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This book is embarrassingly bad, yet it had the potential to be a vital and necessary reference for policy makers, particularly in health care and education (it almost exclusively addresses health care). It needs a total rework on Chapter 4, which is the heart of the book. There, it dumps in its own hat, and then dons it. Let me explain.
For years, I have been advising school boards and administrations about Baumol's "Cost Disease". Those labor-intensive institutions, with few means of productivity improvement, will have costs that inevitably outstrip growth in the Consumer Price Index (CPI). This happens because they have to offer compensation that matches growth in the more productive sectors (such as manufacturing). Otherwise, we will lose workers in vital low-productivity growth sectors such as education, health care, the criminal justice system at all stages of the process, and more. This is Baumol's thesis, and he should be the best to expound it. However, he fails to pursue its consequences in a manner that survives careful examination, with the character of the projections he makes. This is sad, because those arguments could have been made effectively.
Consider that many school districts are restrained by "tax caps", where revenue growth without a referendum is limited to CPI growth. They have an inevitable collision with that. In manufacturing, however, workers can be given compensation increases above the CPI increase, because of the productivity from capital investment, technology, training, better methods, and more. This Baumol describes as the difference between the "stagnant" and the "progressive" sectors, with a "hybrid" sector in between. Some of the "stagnant", personal service industries die off (doctors do not make house calls anymore, there are no milkmen, and there are butlers and cooks only on Downton Abbey). Others will never vanish, because they are necessary to society: Health Care, Education, Criminal Justice, and more. Even barbers and hairdressers must survive.
So I needed a book I could give to schools, and one from the original source would be excellent. This book fails miserably. It is not an academic book by any means (nor should it be, but at times it tries, schizophrenically). It attempts to be a popularization of economic thought, and guru on policy advice, but it does not succeed. Instead, it is a mishmash of different authors and of styles (even within Baumol's own chapters, where he ranges from the academic, to attempts at a breezy style). He fails in the key Chapter 4, "Yes, We Can Afford It". I will have more on that later.
As another reviewer remarked, some of the graphs are poorly rendered, making them almost useless. The XY Charts use data markers that are so small that they are indistinguishable among the multiple data sets. That could have easily been fixed with distinctive line styles (still not requiring color printing), but then the book is poorly edited overall. The most significant editing problem is for coherent content on the modeling in Chapter 4, which would get an MBA student flunked. Even Baumol, in his extremely lengthy Endnote 13 to that chapter, knows that something is wrong. His own colleagues must have warned him. One has to go to the endnotes to ferret out the details, on this pivotal chapter.
He assumes that health care costs, as a percent of GDP, will continue to grow at a compounding rate of 1.41% per year, with no leveling off, ever. Reviewer Gaetan Lion points out that such an assumption will eventually exceed 100% of the economy. Baumol seems to recognize that in Endnote 14, and then blithely ignores it. In fact, in his lengthy Endnote 13, he says he is not doing a "forecast", but a "projection". That seems to be a distinction without a difference, unless "projection" now means "meaningless extrapolation for 100 years, without any underpinnings and logic, leading to an impossibility." Yet he refers to his own use of logic in the endnote. Redo your homework, sir.
Health care in his projection ends up constituting 62% of the economy in one hundred years. As other reviewers have pointed out, this crowds out even the other "stagnant" industries, such as education and criminal justice. We're still going to need barbers and hairdressers also. It has reduced the "progressive" sector to only 38%. Yet this is what is supposed to be paying for everything, so his 2.13% real productivity growth rate across the economy is unsustainable, and its contribution is being steadily eroded. No one seems to have pointed that out -- he has some means to pay for things, but not the amount he assumes, and it would be shrinking every year. This is what results when someone does a back-of-the-envelope calculation, without actually trying to flesh it out in a moderately detailed spreadsheet, where the absurdities and inconsistencies would become apparent.
With regard to some of these considerations, he remarks that a "nonlinear" model would probably not materially change the "linear" model he uses. All I can figure out is that he is rejecting a model that would have certain things grow to some asymptotic limits, such as an "S Curve", or "Logistic Curve". Yes--that is exactly what would make his projections plausible, and perhaps help him make his point - that we will be able to afford all this in some way. I agree with him that no one can fine-tune such predictions. So run half a dozen different plausible scenarios, which actually might make some sense, demonstrate the range of possibilities, and show how things might still work under a variety of circumstances.
As a final critique, I will note that some things noted as "Cost Disease" are actually "Mission Creeps/Mission Enhancements". On page 21, he refers to negative productivity in education (not just stagnation), referring to changing student/teacher ratios in recent years. Much of that was due to Federal and State mandates re Special Ed, and increasing classification of children as Special Ed, where class sizes are often only half as large. Likewise, other reviewers have pointed out that compensation of doctors, nurses, and other medical professionals does not explain much of health care expense growth. Stats from the Dept of Education and Dept of Labor show that Baumol's Cost Disease per se only accounted for less than a third of the slippage above the CPI over a twelve-year period in Cost per Student. The rest was Mission Creep (think Special Ed, Technology, Security...), or possibly waste. This book attempts to address a significant set of issues, but does so superficially.
This book requires such a major rework that I think the author will not bother. Yale University Press did a poor vetting of its content, perhaps based on the distinguished past of its chief author. It cannot be used for giving to policy makers, since it can be easily attacked for its absurdities. That need not have been the case, since a proper exposition could have solidly made many of his points, and those are important ones.
