Major Update on Cost Disease

I looked through Tabarrok's book, and my general impression is:

He does a decent job going through the education data. (At least, he finds the same stuff I did when I went through the data a few years ago.)
He totally whiffs on healthcare data. In particular, I saw no mention of demographic shifts, which are far and away the biggest driver of growth in US healthcare spending.
He then takes a hard left turn and goes off talking about the Baumol effect, without grounding it very well in the data. He gives a bunch of qualitative arguments that things look consistent with Baumol, but never makes the quantitative arguments that Baumol explains all the growth, and never properly rules out alternative hypotheses.

A good example is on page 50: "it is evident that despite higher costs Americans have chosen to buy more healthcare output over time. Once again, this is consistent with the Baumol effect but inconsistent with a purely cost-driven explanation for rising prices." It's also consistent with the demand curve shifting up over time, and Baumol having nothing to do with it. Which is exactly what we'd expect in an aging population.

He does do a decent job ruling out "purely cost-driven explanations" as an alternative hypothesis, but that does not imply Baumol.

[-]Davidmanheim6y*120

It also fails to account for the fact that health care is, in a sense, an ultimate superior good - there is no level of income at which people don't want more health, and their demand scales with more income. This combines with the fact that we don't have good ways to exchange money for being healthier. (The same applies for intelligence / education.) I discussed this in an essay on Scott's original post:

https://medium.com/@davidmanheim/chasing-superior-good-syndrome-vs-baumols-or-scott-s-cost-disease-40327ae87b45

[-]clone of saturn6y190

If we measure the Baumol effect in healthcare using "salary and benefits" where there's no increase in salary and the increase in benefits all goes to increased healthcare costs, that seems like a form of circular reasoning or begging the question. We've only concluded that healthcare costs increased because healthcare benefits increased.

[-]Max foobar6y110

Good point about benefits = healthcare = rising, but I'm not sure about your circular reasoning claim. Seems more like you could argue that K-12 cost increases are the result of healthcare price increases, but now you still have to explain why healthcare prices have increased so much.

[-]PeterMcCluskey6y50

They have a good argument that the Baumol effect explains a significant fraction of cost disease.

Much of their point is that it's not surprising that some industries have better productivity growth than others.

But they don't have a full explanation of the extent to which productivity growth varies by industry. Why do medical productivity trends appear much worse than auto repair productivity trends? What caused the pharmaceutical industry to become less productive?

Their partial answer seems to be Hansonian:

A key distinction is when labor is an input into the good or service and when labor, in essence, is the service. Consumers do not care how much labor is used as an input into the production of a car, but they do care how much labor input is used in a massage, artistic performance, or doctor’s visit.

That's pointing in the right general direction, but I expect a full explanation would also involve consumers being unwilling or unable to switch to companies that offer cheaper services.

[-]Said Achmiz6y40

Your images don’t work because you’re not actually linking to images—you’re linking to pages on Imgur.

Your first link should be: https://i.imgur.com/HGvfMLx.png

And your second link should be: https://i.imgur.com/FOMPCw2.png

[-]Max foobar6y30

Thanks! I originally tried using those links but didn't know to add ".png" to the end.

[-]Daniel Snider ツ6y30

Good news, Scott Alexander replied on June 10, 2019!

https://slatestarcodex.com/2019/06/10/book-review-the-prices-are-too-dmn-high/

and on June 17th too.

https://slatestarcodex.com/2019/06/17/followup-on-the-baumol-effect-thanks-o-baumol/

[-]dtphoto6y30

Salary and expenditures are related, but not apples-to-apples. The first thing that popped to mind is healthcare. Here's a reference link which mostly overlaps the above graph's timeline:

http://www.healthsystemtracker.org/wp-content/uploads/2014/11/Slide2.png

Next would be administrative costs...we'd have to see if district salaries are counted and averaged into teacher expenditures...since it's all about the children, and what it costs the public (taxes) to pay the teachers (and everyone who supports them within the educational system).

[-]Dagon6y20

Is part of the discrepancy the inclusion of more people (administrators, support personnel, etc., who are not necessarily paid more, but who are more numerous) in the "expenditure per educator" but not the "salary of educators" measurements?

[-]Charlie Steiner6y30

We have to separate colleges from public K-12 education. Colleges are the place where you hear about increasing numbers of non-teaching staff. K-12 actually has fewer administrators per student than 20 years ago (in most places).

[-]Max foobar6y30

On page 17 of his book, Alex shows that administrators in K-12 education are a vanishingly small fraction of the employees. He thoroughly addresses and dismisses bloat theory in the book (which would notably be a different effect than Baumol).

LESSWRONG
LW

LESSWRONG
LW

42

Major Update on Cost Disease

42

42