In a comment on a post by Bryan Caplan, John Alcorn writes,
Might Helland/Tabarrok and Caplan (and Kling) reach agreement about what kind of evidence could in principle resolve the dispute about the relative weights of the several causes?
My first thought was to suggest looking at an occupation outside of health care and education where we know that the worker/output ratio is relatively fixed, and see what happened there. How about haircuts?
In fact, Tabarrok and Helland include a chart which shows barbers not showing the kind of income gains that doctors have enjoyed. It seems to me that the Baumol effect ought to work at least as much for haircuts as for doctor visits, so I see this as evidence that we need more than just the Baumol effect to explain these observations.
This, used to complain that doctors aren’t paid enough, seems relevant
http://www.er-doctor.com/doctor_income.html
I agree that health care and education are special cases. I’d also add that the United States is an outlier for both health care and education spending compared to the rest of the anglosphere and rich EU nations.
The problem I see with haircuts is that demand is also fixed/inelastic.
How about food protein? While demand for calories is relatively inelastic, the preference and demand for more expensive animal proteins increases as nations become richer. Foods are commodities and result in cost based pricing rather than value based pricing used for most complex services (i.e. productivity numbers should be more meaningful I think). There is enough variation between staple proteins (chicken/eggs, beef/milk, pork, lamb, seafood) for comparative analysis between food groups. Also, large economies with preferences/taboos against specific food sources can be used for additional comparisons (e.g. India and Israel). I think there are also very good international data sources available.
Barbers get no economies of scale that allow it to adjust to changes in productivity.
Barbers get compressed out of the economy, they become round off error in terms of pricing.
So the essence, from my understanding, Baumol is all about scale, the ability of a firm or sector to move left or right on the yield curve. Violinists can get larger concert halls, barbers are stuck in a one on one service. A banker groups the barber with all the short term credit card accounts, the barber is not moving on the yield curve with term debt. The bankers job is to optimally pack the yield curve.
Adjusting with scale after a productivity shock must be the mechanism for a strict denotation of Baumol.
Why is being a barber any different than any other service industry sector? If you want to increase output, hire more barbers. If you want to build a larger restaurant to accomodate more customers, you will need more servers.
Maybe productivity is not measured correctly. If the education premium has increased, then a teacher is more productive even if he/she has the same number of students as in the past. Doctors may be the same. Go to the doctor today and, mainly because of pharmaceuticals, you get more benefit.
Barbering has MUCH lower barriers to entry than doctoring.
Barbering is essentially the same as it was 100 years ago. Clip the #1 guard on the clipper.
Doctoring has changed quite a bit.
Much of primary care doctoring consists of looking for a number of fairly common maladies that have fairly standardized treatment. Then, if there is something else wrong, referring to a specialist.
E.g., much of pediatrics is immunizations and upper respiratory involvements, taking measurements and seeing where the patient falls on standard growth curves, and seeing that milestones are made within acceptable limits.
There is a real question how much training this requires.
The problem with medicine is that it is so complex that referral to experts have to be made for all but the most trivial of complaints. These experts don’t know the patients as as people in the same way as the old style family doctor. This produces a strong nocebo effect which causes the apparent success of the more person to person treatments such as homoeopathy or acupuncture which have a strong placebo element.
So, the completion of Baumol theory. It derives from the automatic gains to scale adjustments the bankers create by optimally packing the yield curve. Baumol is the effect of scale adjustment. Scale adjustment is forced by the currency bankers as they keep deposit and loan queues stable, thus packing the yield curve. Bankers make structured queues, setting loan quantization just like a Walmart checkout manager can adjust ‘items per basket’ for the various checkout stands.
Baumol is the fundamental mechanism of PSST and number theory.
Its an “effect”. One identifiable explanation of an influence. It is not a unifying theory that can explain everything.
That was the original thought I had a few posts ago. But two or three posters thought it more significant. So, just redefine its definition to mean the ‘Mechanism of a productivity gains in an economy, all things being equal’. If we do that, then it is quite significant, Baumol has to explain how we construct yield curves. So, make it do that.
How about restaurants? Cooks and waiters do basically the same job. We do have food processors and microwaves and dishwashing machines now, but old methods still prevail.
It’s an interesting comparison because Ben Bernanke famously paid his Harvard tuition by waiting tables in the summer, and also some construction work. And he didn’t work in some upscale restaurant in Manhattan with big tippers, but rather in a kitschy roadside restaurant in Dillon, South Carolina.
