Papyrus News

Several things are clear about both education and health care costs in the United States:

1. They continually rise faster than inflation

2. Increases in cost are not matched by increases in results

3. Our costs are higher than those in other developed countries

The conventional wisdom is that these costs are spiraling out of control due to waste and inefficiency.

However, though there is certainly waste and inefficiency involved, even if all the waste and inefficiency were removed, it is virtually guaranteed that costs in education and health care would rise (a) faster than the rate of inflation and (b) faster than corresponding improvements in quality.  What’s more, while costs in the U.S. are indeed higher than in other countries (in all cases in health care and in many cases in education), the rate of change of costs is pretty consistent across countries, with other nations experiencing increases above and beyond the rate of inflation on about the same curve as the U.S. is.

The real reason why education and health care costs rise has been known by economists ever since at least the 1960s, when Baumol and Bowen published a seminal book on the economics of the performing arts. Their analysis was as follows.  The productivity of manufacturing rises dramatically over time: it might take only a few minutes of person power to make a shirt compared to many hours a couple of centuries ago.  However, the productivity of a string quartet giving a live performance increases hardly at all, since that work cannot be made more productive without harming its quality (having 3 people instead of 4, having them play faster).  For that reason, the cost of attending a live cultural performance vis-a-vis the cost of buying manufactured goods rises steadily over time–and, if a society wants to see as many string quartet performances as it did before, it will need to devote a higher percentage of its personal and national income for that.

The same principle holds true for education, healthcare, and other services that demand in-person labor.  Yes, they can be made more productive in some ways, but never at the same rate of productivity increase as manufacturing or agriculture or mining.  For that reason, the relative costs of education and healthcare will go up over time.

The music industry has survived over the last 200 years by moving away from live performances to recorded music.  It costs a lot to produce a CD (or MP3), but it can be heard by millions of people.  There are some who argue that we need to make the same change in education, to move to massive online education using software so that, just like you can get a world-class music collection for a few hundred dollars, you could get a world-class education for the same low-cost.  And they often cite Baumol’s work as a reason why such a shift is necessary.

I happen to believe that you cannot get a world-class education without teachers, or with very few of them. Listening to music is by nature a pretty one-way experience, whether done at a live performance or at home on an iPod.  But learning is a very social, interactive, multi-directional process, and the kind of learning that takes place with mentors and peers is vastly superior in many contexts than that which takes place from software. This is especially so for young learners, learners with low motivation, learners with many language and literacy challenges, learners with special needs–exactly the types of learners who are so numerous in K-12 schools.

The question, though, is if we don’t radically increase educational “productivity”–by replacing teachers with software, or by dramatically increasing student-teacher ratio in new online diploma mills–how do we get around the Baumol affect?  Are such dramatic cost measures necessary?

And here, those who like to cite Baumol’s 1966 book fail to point to his important paper three decades later where he answers that question.  In that paper, Baumol explicitly discusses education and health care, pointing out that, whatever new efficiencies are put in place, education and health care costs will still inevitably rise in cost faster than inflation and thus require a growing percentage of our national income.  He also points out though, that precisely because of advancing productivity in other sectors, we can afford to pay more for education and health care and still have an ability to afford more good and services.

He compares the cost of education and health care to the cost of an imaginary steering wheel on a car.  Let’s say the cost of a car fell from over a decade, but, over that time, the relative or absolute cost of a steering wheel increased.  Well, the cost of a steering wheel as a percentage of the whole care would rise continually.  That, however, would not keep you from buying the car, because the cost of other components are falling.  You can still get the more expensive  steering wheel because the cost of the car is falling.  In fact, even if the steering wheel rises to 20%, 40%, or 60% of the cost of a car, as long as the total cost of the car falls, you can still buy the steering wheel.

In other words, increased productivity means that the costs of education and health care will continue to keep rising as a portion of the economy, but it also means that we can afford them.  As Baumol says in his article, “productivity growth in the entire economy means we can afford more of everything.”

The issue not so much whether we can afford higher costs of education.  The issue is whether we have the will to do so. So yes, let’s try to make education as effective and efficient as possible, but let’s also help people understand why it is that costs will rise anyway, and why we can afford to pay them.