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= Why Housing, Health Care, and Education Prices Rise While the Prices of Many Goods Fall =

Rent, medical bills, child care, and tuition keep rising, while phones and televisions keep falling in price. This page explains why and what would have to change. It serves two purposes. It helps readers understand scarcity versus abundance, which is central to [[Post-scarcity economy|post-scarcity]] thinking, and it supports the practical work of solving [[Problems in living|problems in living]], because housing, care, and education are the costs that press hardest on ordinary households.

''This page is general information, not medical, legal, or financial advice.''

== The pattern in the data ==
Economist Mark Perry of the American Enterprise Institute publishes a widely shared chart built from Bureau of Labor Statistics price data. In his July 2022 update, covering January 2000 to June 2022, overall consumer prices rose 74.4 percent and average hourly earnings rose almost 100 percent. Over the same period hospital services rose 220 percent, college tuition and fees 178 percent, medical care services 130 percent, child care 115 percent, and housing 80 percent. Televisions fell 97 percent, toys 72 percent, and computer software 70.5 percent.

These are national averages, and local housing markets differ a great deal. The chart shows a pattern, not a proven cause. Perry points to government involvement and trade exposure, which is one reading among several.

== The Baumol explanation ==
In 1966 William Baumol and William Bowen studied the performing arts. They argued that live performance leaves little room for labor-saving change, because the end product is the labor of the performer. A string quartet needs the same four people and the same time as it did a century ago. Meanwhile, productivity in the whole economy had risen at roughly 2 percent per year, and wages elsewhere rose with it. Performers need pay that keeps up, so their cost rises compared with the cost of goods.

The same logic applies to teaching, nursing, and child care. A factory can make more televisions per worker each year, so wages can rise while prices fall. A teacher or caregiver cannot serve many more people per hour without a change in quality. This is called the Baumol cost disease.

== Housing: rules that limit supply ==
Land in desirable places cannot be manufactured, and many places limit what can be built on it. A Federal Reserve working paper by Raven Saks found that, for the same increase in demand, metropolitan areas with more housing regulation had a 17 percent smaller expansion of the housing stock and almost double the increase in housing prices.

A later Federal Reserve paper by Raven Molloy, Charles Nathanson, and Andrew Paciorek adds detail. They found that supply constraints raise purchase prices more than rents. A metropolitan area with regulation two standard deviations tighter than average had only about 7 percentage points more rent growth over 35 years. They concluded that supply limits alone have not been the main force behind high rents, and that strong demand also matters. Easier permitting and more building are part of the answer, not the whole answer.

== Education: where technology might help ==
Robert Archibald and David Feldman of William and Mary compared higher education costs with the prices of many other goods and services from 1929 to 1995. College costs followed the path of other services that depend on highly educated labor, and the authors judged the cost disease to be the dominant long-run driver. Enlarging classes or hiring lower-paid staff is often seen as a loss of quality.

Software tutoring is the most discussed remedy. In a 2025 randomized trial with 194 Harvard physics students, a carefully designed AI tutor produced larger learning gains than an active-learning class, in less time. The authors cautioned that the result depended on expert-written prompts, introductory material, and months of platform development. In another 2025 trial with nearly 1,000 high school math students in Turkey, an unrestricted chatbot raised practice scores but lowered later exam scores by 17 percent. A version with teacher-designed hints only restored exam results to the level of the control group. Automation can help, but the evidence is mixed and design matters.

== Health care: where the money goes ==
Health care combines the Baumol problem with other drivers, such as new treatments and an aging population. Spending is highly concentrated. The Agency for Healthcare Research and Quality reports that in 2022 the top 5 percent of spenders accounted for 49.7 percent of health spending in the civilian noninstitutionalized population, and the bottom half accounted for 2.8 percent. Among adults in the top group, 75.1 percent had two or more chronic conditions, compared with 22.9 percent in the bottom half.

The Kaiser Family Foundation reports that about 25 percent of Medicare spending for people 65 and older goes to the last year of life. For traditional Medicare beneficiaries who died during 2014, average spending was $34,529, compared with $9,121 for those who survived the year.

A common argument follows. If much spending goes to people with several serious chronic diseases and to the final year of life, then keeping people healthy longer could reduce spending in several ways. That is the logic behind research on [[Aging|aging]] and [[Longevity escape velocity|longevity escape velocity]], explored further in [[The economics of extending healthy lifespan|the economics of extending healthy lifespan]].

One simulation gives a mixed result. Goldman and colleagues used the Future Elderly Model and estimated that delayed aging would add 2.2 years of life expectancy at age 51, mostly in good health, with lower Medicare spending per person. More people would be alive and collecting benefits, so total entitlement spending would rise. The scenario assumed the new treatments cost nothing, so it is not a forecast.

== A contested explanation ==
Economists disagree about how much of the cost problem comes from Baumol effects. Archibald and Feldman favor the cost disease for colleges. Robert Martin and R. Carter Hill estimated that both Baumol effects and Bowen effects, meaning revenue-driven spending and staffing choices, raise costs at research universities, and found the Bowen effects larger. Other commonly proposed causes include market power, subsidies that raise demand, regulation, and measurement problems, since the quality of a hospital stay is hard to compare across decades. This page does not settle that debate.

