Alex by answers his critics:
I think that the Baumol effect is big but you also need an increase in demand to make it explain the gerat majority (95%+) of the increase in spending on healthcare and schooling. That is were Governments subsidizing demand contributes. Government does not subsidize demand for cars nearly as much as for schooling and healthcare.
If 95% of spending rise is dues to all the Baumol effect, we should ask what percent of the healthcare cost is direct labor? To look at a non the Baumol effect part of healthcare, drugs, drugs use very little direct labor, are drug prices are falling but very slowly.
So, I think it takes both rising demand and the Baumol effect to explain the increase in spedning.
BUT:
If it is 95%+ Baumol effect, since a lot of schooling healthcare seems to have such low bang for the buck. how do we lower demand AND increase efficiency.
Direct instruction and tutoring seems to work in schooling but there is little move in that direction AND is it totally irrational for a person to increase his life time consumption of non- healthcare stuff by say 12% and only use the most effective healthcare? I don't think that is irrational at all, the UK provides something like that though the NHS, though it provides much more than the one third that would save use 12% of spending.
BTW there have also been a sharp rise in costs of road/subway construction which is mechanizing fast.
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