Yes, another old link that someone pointed me at weeks ago and I’ve lost the back-pointer to whom. If it was you, pipe up.
The article is about Baumol dying. He postulated an economic theory that is, basically, as costs of other stuff goes down, and labor intensive services don’t, we’ll have to pay MORE for those services and this limits economic growth as we pay up for non-growth services.
William Baumol, whose famous economic theory explains the modern world, has died
Updated by Timothy B. Leetim@vox.com May 4, 2017, 5:00pm EDT
William Baumol — an economist who just died at the age of 95 — had a famous idea, commonly known as Baumol’s cost disease, that explains a lot about our modern world.
It explains why barbers make more in San Francisco than in Cleveland and why services such as health care and education keep getting more expensive. And it provides a possible explanation for why rich countries like America are devoting more and more of their workforces to low-productivity services, dragging down the economy-wide rate of productivity growth.
In the 1960s, Baumol was trying to understand the economics of the arts, and he noticed something surprising: Musicians weren’t getting any more productive — playing a piece written for a string quartet took four musicians the same amount of time in 1965 as it did in 1865 — yet musicians in 1965 made a lot more money than musicians in 1865.
The explanation wasn’t too hard to figure out. Rising worker productivity in other sectors of the economy, like manufacturing, was pushing up wages. An arts institution that insisted on paying musicians 1860s wages in a 1960s economy would find their musicians were constantly quitting to take other jobs. So arts institutions — at least those that could afford it — had to raise their wages in order to attract and retain the best musicians.
The consequence is that rising productivity in the manufacturing sector of the economy inevitably pushes up the cost of labor-intensive services like live musical performances. Rising productivity allows factories to cut prices and raise wages at the same time. But when wages rise, music venues have no alternative but to raise ticket prices to cover the higher costs.
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:
Now IMHO there is some “there there”. Just not much. “Why” is in the graph in the article. (Sidebar: “Why? Don’t ask why. Down that path lies insanity and ruin. -E.M.Smith”… so now: Exploring why…)
Now they concentrate in the article on the top two lines. Education and health care. I can’t think of any other two areas more dominated by Government Mandates, Intrusion, and Darling Of The Left promotion than them. Government pretty much owns Education from the Federal Department of Education down to local School Boards. It’s nearly all government all the way. Only a few (very few, nearly token) private schools for the Very Rich survive. Similarly, now that the USA has effectively nationalized Health Care with the unaffordable Health Care Act, I can see no reason at all not to call it what it is: A “3rd Way Socialist enterprise”.
Now look at the center lines. Food at home and food away from home. Basically flat lines. I know something about food away from home. I grew up in a Family Restaurant. It is 100% a labor and service industry. You try to take in the most basic materials possible in the stock room, add the most value added labor possible in the middle, and serve it with a smile in the front. Not a lot of capital stock involved. Stove, fryers, fridge and freezers, dishwasher (that was me… not a machine then), hot table, and dishes. Oh, and a coffee maker too. Yeah, that simple.
(I’ve spent years cleaning every part of it, and helped build it too… you could consider the tables, chairs, booths, and counter / stools part of the capital, but it took all of about 3 weeks to build and install them. I also put in the plumbing to the coffee island… yeah, doing plumbing at 8 years old… but Dad didn’t fit in the crawl space…)
So just WHY is such a labor intensive thing flat lined if labor is the issue, hmmm?
I’d also point out a hair cut costs me about $15 (last time I paid for one… the spouse does it at home now with our own clippers… but 2 years ago I bought one). Deflated by my own personal deflation metric, that’s about 75 ¢ in 1960 dollars and IIRC that’s about what I paid for one then. I’m just not seeing the rapid and extreme real cost rise. I suspect his thesis rests on poor inflation adjustment.
The article goes on to assert others are involved, too, but without evidence:
While some argue that prices keep rising because the government subsidizes health care through programs like Medicare and college educations through student loans and grants, you see the same basic pattern with services like summer camps, veterinary services, and Broadway shows that aren’t hamstrung by government regulations and subsidies.
Summer camps? Vet Services? Broadway Shows? Are you effing kidding me? I’ve NEVER EVER been to a Broadway Show. The Vet Services rise with medical as they draw from the same talent pool and frankly, only rich folks can pay to have Fluffy get a Cat Scan. Folks out in poor country take the rifle and put Fluffy out of his misery. ( I know. I’ve “participated” in it…) Then there is “summer camp”. I went to Church Camp, exactly once. My kids went to church camp too, and one went to Girl Scout Horse Camp once. These were not high cost operations. Whatever “summer camp” they costed out is not what “folks like me” use. An old pickup and a week in the wilderness with Dad was what I called “summer camp” most years.
So gee, their “proof” rests on “what rich folks buy”. What a surprise…
Then they show 35 years of China stealing manufacturing and driving prices down on the other side? WT?
No, I’m not at all convinced that this is anything other than a Plausible Story (“There is ALWAYS a story. -E.M.Smith) masquerading as Economic Theory.
IMHO, an equally plausible economic theory would be based on Survivor Bias. We’ve automated those services where costs got high AND we could apply automation. That only leaves those services where automation was not possible (yet). Grape Pickers have been largely replaced by machines. That ought to drive the cost of grape picking services down fairly nicely. But that isn’t in the graph, is it?
So we’ve made all sorts of “services” cost less, often to the point of obliterating them. How about Cobblers. When was the last time you had your shoes rebuilt? For me, it was about the 1970s. For the spouse (who takes custom shoes) about 1990. It is just too cheap to buy new shoes. So Cobbler leaves the metric of “service” costs. Only those services where their is no alternative, and especially those with a Government Mandate, enter the Baumol calculations…
Then there is the question of just what “price deflator” is applied. This is a huge issue in historical economics. Not much can be done to “correct” out changes from inflation and product changes. Just how do you compare a Big Band of the 30s with a Disco DJ of the 70s and a Rave Concert of the 00s? Is U2 comparable to Glenn Miller? Really? Including CD and DVD sales? Oh, wait…
So IMHO it is an interesting THEORY that is worth the ponder. Might even have some truth in it to be discovered. But believe that it “explains the modern economy”? No way. Far too many moving parts have moved and changed for it to do that.