Sunday, February 20, 2011

Note to Sen. Simpson: Hurling insults is not the way to cut spending. Technology is the key.

A piece I published in The Washington Examiner on February 13, headlined, "Note to Sen. Simpson: Hurling insults is not the way to cut spending.  Technology is the key," seems to keep disappearing off the Examiner website, so here's the text:

On Sunday, former Sen. Alan Simpson (R-WY) told CNN that budget-cutting efforts have been the equivalent of “a sparrow belch in the midst of the typhoon.”    Unless Washington was willing to confront the “big four,” Simpson added--Medicare, Medicaid, Social Security, and defense--there wouldn’t be much federal cutting.   

Simpson should have learned by now that merely hurling colorful phrases and insults is not an effective budget-cutting strategy, either.  Yet in terms of dollar numbers, he has a point: Those four categories alone account for almost two-thirds of federal spending.   

And yet there’s a basic reason why all federal spending is so hard to cut: Baumol’s Law, sometimes called Baumol’s Cost Disease.  Decades ago, William Baumol, a New York University economist, observed that cost savings rarely occur in labor-intensive industries.  The example he used was classical music: A piece written two hundred years ago for a quartet still takes a quartet today.   In other words, if something is labor-intensive, it will be expensive.  

Let’s take healthcare as an example.  Some 14.3 million people work in the healthcare sector;  yet which political party wants to start laying off healthcare workers?  Even Sen. Jim DeMint (R-SC) has said he doesn’t want to cut Medicare,  and the Medicare-voucherizing “road map” of Rep. Paul Ryan (R-WI) is not exactly front-and-center on the GOP agenda.  

But there’s a cure for Baumol’s Law, which Baumol himself identified: It’s called “industrial revolution.”  For centuries, the American economy has advanced because technology displaced human labor, both cutting costs and freeing up labor for new and more productive uses.   In his 2002 book, The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism, Baumol calculated that 90 percent of the GDP of America today can trace its origins to the innovation and productivity gains of the last three centuries.  

Today, we can look around our society and see the difference in cost between “revolutionized” sectors, such as manufacturing, and “craft” sectors, such as healthcare, which is still labor intensive--lots of doctors doing their Hippocratic thing, patient by patient, lots of labor-intensive hospitals and other care facilities.  

So can we industrialize medicine, replacing the kindly GP with a robot?  Probably not.  Thus we need to find other ways to inject technology into the healthcare sector.  One way is through medical cures; the polio vaccine, after all, obviated the need for many physical therapists and iron-lung tenders. 

Today, what’s the parallel opportunity--both health-giving and labor-saving?  We might consider  the case of Alzheimer’s Disease, which costs $172 billion a year; both incidence and costs are rising fast.    If we could find a cure for Alzheimer’s, or even push back its onset by a few years, we would not only save on Medicare, but we might also be able to raise the retirement age--another huge win for the treasury.   

So a crash effort against Alzheimer’s could pay for itself, by curing not only Alzheimer’s Disease, but also Baumol’s Disease--reducing the need for labor-intensive nursing homes.   But could we really make scientific progress against Alzheimer’s?  There’s no guarantee, but our track record as a nation--not only in polio, but also in AIDS--suggests that we could solve such problems. 

And besides, we don’t have a choice other than to try: Simpson’s angry verbiage aside, if people get sick, we will pay for their sickness, out of one pocket or another.   So let’s industrialize medicine in a humane way: by mass-producing new cures.

1 comment:

  1. Maybe this is not the correct strategy, but everybody has different ways to share his/her thoughts. Even firms can be wrong, but as I said, this is notorious just if you think a different thing.