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Welcome to, rationally speaking, the podcast, where we explore the borderlands between reason and nonsense. I'm your host, Julia Gillard, and my guest today is Alex Tabarrok. Alex is an economist at George Mason University and a blogger at Marginal Revolution. His latest book is Why Are the Prices So Damn High? It's co-authored with Eric Helland and available for free on the Mercatus Center website. And it's about specifically why are the prices so damn high in health care and education?
As you may have noticed, while the prices of many consumer goods have been plummeting like electronics and toys, the price of services like a hospital visit or a college education have gone up by a lot, about 200 percent just in the last two decades. And that's in real dollars. That's adjusting for inflation. And they've been climbing pretty steadily since the middle of last century. So this is the big mystery. Why are the prices so damn high and getting damn higher?
Alex, great to have you on the show.
Finally, it's fantastic to be here.
You know, I've been quoting you for years, like colloquially and in talks. Do you want to guess which of your which of your many excellent lines I quote the most often?
I'd be delighted if for you to tell me it's a bet is a tax on bullshit.
Yes. Yes. That's a great one. Yes. Yeah. I've I've borrowed lots of cred with that line. So, Alex, to start, maybe you could say a little bit more about those price trends that I mentioned, like how long have health care and education been getting more expensive? And also how surprising are those trends? How surprised should we be that these services are getting more expensive over time? Right.
So I think that is one of the most distinguishing factors of these trends, is that they've existed for as long as we can find data on these things. So in the book, you know, we start about nineteen fifty. So we have sixty five years of data and you can see the price of home appliances has fallen by a factor of more than four. While, as you said, the price of higher education, lower education, health care, they've gone up by a factor of three or four.
They're not the only things we'll talk about later on. Other other services have also gone up in price. And it is important and interesting that this continues to happen year after year after year. This is sort of a slow, steady increase in price overall over time. It's not as if you see in one year some law changes and there's a big jump in price and then continues. This appears to be a more kind of secular increase. As I said, we have data going back to it.
Yes, secular. Our listeners probably won't all know what that means. What a secular mean in this context.
Yes. So secular in this context just means a long run trend, basically. Yeah, I should have said that.
Long run. Not totally. Yeah. Yeah, no, exactly. Some context but going we have dated since 1950, but in fact you can go back and look in the nineteen sixties, in the nineteen seventies and, and people back then are complaining oh health care has gone up so much in price you know, how can we continue to afford this.
All of the problem is summertimes. Yeah.
All of the problems that you hear today, people were saying in the nineteen seventies about health care and even at the same time or even in earlier, people were saying education has increased and a tremendous amount since nineteen hundred. It's nineteen fifty now and you know education has gone up and you know what's going on and what's wrong. And there must be something terrible about these sectors. So these are very, very long run trends.
Yeah. And I think to me what feels surprising about it apriori is just that I have this pattern in my head that, you know, stuff gets cheaper over time because we, like, find ways to innovate and make it cheaper. And so it's weird and perplexing when stuff gets more expensive.
Yeah, that's very that's a very common intuition, I think is a very natural intuition to think that progress means prices should fall. And so you look at clothing and shoes and telecommunications and home appliance and that's capitalism working. That's the way things should be. And you look at higher education, at lower education and health care, professional services, and you say, oh, something's wrong, there's something wrong. You know, is it unions? Is it regulation, is it government?
What is going wrong in these sectors? And part of what the book or the booklet is about is actually to challenge this common wisdom and to say, actually, all real prices cannot fall. What we are hoping to see cannot, in fact, happen over time. You must see some prices rise. And that is due to. You know what it's called, the bomb will effect what we call the bomb effect. Yes, great. Yeah. So I was just I was going to tease that answer, but you got to it before I did.
So, in one of your blog posts about the book, you said that when you were first approaching this question, you kind of assumed that the answer to why are the prices so damn high? Would be this multipronged answer that it would be, you know, various factors that people have pointed to over the years. And in the end, after looking at it in depth, you came to the conclusion that it's basically almost all the Baumol effect.
So the subtitle of the book is Health, Education and the Baumol Effect. Can you walk us through a simple example of how the Bommel? Sure.
So let me give you the kind of classic example which probably a number of your listeners have heard, but I think it's still useful to think about, and that is the famous string quartet. So you take the string quartet in eighteen twenty six. It takes four people 40 minutes to produce the piece. Now we move all the way to twenty nineteen. It still takes four people 40 minutes to produce the piece. So there has been zero increase in productivity over that.
One hundred and eight hundred and eighty years or so. Zero increases.
