In a recent article in these pages (“Boom Times Ahead?”), I wrote about the positive impact of the coming energy boom in theUnited States. Assuming we make the right policy decisions, inexpensive natural gas is likely to drive a very substantial “Rust Bowl” manufacturing recovery. A number of forecasts expect the creation of perhaps a million or even more well-paying, mostly blue-collar jobs, while national energy independence will do wonders for our trade deficit and international-debt problems.

A manufacturing and energy revival will also dovetail nicely with the continued productivity advance in our service industries. When speaking of high-productivity services, economists generally focus on “business services.” For example, companies now frequently contract their data-center operations to firms like IBM, which find multiple ways to improve operations and save money.

Our biggest service industry, however, is health care, which a famous economist, William J. Baumol, calls a “stagnant service.” It is a theory he developed decades ago, and has just updated in a new book, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t. Baumol argues that hands-on service industries typically cannot make major productivity improvements. String players still need half an hour to play a Mozart quartet. Nurses have many more tools today, but nursing is still an intensely personal service. With flat productivity in these service sectors, costs must rise to pay workers living wages.

Baumol’s book has received much flattering comment, but he is almost entirely wrong. The best string players now command audiences thousands of times bigger than they once did, which is hardly stagnation. In health care, only about 30 percent of workers, and about 13 percent of costs, relate to traditional one-on-one personal care, like home health care, in which it is hard to make big efficiency improvements. But in the rest of health care, productivity growth is quite high, driven by the same software, microprocessor, and biomolecular advances that are boosting productivity in other industries.

A friend of mine, in her mid-seventies, recently required breast-cancer surgery. Her first surprise was that much breast-cancer surgery is now an out-patient procedure. She arrived at the hospital in the morning for prep work and tests, was in the operating room about 10:30, and in recovery in early afternoon. The recovery room had some forty or more cubicles, she said, that seemed to turn over every couple of hours. The nurses were attentive, and all her records were on digital display in the cubicle. Since incisions have become much smaller, by late afternoon, she felt truly ready to go home.

A few weeks later, she had radiation treatments, but for only four weeks rather than the previously standard six, since the focusing and managing of doses has much improved. And instead of intravenous chemotherapy—with its attendant fatigue, hair loss, etc.—she will take a daily pill for five years. It’s a generic, costs about twenty cents a pill, and has minimal side effects. So the total chemo cost will be only about $1,000 for the five years, compared to the $25,000 or so for the intravenous protocol.

Most areas of health care show similar improvement. Open-chest cardiac surgery, including even valve replacements, are now being accomplished with minimally invasive procedures. They not only cost less, but facilitate much faster recoveries. Much expensive psychotherapy has been substantially replaced with inexpensive medications. So why are costs still rising?

The truth is that costs for most interventions are going down, even without counting the savings in lost time at work. It is spending that is going up, which is quite different. Beginner’s economics says that when a product is cheaper, more effective, with fewer collateral costs, people buy more of it. In the 1970s, rudimentary personal computers cost up to $10,000, and the market was very small. Now they cost 5 percent of that, and total spending is vastly higher.

The very effectiveness of modern health care also tends to increase spending. The death rate among heart-attack victims who receive timely intervention is now very low. So there are millions of heart-attack victims leading apparently normal lives, but they do need medications and monitoring. And, largely because of health care, seniors now have much longer healthy life expectancies than a generation ago, and inevitably consume more health care. But most people would consider those good things.

There is much that is wrong with health care—the allocation of resources is sometimes wildly skewed. But the money is not leaked away into outer space, or hoarded by selfish old people. It is paid out mostly into the private economy, and supports the wages of some 15 million health-care workers, two-thirds of whom are professionals or semiprofessionals, plus all the device and drug companies, like GE and IBM, that have major health-care businesses. In terms of jobs it’s the best industry we have. And to his credit, Baumol winds up his book with an elegant argument showing that, contrary to received opinion, we can afford as much health care as we need.

Charles R. Morris’s most recent book is The Rabble of Dead Money, a history of the Great Depression (PublicAffairs).

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Published in the 2012-12-21 issue: View Contents
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