The Cost Disease of the Personal Services

Abstract

The cost disease of the personal services, sometimes called “Baumol’s disease,” refers to the tendency of costs and prices in a number of services, notably healthcare, education, legal services and live artistic performance, to rise persistently and cumulatively faster than the rate of inflation. This phenomenon has led to pressing social and political problems. Where the activities are provided via the market, less-affluent individuals have been deprived of such services, many of which are generally considered essential for their welfare. Where government finances the services in question, their rising cost has led to dramatic fiscal pressures and has engendered great political controversy. The data show unambiguously that such cost and price behavior of the affected services has persisted with little or no hiatus for as long as the statistical data are available, in some cases well over a century. The evidence also indicates that none of the many different programs various countries have adopted to counteract the cost disease has succeeded. Yet, as will be shown below, the cost disease is not a threat to the general welfare unless the measures taken to counteract it turn out to conflict with the public interest.