Factory workers are not getting paid more. That makes it hard for me to understand how rising wages for factory workers are forcing up salaries for violinists, teachers, and doctors.
. . .College really does seem to be getting less affordable. So do health care, primary education, and all the other areas affected by cost disease. Baumol effects shouldn’t be able to do this, unless I am really confused about them.
Suppose that the economy consists of apples and string quartets, and productivity doubles in apple picking. The Baumol-effect story is that we are now richer, and we can afford to spend more on both apples and string quartets. The increased spending on apples is more than offset by the higher productivity, so apple prices fall. But the productivity of violinists stays constant, so the increased spending on string quartets causes their prices to rise.
As I see it, Alexander is asking: if this is the scenario, then why does it seem as though the apple pickers have not gotten richer?
In a straightforward Baumol-effect story, when the productivity windfall hits the apple industry, some workers should be released from the apple-picking sector to work as violinists, so that we now have more string quartets as well as more apples. Everyone is richer.
Instead, Alexander’s data and anecdotes seem to indicate that we have had a big redistribution of income away from apple pickers and toward violinists. How do you get that? A combination of very inelastic demand for apples and little ability to shift from apple picking to string-quartet playing? That would seem necessary, but it may not be sufficient.
Note that in our national economic data, concepts like “real wages” may be calculated using price indexes that are constructed in a way that treats the demand for apples as totally inelastic, regardless of whether this is actually true. So perhaps the absence of real wage growth in the data is a mere statistical artifact, which opens up a different kettle of worms entirely.
So here is the issue: if Tabarrok and Helland are correct that the Baumol effect explains rising prices in health care and education, then it seems that we should have observed broad-based increases in real incomes. Instead, what we seem to have experienced is a significant redistribution of incomes toward the providers of services in health care and education. If so, then the Baumol-effect story may not suffice, and we need another explanation.
“Subsidize demand, restrict supply” comes to mind.
Bryan Caplan has weighed in:
https://www.econlib.org/why-the-prices-are-so-damn-high-a-deeper-look/
Bryan concludes:
“while Helland and Tabarrok are not wrong to invoke the Baumol effect, they are wrong to fail to blame government for dramatically amplifying it. If paying customers bore the full financial burden of education and health care, prices could easily fall by 50% or more. […] .”
Subsidize demand, enhance supply. Our government attempts to buy medical service at market prices when rendered.
At equiliibrium the entire economy is composed of doctors selling medical service for fake money. We had a history of this in the Free Silver movement. At one time government attempted to buy silver at market price. Government soon became the sole buyer and government quit the practice. We have hospitals today who want to house some patients in residential neighborhoods at local rents. That is actually entering the government housing business and calling is medicine. Some hospitals reserve space for profit making hypochondriacs, deliberately delivering placebo as a medical therapy for hypochondria.
Undocumented immigrants to get health care in Gavin Newsom’s California budget deal
OK this is one of today’s lead story in California. For Dems voters, this is supposed to mean Latinos, but they cannot restrict medicine by race, so it is essentially open to the world. We will get economies of scale for the serious cases, it is fairly cheap to send a kid to LA for treatment, and LA will have the world’s largest medical center, handling millions of patients.
Make sense? Maybe not, but the economies of scale come free, they are a result of having to count medical inventory. Counting is the force behind economies of scale, prime numbers use it.
First, I don’t believe that admin costs have stayed at 16% in higher education since 1980.
Second, the fact that regulation intensity is not correlated with cost increases across industries does not prove that regulation is not harmful, a claim that Alexander makes and then takes back.
But *have* string quartet wages risen quickly? My sense is there’s a great oversupply of capable violinists who’d like to be playing professionally in string quartets and orchestras but who are stuck teaching high-school music, offering lessons, or working in non-music-related jobs and, perhaps, playing in non-professional community orchestras as a hobby. And where violinists are earning a high salary, that seems to be mostly a result of union negotiating with organizations that are supported more by donations and government subsidies than by paying customers (but that still often struggle with insolvency). In a free market, it’s not clear that violinists actually would be paid more than apple-pickers. But that’s because the production of string-quartets and all forms of music has been automated through recording and productivity increases have been astronomical (a single quartet, playing a single piece of music just once, may entertain millions indefinitely).
So for Baumol, it seems that violinist is a bad example — better stick to barbers.
Also with the flood of PhDs locked out of academic jobs and the poor pay of adjuncts — how can tuition be so high. The professor pool is cheap labor.
All of the examples of the Baumol effect I have seen use a production possibilities curve. We all know that ALL factors of production create a given set of production possibilities. A change in the function can tell us what happens to the relative costs of production, but one has to dig deeper to find the effect on a given factor such as labor or capital (physical as well as human).
Also using changes in the distribution of labor income between sectors doesn’t suffice as an argument against the Baumol effect. One would want to know more about the changes in the distribution of income among all factors of production in order to confirm or reject a Baumol effect.
All of the examples of the Baumol effect I have seen use a production possibilities curve. We all know that ALL factors of production create a given set of production possibilities. A change in the function can tell us what happens to the relative costs of production, but one has to dig deeper to find the effect on a given factor such as labor or capital (physical as well as human).
Also using changes in the distribution of labor income between sectors doesn’t suffice as an argument against the Baumol effect. One would want to know more about the changes in the distribution of income among all factors of production in order to confirm or reject a Baumol effect.
My gut reaction is also to be suspicious of the H&T story. I think Alexander’s point about tuition as a multiple of months worked is a good one, as is Caplan’s point about bloat not having to be increasing at a rapid clip to be contributing to rising costs.