32 von 35 Kunden fanden die folgende Rezension hilfreich
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The basic premise of the book seemed so intriguing. In a nutshell, US healthcare spending is virtually uncontrollable and will go through the roof; but, we will very easily be able to afford those costs.
Baumol projects healthcare spending to rise from 15% of US GDP in 2005 to 62% in 2105. But, not to worry because overall we will be over 8 times wealthier as our GDP per capita will rise from $41,800 to $343,000. Given that, it will be so easy to spend nearly 2/3 of every dollar on healthcare.
However, Baumol's extrapolations 100 years down the road are meaningless if not completely wrong. To understand how he derived his 2105 projections you have to read carefully note 13 on page 187.
For healthcare spending as a % of GDP, Baumol observed that they grew by 1.41% per year over the 1995-2005 decade. So, here is how he got the healthcare spending of 62% of GDP: 15%(1 + 1.41%)^100 = 60.8% (I got a different figure because of decimal figures). This same logic suggests that by 2140 or just 35 years later, healthcare will account for 100% of GDP. This does not make any sense. The 62% by 2105 does not make any more sense than the 100% by 2140. Taxes, housing, other consumptions of goods and services, business investments, Government spending can't so readily be squeezed into our remaining 38 cents on the dollar (1 - 62% allocated to healthcare).
When it comes to real GDP per capita, Baumol took the 2005 level of $41,800 and used the 2.13% average annual growth rate in this measure over the 1950 to 2001 period. His calculation: $41,800(1 + 2.13%)^100 = $343,000. Now do you believe that in 2105 we could possibly be over 8 times wealthier than we are currently? This entails that our prospective economy will be far greater than 2 times the current World economy (when you factor US population growth). If we grasp what that entails in terms of World's resources and industrial capacity, this extrapolation does not make sense. So, what went wrong? It is simple. Baumol used a 2.13% GDP per capita growth rate that captured the post WWII economic boom. And, this growth rate does not resemble at all the relevant current trend. When looking at this same measure over the 1990 - 2011 period, this growth rate plummets to 1.38%. If we focus on the 2000 - 2011 period it further drops to only 0.70%. Using this last growth rate and current GDP per capita level ($42,906 in 2011), you get a GDP per capita of $82,658 in 2105 only 24% of Baumol's level. Instead of predicting we will be over 8 times wealthier; this more realistic projection suggests we will be less than twice as wealthy as currently. And, even this level may be taken with a grain of salt. What will it truly mean in terms of resource constraint, living standard, and purchasing power parity with other countries?
Where Baumol's Cost Disease theory go astray? His basic rational is that labor productivity in the "progressive sectors" (industries with fast labor productivity such as high tech) drive overall wage earnings including the ones within the "stagnant sectors" (sectors with no labor productivity increase such as healthcare and education). This perfectly explains "why computers get cheaper and healthcare doesn't" (subtitle of the book). But, this certainly does not mean that one specific single stagnant sector (healthcare) will inevitably take over the economy. This proposition is absurd in itself given that there are so many other stagnant sectors to begin with. For healthcare to take over, it would need to squeeze out not only all the progressive sectors but also all the other stagnant sectors into this minuscule 38 cents on the dollar slice of the economy.
There is another reason that even all stagnant sectors combined will not take over the economy relative to the progressive ones. That reason is the famous Jevons Paradox. The latter states that increase in efficiency do not lead to increase in savings; they lead instead to increase consumption.
The Jevons Paradox contradicts the Cost Disease theory. Computers indeed got cheaper as the Cost Disease suggests. But, spending on computers and related hi tech appliances has gone way up (think not only of PCs but laptop, tablets, smartphones that did not exist just a few years ago) as Jevons Paradox suggests. So contrary to what Baumol thinks there is no reason for the stagnant sectors to gain share of the economy relative to the progressive sectors. In fact, the opposite is not unlikely.
The Cost Disease theory embeds many other contradictions besides the Jevons Paradox. Regarding healthcare spending, how could our wages be depressed by the rising cost of healthcare benefits since it is our own wage rate increases that supposedly set the cost increase of such healthcare prices?
Baumol's proposition that we can readily afford rapidly rising healthcare cost is laughable. Those costs are bankrupting the US fragile fiscal position as any CBO projections show. They are much reducing the competitiveness of US domestic manufacturers and have lead to off shoring manufacturing capacity. Municipalities, corporations, and household budgets have all felt the crippling impact of rising in healthcare costs.
The rising costs of healthcare and college education are indeed problems. But, it is not so much because of the Cost Disease (which primarily addresses the rising wages of employees within those industries). And, Baumol's own data proves that.
Regarding healthcare, Baumol discloses a graph (pg. 13) that shows that medical employees (doctors, nurses) salaries have grown at nearly exactly the same pace as inflation (3% to 4%). But hospital costs have grown far faster by 8% a year (graph pg. 7). Thus, the staggering rise in healthcare costs is related to factors outside the Cost Disease domain.
Turning to college education, Baumol shows that college tuition and fees have risen at 7% a year or far faster than inflation (graph on page 8). Meanwhile, wages of professors and other employees have risen a lot slower than inflation (graph pg. 13). Thus, college education costs have risen very fast for reasons outside the Cost Disease.
Given that his analytical framework is so off, Baumol's policy recommendations are of little interest. The chapters written by his coauthors in part 2 of the book regarding how to reduce the growth of healthcare costs and other stagnant services are reasonably good and interesting. But, they are lost in Baumol's book whose main thesis is wrong.