The increase in the price of health care in the United States has been astounding. In 1960, it was around 5% of the total GDP; now, it’s around 18% and predicted to be about 60% in 2105. What does this mean for the American consumer? Well, one first must understand the concept of cost disease. Let’s take a look at the economy’s average rate of growth. Some industries such as the car industry are able to cut costs because of new technology, therefore can afford to increase wages. Other industries such as the music industry, aren’t able to cut costs (A string quartet in the 18th century is as efficient as a string quartet in the 21st century); in order to compensate and keep up with wages, they are forced to increase the price of tickets. These type of industries are stagnant in terms of productivity, thus the term “cost disease” is given to them. Cost disease mainly applies to industries that require human interaction such as haircuts, health care, education, etc. Human input are the main costs in the industry and cutting labor would be counterproductive.

Since the 1980’s, the price of a university education has risen 440% while the price of medical care has risen 250%. The average prices of goods has increased by 110% while wages have increased by 150%. Although the price of health care is increasing at an alarming rate, it also means that consumers have more money to spend on other consumer goods (shown in the graph). Buying power is growing and innovation in industries are making many goods such as cars more affordable. This topic is relevant to what we have been learning in class. Many different sectors of the economy have to keep up with inflation in order to make it more efficient, and different sectors grow at different rates.

Sources:

http://www.economist.com/node/21563714

http://en.wikipedia.org/wiki/Baumol%27s_cost_disease