If Baumol explains everything, surely it ought to be possible to do something similar today.
There is little to no “shortage” of barbers, most customers look for “good enough” quality at the lowest price. Same with most apple buyers.
And both barbers and apples have many near substitutes, lots of consumer choice with moderately good info available to those who look.
While there really are plenty of “educators”, the top 100 colleges continue to command the bulk of college educated prestige, and the highest starting salaries. There’s very limited, if any, price competition between the top schools — it’s status vs status.
Similarly, doctors and hospitals don’t even list most of their prices. The number of doctors is severely limited by AMA not expanding the number of med schools. I remain amazed and disappointed at how little publicity is given to the number of med schools, and yearly med school graduates.
Best way to reduce health care costs is to increase the number of med schools and graduates.
The economy has been rigged, by the elite, for the elite. With or without much Baumol effect. I’m glad there were lower tax rates, there should be even lower rates for married folk with children.
Here’s the metric I advocate. Look at income from all sources for the top 10%, and compare to the median 50% level. The income growth for that median should be faster, year after year, than the level for the top 10%. Otherwise the tax system should be adjusted so the rich pay more and the average workers pay less. I suspect Baumol effect uncertainties become a diversion away from more clear tax policy and income inequality considerations.
“Fair” is when the median income increases at a faster rate than the top levels.
I remain amazed and disappointed at how little publicity is given to the number of med schools, and yearly med school graduates.
It’s more than just numbers. The Liaison Committee on Medical Education sets accreditation standards that make impossible anything other than an expensive four years of medical school on top of four years of college.
It seems to me that the Baumol effect should have two regimes that behave differently. Consider a two-good economy with widgets and surgeries. Labor productivity greatly increases in widgets but not in surgeries. Either way, people consume more widgets because they’re cheaper. Depending on the relative elasticities of demand, either:
1) At the new price, the quantity demanded for widgets is high enough to require more widget producers. Widget producer incomes rise; surgeon incomes rise because of opportunity cost. The standard Baumol story.
or 2) At the new price, productivity gains allow a smaller number of widget producers to meet all widget demand. Widget producer wages fall as marginal widget producers go out of business. Surgeon incomes increase* and medical school applications soar because of displaced widget-makers.
I think the American economy is more like case 2 than case 1.
* Relative to widget-makers, as measured in a mixed basket of widgets and surgeries.
Isn’t Baumol premised on the theory that two sectors’ wages should be linked if the workers in those sectors are drawing from the same pool? And so if one of those sectors has rising productivity and the other stagnant productivity, then the one with stagnant productivity will see price increases.
I don’t know if barbers and doctors are necessarily drawing from the same worker pool. Perhaps we should see if barber wages have kept up with wages of, say plumbers or something. And maybe we should see if doctors wages have kept up with lawyers or maybe biotech engineers or something.
Alex Tabarrok replies to Bryan Caplan, re: the Baumol effect:
https://marginalrevolution.com/marginalrevolution/2019/06/slatestarcodex-and-caplan-on-why-are-the-prices-are-so-dmn-high.html
It is reality easy to change barbers, especially compared to doctors.
t a hair
I use to have a rule of thumb that a haircut cost about double average hourly earnings.
Is that still valid? I have not been to a barber in many , many years.
It is reality easy to change barbers, especially compared to doctors.
I use to have a rule of thumb that a haircut cost about double average hourly earnings.
Is that still valid? I have not been to a barber in many , many years.
Robin Hanson offers a different explanation of d*mn high prices in education and health care (and in a few other sectors):
http://www.overcomingbias.com/2019/06/our-prestige-obsession.html
He calls his explanation “the increasing-focus-on-prestige effect:”
“This increasing-focus-on-prestige effect can also help us to understand some larger economic patterns. Over the last half century, rising wage inequality has been driven to a large extent by a limited number of unusual services, such as medicine, education, law, firm management, management consulting, and investment management. And these services tend to share a common pattern. […]
For each of these services, we see customers knowing and caring more about the prestige of key service faces, relative to their service track records. Customers seem surprisingly disinterested in big ways in which these services are inefficient and could be greatly improved, such as via tech. And these services tend to be more highly regulated.”
He concludes:
“the so-called Baumol ‘cost disease’, wherein doing some tasks just takes a certain number of hours unaided by tech gains, can only explain spending increases proportional to overall wage increases, and that only if demand is very inelastic. It can’t explain how some wages rise faster than the average, nor big increases in quantity demanded even as prices increases.”