How A String Quartet Explains Healthcare Costs : Planet Money The costs of education and healthcare have climbed faster than other prices throughout the economy — for decades. An under-appreciated economic theory explains why.
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How A String Quartet Explains Healthcare Costs

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How A String Quartet Explains Healthcare Costs

How A String Quartet Explains Healthcare Costs

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(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

CARDIFF GARCIA, HOST:

For so many of us, there is nothing more important than our health or the health of our loved ones and our ability to prepare kids for the future. And yet for decades, the costs of health care and education have been rising faster than the costs of other things that are nice but don't really matter as much, things like smartphones and flat-screen TVs and cars and furniture.

DANIELLE KURTZLEBEN, HOST:

Something seems off about that. And when people try to figure out why health care and education costs have gone up so fast, they often point to a number of causes, like too much bureaucracy or too much regulation or not enough regulation or too much wasteful spending. So there are lots of different theories.

GARCIA: And you know what? There's a good chance that all of those theories are right, that they all identify things that contribute to these costs. But there's another theory that hasn't gotten as much attention. And it says that the rising cost of health care and education is not mainly about any particular failure in these sectors of the economy but rather because of a great success in other sectors of the economy. I'm Cardiff Garcia.

KURTZLEBEN: And I'm Danielle Kurtzleben from the NPR Politics desk filling in for Stacey Vanek Smith. Today on the show - the Baumol effect or how the string quartet explains the cost of college tuition.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GARCIA: Alex Tabarrok, an economist at George Mason University, is the co-author of a new book called "Why Are The Prices So Damn High?" And the answer, he says, starts with an economist named William Baumol.

ALEX TABARROK: So William Baumol was a economist. I think he just missed out on winning a Nobel Prize. He died a little bit too soon.

GARCIA: Because you have to be alive to be given the Nobel Prize.

TABARROK: Unfortunately, you have to be alive to be given the Nobel Prize. Right.

KURTZLEBEN: And the big idea that might have gotten William Baumol the Nobel Prize is actually named after him, the Baumol effect.

GARCIA: Having an effect named after you is better than a Nobel Prize, I think.

KURTZLEBEN: Yeah. It's a really clever name. There's a canonical example that Baumol liked to use to explain the effect.

TABARROK: He says think about a string quartet in 1826. It takes four people 40 minutes to play this string quartet. Now, let's think about the same string quartet in 2019 - live performance, same four people. It still takes them 40 minutes to produce the music. So in this nearly 200 years, we've had zero increases in productivity in the string quartet industry.

KURTZLEBEN: It would be kind of funny if string quartets just played music faster as years went on.

GARCIA: Right. Right. The string quartet in four minutes instead of 40.

KURTZLEBEN: Yeah.

GARCIA: Right. Yeah, no, zero increases in productivity growth for 200 years just means that when you see a live string quartet, you're getting the same product that your ancestors got a couple of centuries ago.

KURTZLEBEN: But the price you pay to see that live string quartet has gone up way more than the price of everything else in the economy. The reason why is the Baumol effect.

GARCIA: So what is the Baumol effect? We've broken it down into five parts.

KURTZLEBEN: And in honor of Baumol's string quartet example, we are going to soundtrack this with Beethoven's "String Quartet Opus 131 In C Sharp Minor."

GARCIA: Part 1.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

GARCIA: Some sectors of the economy get better at making stuff every year. In other words, productivity grows really fast in these sectors.

KURTZLEBEN: For example, let's say an electronics company can make more flat-screen televisions this year with the same number of workers as last year. And those workers work the same number of hours. More is produced for each hour of work. Maybe because there's better equipment for the workers to use or new technology that makes producing flat-screen TVs more efficient. Or maybe the workers themselves just have gotten better at making the TVs as they got more experienced.

GARCIA: Part 2.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

GARCIA: When a sector of the economy has fast productivity growth, that means it can afford to raise the wages it pays to its workers without raising the prices of the goods they make. So these goods can become more affordable over time.

