Thursday, May 30, 2019

Agreement from an Unlikely Source

I’ve followed political debates in the US long enough to have a pretty reliable sense of who will line up on which side of a given issue.  That’s why I was surprised to see this blog post at The Grumpy Economist, drawing on the new book “Why Are the Prices So D*amn High?,” by by Erik Helland and Alex Tabarrok.  It’s published by the Mercatus Center at George Mason University, which identifies itself as “advanc[ing] knowledge of how markets work to improve people’s lives.”

Working from a basically libertarian perspective, the book tackles the question of college tuition increases.  Given the source, I would have expected the usual villains in the libertarian narrative: “rent-seeking” liberal academics who use their sinecures isolated from the market to feather their own nests, or some variation on the theme.

But no.  To their credit, they specifically exonerate three of the usual villains.  It’s not administrative bloat, the regulatory state, or even unions. (Reader, I have lived long enough to see libertarians exonerate unions.  I am older than I thought.) Looking at the relative increase in the cost of goods over the last several decades as compared to the cost of services, and then breaking out different sorts of services based on the degree to which they can be automated, Helland and Tabarrok land on the real culprit:

Drum roll, please…

Longtime readers can see this one coming…

Baumol’s Cost Disease!

I’m particularly enamored of figure 24 on page 42.  It’s just about as plain as they make ‘em.

The “solutions” section of the book looks like it was written in 2012 and left on a shelf for a while, but the “diagnosis” part holds up.  (I say that having written about BCD in 2012 myself - see here. Check out the “Occupy” reference! It was a more innocent time…) When the productivity of some sectors -- say, manufacturing -- goes up much faster than others -- say, teaching -- then the latter will become more expensive relative to the former.  The trend is inexorable, insidious, and mostly inscrutable in the moment.

Baumol’s disease, named after economist William Baumol, wasn’t even originally postulated to explain tuition.  It was originally applied to live music. It takes just as many musicians just as long to play a string quartet piece as it did 200 years ago, but they get paid much more than they did 200 years ago.  Meanwhile, over the last 200 years, farming has gone from the majority occupation in the country to a percentage in the low single digits, and food has gotten cheaper, even as the population has exploded.  Different rates of productivity increase explain the divergence. The cost disease explains why health care, education, live theatre, and law enforcement have grown more expensive over time, but televisions, cars, and clothes have gotten cheaper.  Lazy rivers and climbing walls have nothing to do with it.

Baumol’s is a tough case to solve, but getting the diagnosis right is the first step.  Seeing folks from a very different political orientation land in the same place gives me hope.  Let’s dissolve the circular firing squads and address what’s actually happening while we still can.