Major Update on Cost Disease

by Max D Porter1 min read5th Jun 201912 comments


Cost Disease

Recently I asked about cost disease at the Austin, TX meetup and someone responded "Isn't it just increasing labor costs via the Baumol effect?" and I said "huh?" The next day a friend on facebook linked to Marginal Revolution (MR) discussing the Baumol effect. Next thing I know I'm nerd-sniped.

Turns out Alex Tabarrok at MR just published a free book with the thesis, "Cost disease is mostly just the Baumol effect, which btw isn't a disease and is actually good in a way."

How does this fit in with Scott Alexander's original posts on cost disease? Well here's an imaginary dialogue to demonstrate how I think things went (MR sometimes means Alex Tabarrok and sometimes Tyler Cowen):



MR: Education and healthcare are experiencing cost disease!

Scott: Wow you're right! Let's look at a bunch of possible reasons but see that none of them quite work. For example, it can't be the Baumol effect because that implies increasing wages (for i.e. teachers, professors, and doctors), but we see all those wages increasing at rates equal to or less than the average.

MR: Great post Scott!

Scott: ... And despite lots of good comments, I still can't tell what the cause is. It's certainly not just the Baumol effect though.


MR: So we did some research and actually, looks like it's mostly just the Baumol effect.

Scott: ???


(Scott's last line is a stand-in for both "Is Scott going to respond?" and "what the eff?")

This back-and-forth of course made me extra confused. What did Scott and Alex see differently? Have the relevant salaries been greatly increasing or not?

Seems they disagree on the basic facts here. Focusing just on public K-12 education for simplicity, in 2017 Scott posted this (section III) graph:

from SSC, source at link above

which seems to show unimpressive changes in teacher salaries, ruling out Baumol. In contrast, Alex's new 2019 book gives this (page 19) graph:

from Alex Tabarrok's new book

which shows huge increases in "expenditures per instructor." And he insists that trend is mostly driven by increases in teacher salary and benefits. So either those are some serious benefits, or Scott and Alex are living in different USA's. I'm not sure what's going on here. It's very exciting that Alex says he's solved "cost disease," but it seems like a piece of the story is either missing or confused. (Or I just need to read his whole book.) Comments welcome!

Cost Disease4