== What individuals can do now ==
Systems change slowly, so some practical steps matter in the meantime. These are general ideas, not recommendations for any product or provider.
* Compare the net price of a school after aid, and look at free open textbooks, which Perry expects to put pressure on textbook prices.
* Ask for itemized bills and prices before non-emergency care, and check whether public or nonprofit programs apply to you.
* Work with a clinician on steady management of chronic conditions, since high spending clusters among people with several of them.
* Build a small buffer with [[Emergency fund planning|emergency fund planning]], and learn about [[Credit union small-dollar loans|credit union small-dollar loans]] as an alternative to high-cost borrowing.

== Where basic income fits ==
People with little slack feel cost increases most. In the national series above, wages rose faster than housing but slower than hospital, tuition, medical, and child care prices. A small, predictable payment does not lower those prices, but it may make them easier to absorb. One hedged idea is a [[Basic income through credit unions|semi-private basic income through credit unions]] or nonprofits, described alongside other pilots in [[Basic income experiments around the world|basic income experiments]]. It is an experiment, not a cure for cost disease.

== What would have to change ==
Abundance here means moving costly categories toward the side where technology lowers prices. That could mean more housing built under simpler rules, services redesigned so one skilled person can help more people without losing quality, and lower health spending through prevention and slower aging, if that proves possible.

== Limits of this explanation ==
* The price data are national averages and do not capture quality changes, local variation, or what households pay after aid and insurance.
* The Perry chart shows correlation, not cause.
* The AI education trials were short, small, or limited to one subject.
* The Goldman model assumes costless new therapies, and the Kaiser figures cover only traditional Medicare in 2014.
* Nothing here promises that these changes will happen or that any step will lower your costs.

==Discussion questions, essay ideas, and learning related AI prompt ideas==
'''Discussion questions'''
* Which costs in your life have risen faster than your pay, and which have fallen?
* Can a service that cannot be made faster still become less expensive?

'''Essay ideas'''
* Compare the cost disease explanation with the revenue explanation of college costs.
* Argue whether concentrated health spending supports the case for aging research.

'''Learning related AI prompt ideas'''
* Ask an AI system to explain the Baumol cost disease using a barber and a car factory as examples.
* Ask an AI system to list the strongest evidence for and against housing regulation as a cause of high rents.
* Ask an AI system to help design a fair test of whether an AI tutor improves exam results.

== See also ==
* [[Affordable housing|Affordable housing]]
* [[Education|Education]]
* [[Income|Income]]
* [[Opportunity engineering|Opportunity engineering]]

== References ==
* Chart of the Day . . . or Century?, American Enterprise Institute, 2022. https://www.aei.org/economics/chart-of-the-day-or-century-8/
* Performing Arts: The Economic Dilemma (review quoting Baumol and Bowen), College Music Symposium, 1966. https://symposium.music.org/volume-7/reviews/performing-arts-the-economic-dilemma-a-study-of-problems-common-to-theater-opera-music-and-dance-by-william-j-baumol-and-william-g-bowen
* Explaining Increases in Higher Education Costs, College of William and Mary, 2006. https://economics.wm.edu/wp/cwm_wp42.pdf
* Baumol and Bowen Cost Effects in Research Universities, Southern University College of Business E-Journal, 2022. https://digitalcommons.subr.edu/cbej/vol17/iss1/1
* Job Creation and Housing Construction: Constraints on Metropolitan Area Employment Growth, Federal Reserve Board, 2005. https://www.federalreserve.gov/pubs/feds/2005/200549/200549abs.html
* Housing Supply and Affordability: Evidence from Rents, Housing Consumption and Household Location, Federal Reserve Board, 2020. https://www.federalreserve.gov/econres/feds/files/2020044pap.pdf
* Concentration of Healthcare Expenditures and Selected Characteristics of People with High Expenses, 2018-2022, Agency for Healthcare Research and Quality, 2025. https://meps.ahrq.gov/data_files/publications/st560/stat560.shtml
* Medicare Spending at the End of Life: A Snapshot of Beneficiaries Who Died in 2014, Kaiser Family Foundation, 2016. https://www.kff.org/medicare/medicare-spending-at-the-end-of-life/
* Substantial Health and Economic Returns From Delayed Aging May Warrant a New Focus for Medical Research, Health Affairs, 2013. https://ncbi.nlm.nih.gov/pmc/articles/PMC3938188/
* AI tutoring outperforms in-class active learning: an RCT, Scientific Reports, 2025. https://www.nature.com/articles/s41598-025-97652-6
* Generative AI without guardrails can harm learning: Evidence from high school mathematics, PNAS, 2025. https://www.pnas.org/doi/10.1073/pnas.2422633122

[[Category:Economics]]
[[Category:Abundance]]
[[Category:Post-scarcity]]
[[Category:Problems in living]]
[[Category:Social policy]]
[[Category:Longevity]]