Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago.
Baumol’s cost disease is a powerful tool for understanding the modern economic world. It suggests, for example, that the continually rising costs of education and health care isn’t necessarily a sign that anything has gone wrong with those sectors of the economy. At least until we invent robotic professors, teachers, doctors, and nurses, we should expect these low-productivity sectors of the economy to get more expensive.
While some argue that prices keep rising because the government subsidizes health care through programs like Medicare and college educations through student loans and grants, you see the same basic pattern with services like summer camps, veterinary services, and Broadway shows that aren’t hamstrung by government regulations and subsidies.
Of course, as the Atlantic’s Derek Thompson pointed out a few years ago, the cost of many of these services is actually rising faster than wages are growing, suggesting that Baumol’s disease isn’t the whole story. Universities, for example, have been hiring a growing army of administrators and building ever more lavish amenities to attract the best students. The growing incomes of the richest Americans are a major underlying factor here — rich people are buying services like Broadway shows, summer camp spots, and Harvard educations more quickly than anyone can expand the supply.