KURTZLEBEN: Again, look at that electronics company. If the same number of workers are making more flat-screen TVs each year, then the company can make more money simply from selling those extra televisions. So the company can offer higher salaries without having to charge more for a television.

GARCIA: Part 3.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

GARCIA: There are also some sectors that have very slow productivity growth. They do not become more efficient at producing their goods or services from year to year. Kind of like the musicians in a string quartet, these workers do not produce much more of the same product. And this is not because these workers are bad at their jobs. It's just because the nature of their work is different.

KURTZLEBEN: The health care and education sectors fall into this category. Doctors, nurses, teachers, college professors - their productivity just doesn't go up much every year. But, again, it's not because they're bad workers. Alex is definitely not saying that teachers and nurses and doctors are overpaid.

GARCIA: No. The reason they don't get more efficient over time is largely because a big part of what their customers want from them is their time, their presence. You don't necessarily want your daughter's grade school teacher to be more efficient by spending less time teaching her in the classroom. You don't want doctors to be more efficient by rushing through a diagnosis or a surgery.

KURTZLEBEN: And that leads us to Part 4.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

KURTZLEBEN: The health care and education sectors still have to pay wages that can compete with other sectors of the economy that do have fast productivity growth because otherwise not enough people would become doctors, nurses, teachers, professors or play in string quartets. Instead, they would go work at that flat-screen TV company or do some other job that can pay them the higher salaries.

GARCIA: For example, Alex says, computer science professors at a university could instead just be working and making a lot of money in the high-tech sector.

TABARROK: That's their opportunity cost. So it's not surprising that professors of computer science, their salaries have gone up because they could be working in these highly productive sectors. So you've got to pay them more.

GARCIA: And finally Part 5.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

GARCIA: The way that the health care and education sectors pay those higher salaries is by raising the prices of what they sell.

KURTZLEBEN: Since the workers in these sectors are not making more stuff to sell each year, the businesses that hire them - the schools, the colleges, the hospitals - they have to raise their prices so they can afford to pay those rising salaries.

GARCIA: Yeah. And when Alex analyzed what was happening in the health care and education sectors, he found that not only had salaries for education and health care workers climbed year after year for decades, but also we have more of them than we used to.

TABARROK: In terms of physicians per capita, we have more physicians per capita than in 1950. We have more teachers per student than we used to. Because teachers are fairly well educated and skilled, we have to pay them at least as much as they could earn elsewhere. We pay our physicians a lot, but we pay all of our high-skilled workers in the United States a lot.

KURTZLEBEN: So to sum up - rising salaries plus more salaries to pay plus slow productivity growth equals rising medical expenses and school tuition. That is the Baumol effect.

(SOUNDBITE OF LUDWIG VAN BEETHOVEN'S "STRING QUARTET NO. 14 IN C SHARP MINOR, OP. 131")

GARCIA: Now, it's really important to note what Alex is not saying. Alex is not saying that there's no dysfunction or waste in health care and education. He's certainly not saying that these systems treat everybody fairly. And he does believe that there are policies that could bring down costs in health care and education below where they are right now. All he's saying is that even if we do those things, the costs of health care and education would still rise faster than the costs in other parts the economy simply because productivity growth in health care and education is slower. That is the mechanical relationship explained by the Baumol effect. It's not a judgment about the best ways to run these sectors.

KURTZLEBEN: And by the way, Alex says that just because the costs of health care and education have been rising so much more than other costs for such a long time doesn't mean the trend will last forever. Alex is even cautiously optimistic about the possibility that new technologies could lead to faster productivity growth in these sectors, which means that the price of middle school or a medical checkup won't rise as much.

GARCIA: Just remember if that day comes, the day when productivity growth does finally accelerate in health care and education, don't be surprised or alarmed if the cost of other stuff like theater tickets or a massage start going up really fast instead. It just means that the Baumol effect will have migrated to another part of the economy.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GARCIA: Thanks for listening. THE INDICATOR is a production of NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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