It would be interesting to test whether Baumol cost disease explains the 3.7% increase in US states’ spending on higher education from 2017 to 2018 by following up on Richard Vedder’s recent proposal in Minding the Campus, to privatize state colleges. Presumably, if the Baumol hypothesis is correct, privatized colleges, operating without state subsidies, would be unable to achieve any management cost savings and total education spending would continue increasing apace.
Illinois, perennially the most fiscally messed up state, would provide a good test case as well as an alternative to the constitutional amendment creating soak-the-rich tax brackets that Illinois voters will be asked to approve in an upcoming election.
Despite a steep discount over what out-of-state students are asked pay ($31,390-$36,394 per year versus $48,872-$53,876), the number of Illinois residents opting to go to school out of state has increased rapidly. In 2002, only 29 percent of the four-year, college-going Illinois high school graduates enrolled outside the state, but by 2016, 46 percent of the high school graduates enrolled in out-of-state colleges, an increase of over 57 percent. This, notwithstanding lavish state subsidies that a quick back of the envelope calculation thumbing through the Illinois budget books total somewhere around $1.5 billion this year not including local property tax support for community colleges.
I predict Illinois could resolve much of its budgetary mess without resorting to punitive tax rates on highly productive citizens, increase the number of residents electing to remain in Illinois for schooling, achieve an overall decrease in higher education spending by Illinois residents, and realize lower average tuition rates, as well as a faster growing economy, if Illinois were to undertake the following commonsense reform agenda:
(1) Eliminate state subsidies (currently somewhere around $250 million a year) to community colleges and grant greater freedom to localities to determine their subsidies.
(2) Consolidate the four-year colleges on three campuses: University of Illinois, Northern Illinois, and Southern Illinois. Sell off the real estate holdings of Chicago State, EIU, NEIU, Governors State, and the rest for commercial real estate development by tax paying entities.
(3) Privatize the three remaining campuses by selling off their excess real estate holdings to commercial developers and selling off cafeterias and dormitories to tax paying entities. Privatizing the school functions as for-profits (ie non-tax exempt) and converting state subsidies to a per capita Illinois resident enrolled amount to be gradually reduced and eliminated over a 4- year period.
(4) Deregulating higher education and eliminating the state higher education oversight bureaucracies.
If the average costs an Illinois resident faced attending a college in-state did not fall, I would be willing to entertain the idea of Baumol’s cost disease being something other than another economic jargon hammer being used to argue that increased costs in every publicly-subsidized, third party payer arrangement is a nail.
When I was in school (decent public institution) in the mid-2000s, there was a large amount of construction. New dorms, a new hockey arena a new business school, and a number of other buildings were either built or planned while I was there. This goes hand in hand with the subsidization problem, as the school was clearly competing on amenities rather than cost.
Small class sizes were often emphasized, particularly for upper level classes. To the degree that average class sizes have been trending down, or that classes per professor were falling (or both) it would push up the labor cost per person. This would be consistent with professors complaining about low wage growth (especially given rising health care costs) and also higher costs passed on to students.
One other observation from being a manager for some time now. Cutting costs is really hard. You don’t want to have to fire people, shrink your empire, etc. You want to be creative, to think up new projects and to show accomplishments (ideally, to actually help your institution to advance). In the absence of significant budget pressure, it’s hard not to get administrative bloat. Also, some administrative groups might not provide a lot of educational value to the average student but might be hard to cut for PC reasons (e.g. the office of diversity and inclusion).
OK, ok, I know what Kling wants, explain the Baumol effect strictly from a number theory point of view.
Here is the key part, start with the X axis on the yield curve. Then, ll things being equal, allow an unexpected productivity jump in apple distribution. A production jump is a shortening of the step to distribution, a shortening of time to delivery when time is synchronized. Apple production moves down the yield curve, it borrows at the three year rate instead of the five year rate.
Now, here is where number theory and and yield curve come together. Apple production has to move left on the yield curve, and some stuff has to move right. Orange production and violin sonatas move right, the extending the amount of x axis needed. The effect is to organize ‘primes’ along the X axis so as to minimize the number of transactions to engage in multiply, of all things! Yes, economies of scale are part of prime theory and they come automatically with use of the yield curve as a ‘thing’ counter.
So, apple become cheaper, oranges a bit more expensive, and violin sonatas even more expensive. The density of primes reduces as you walk right along the X axis. Violin sonatas become your largest prime, you need bigger music halls and they orchestras perform less frequently.
It all works out, it is PSST. A PSST, as defined, is really another definition of number theory. PSST is equivalent to organizes relatively prime functions along an X axis to make inventory flow sustainable, same finite arithmetic and round off error.
I am not trained in economics (as will become evident shortly), but let me raise the following question:
Are we incorrect in assuming that enhanced shop-floor productivity will always bring higher incomes? Farmers have had spectacular increases in productivity since at least the 1920’s, but farm incomes are famously stagnant and precarious, even now.
Incomes also derive from bargaining power, status, insulation from foreign competition, and relative exposure to what Marx called ‘the reserve army of the unemployed.’
There is a liberal myth that auto workers in the 1950’s got regular raises because of their productivity. I think that those raises were 99% due to the bargaining power of their union, plus the fact that management could raise prices to accomodate higher wages.
What a laymen like me considers ‘productivity’ is more output per hour on the shop floor. The economic concept of “GDP per hours worked” is much more elusive and not I suspect a reliable formula for incomes.
It seems to me that if the productivity had been lower. then management would have held a much harder line than they did in union negotiations.
High productivity subsidizes a multitude of sins. When robots do all the work, a total welfare state will be tenable.