Thursday, February 15, 2018

Baumol Cost Disease and Relative Prices – Part 2

Many thanks to the Angrybear for reposting this as well as some excellent comments (save that absurd contention I’m a Luddite). If you check the comments over at Mark Perry’s place you will see that Paul Wynn made the same point I made and even linked to Timothy Lee:
This became known as Baumol’s cost disease, and Baumol realized that it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise. And this is exactly what the data shows. Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago… this has an important implication for government policy. Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
Lee wrote this back on May 4 and included the same graph that Mark Perry presented.


Jerry Brown said...

Very nice. Are there any cures for this disease? (I doubt the AMA is all that interested in finding one)

One thing that troubles me is that in the case of physicians, for example, where are they really going to find higher paying jobs in the higher productivity industries? Same thing with say hospital and university top administrators- some of these jobs are in the upper six figure range and even in the millions sometimes. Does Baumol's Disease explain all of it, or do you think there's more involved?

ProGrowthLiberal said...

There is always more involved. You note how highly doctors are paid in this nation. In other nations they are just as qualified and productive at half the pay. As yea - the administrators at universities are likely commanding obscene salaries.

2slugbaits said...

Making the same points in a slightly different way, you might find this interesting as well:

The Reader's Digest version is that Baumol's "cost disease" can also be thought of as an inevitable consequence of becoming wealthier.