive service industries such as medical care and education is neutral and completely affordable. However, those who consume these services are always individual individuals.
So is “cost disease” also neutral and entirely affordable for society’s vulnerable poor? I’m afraid a big question mark needs to be placed.
The progress brought about by technological revolution is never uniform and universal. For one reason or another, the productivity improvement of the poor often lags behind the average level of society as a whole, and the increment of services they can consume that are plagued by the “cost disease” is lower than the average level of society as a whole, and they may even fall behind and be “fallen behind”. Throw out”. In other words, for the vulnerable poor, the “cost disease” may be more of an annoyance or even a burden. The rising costs of medical care and education will overwhelm these vulnerable groups.
At this time, it is still necessary to maintain rational policy. If we hope to control the “cost” of the “cost disease”, it seems that the poor will be able to afford it, but the result is that “strong medicine” often backfires. The supply level and quality of these services will subsequently decline, and the share that the poor can “consume” will be even smaller than it is now. High-quality medical and educational services are crucial to improving the human capital of the poor and even their future generations. If we thoroughly understand the “cost disease” and have a thorough understanding of its mechanism and essence, then we can hope to adopt the correct response strategy, that is, provide necessary subsidies to the poor on the demand side. This is because the vulnerability of the poor is mainly due to income and is not caused by “cost disease”.