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The Importance of Being Productive

In an insightful piece at The Atlantic, Derek Thompson argues that lack of productivity in the service sector is the main reason for the decline of the middle class:

The reason why toasters are cheap and health insurance is not is that the productivity gains that made toasters — not to mention computers, media*, durable goods, food, and clothes — more affordable are not spilling over into health care. The next chart from McKinsey tells the story: More than half of total productivity growth comes from computers and information technology. Practically zero comes from health care and education. In fact, one reason why heath and education are adding the most jobs today is that employers can’t meet new demand with technology or offshoring. They have to keep hiring people.

Health care isn’t cost-effective because …. well, there are so many reasons. But perhaps the most important reason is that there are not clear incentives to make it more cost-effective, said Ross DeVol, executive director of economic research at the Milken Institute. “Where you have international competition, there are major incentives for innovation and efficiency,” he said. “For instance, there is enormous international competition in computers. On the other hand, health care and education are inherently local services that are labor intensive, and there’s little international pressure to raise efficiency to compete. Medical tourism [traveling to another country to see a doctor], for example, is still small. There are very few pressures to raise efficiency.”

Martin Baily, an economic researcher at the Brookings Institution, echoed DeVol: “Health care is a fragmented industry without a Toyota, a player who will come in and shake up the production process. If you’re in a doctor’s office, you can make money by having an MRI machine and running half a dozen people through it. That’s not a productive structure.”

In education, too, Baily said, “we’re still stuck in the middle ages in terms of how we teach. There’s no big online, national innovation breakthrough to bring down the cost of college.”

Towards the end of the piece, Thompson points the way forward:

The progress of labor has been described as a race between education and technology. Today technology (tag-teaming with globalization) seems to be winning. The share of young Americans with bachelor’s degrees has stalled around 30 percent. The road to better wages leads through our colleges, and higher education education needs a nudge.

Ironically, the nudge will come from technology. The best way to reduce the cost of college is to automate classes and make the college experience place-neutral. As for health care, the world is still searching for a silver bullet to kill high medical inflation. In all likelihood, there is no “bullet,” but there are perhaps few dozen arrows we’ll discover along the way.

Thompson’s argument backs up a point I’ve made numerous times on this blog. Services – especially healthcare, education and a variety of government services – need to become more efficient and cost-effective if we want to avoid bankrupting ourselves. The best way to do this is to harness the power of new technologies to make these services both better and cheaper. In the field of education, this may take the form of online courses which allow distance-learning and cut down on the cost of facilities. For health providers this may entail electronic databases of patient records to streamline the delivery of care. Technological advances have already made products like refrigerators, cars and decent clothing accessible to even the poorest Americans, it is time for the to do the same for the basic services we rely on to keep our country running.

Read the whole piece.

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