Tuesday, May 28, 2019

Conservative Economists Discover the Baumol Cost Disease

A little over a year ago Mark Perry wrote this nonsense:
The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version … Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.
To which I reminded him of the Baumol cost disease and followed up with this. It is good to see that Alex Tabarrok has been thinking about this issue as has John Cochrane. Read their posts as there is a lot of great discussion but permit me to cite just this:
I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect.


rosserjb@jmu.edu said...


You did not show the figure, but I have seen it in several locations. It is easy to blame Baumot, but I note that this figure is for price changes in the US. The most rapidly rising items are higher ed followed by health care. Funny thing, those two have not risen nearly as rapidly in other nations. Heck, on health care, 30 years ago health care costs in the US were not much different from other high income nations whereas today they are twice as high roughly, with the gap growing even more for higher ed costs. More is going on here with this.

Anonymous said...

Please explain what this post is about. I read the post a couple of times, but I am lost.