Well they might be better, they might be better musicians which could count as productivity.
They might be but they don't have to be. Right. So it's it's certainly possible that they're not. They might be, but there's no special reason to think that they are better players. So we've had let's buy assumption, let's say, that zero increase in productivity or not very not a very big increase in productivity in any case. Now, at the same time, all lots of other industries have increase in productivity. So if we go back to eighteen twenty six, the average wage is a dollar an hour because is because those those workers, they can't do very much, they're not very productive.
The average wage in twenty nineteen is more like twenty five dollars an hour. So in eighteen, twenty six we're saying the opportunity cost of those four workers to produce this piece, it's basically four dollars in twenty nineteen for the same for workers it's one hundred dollars. So what we've seen is that zero increase in productivity but the wages have gone up by a factor of twenty five.
So the prices meaning the wages they, the wages they could be getting if they left music and went to work in another.
Exactly. Or to put it the other way, the wages you have to pay them to get them to move from the other sector. Right. Right. So wages have gone up by a factor of twenty five. Productivity hasn't gone up at all. So it must be that prices have gone up by a factor of twenty five. And that's the essence of the bommel effect. If you have a situation where productivity is relatively stagnant, doesn't have to be zero, it just has to be less than in other industries, then prices in that industry must rise because your resource inputs, the inputs into that industry have to be paid their opportunity cost.
They have to be paid what they could earn elsewhere in the economy. So if productivity is increasing elsewhere in the economy, that means that's pushing wages up and pushing input costs up. And if productivity isn't going up, prices must rise.
And then does that mean also that there are going to be fewer musicians, like assuming people aren't willing to just pay increasing amounts indefinitely for the same concerts?
Possibly, right. So in the case of concerts, probably it does. And of course, we do have reasonable substitutes. They're not perfect substitutes. But of course, recorded music has been the big advance in this area. And it's a reasonable subsidy is a perfect substitute because people are still willing to pay a lot more for a live performance than they are for an MP three. So it depends whether we see shifts away from the good, which is increased in relative price depends upon Tait's and upon substitutes.
Now, in the case of education and health care, it just it happens that actually what we see is people purchase more of these goods over time, even as the relative price has increased.
Is that surprising? I don't think it's that surprising. You know, you have diminishing returns to kind of manufactured goods. You can only have a house which is so big and, you know, cars. How many cars can you really want? And, you know, so health care in particular, that in a way, it's the ultimate good, because if you can live, the richer you are, the more valuable it is to live an additional year.
So we have two effects in the case of health care. One is other good have diminishing marginal utility, but health care actually has increasing marginal utility because if you have lots of other good ideas, you're living a really good life, then the opportunity to live an extra year is even more valuable. So the more stuff you have, the more valuable it is to live a little bit extra. So I think it's not surprising that demand for health care has gone up and maybe education too.
There's a good consumption part of education and it's also useful to earn higher wages. So I don't think it's too surprising.
And just to back up and make sure it's clear how the Baumol effect applies to health care and education. So health care and education haven't gotten that much more productive in the last few decades. But other sectors that employ skilled labor have gotten more productive, like, I guess, software engineering. And so they're they're paying more. And so the health care and education sectors have to, in turn, raise wages in order to keep attracting employees and prevent everyone from fleeing to software engineering and other high paying factory.
And so it's a I think it's very plausible. Take the case of education. I think it's very plausible that productivity in education has not gone up very much at all. I mean, we think about what a teacher was doing in nineteen fifty standing before a classroom of 30 people and talking and maybe the teacher used chalk and today's teacher uses PowerPoint. That's just not a big increase in productivity. So I think in education, it's very clear in health care it's less clear because there have been certainly improvements in quality in what a doctor does or in the knowledge which a doctor uses, but still and an outcomes.
Right. Like I mean, that's just an intermediate metric. But outcomes like life.
Exactly. Exactly. So, again, that's another reason why we might spend more on health care, is that quality has gone up. But I think also, you know, when I go to the to the doctor, the doctor still spends a lot of time doing diagnostics, talking with me. You know, even they still use the stethoscope. Right. There's still a lot of detective work of kind of figuring out what the symptoms are, what could this be?
And it's not at all obvious that productivity has increased in that portion. So I think there's a there's a plausible case, not for sure, but there's a plausible case that also in health care, productivity is not increased as much as in other sectors of the economy. Right.
A nice kind of intuitive thought experiment that the blogger Scott Alexander at Slate start codecs posed that Scott wrote a excellent series of posts on on rising costs and the Bommel effect of those two years. And in one of them, to kind of pump your intuition to accept the idea that education was getting more costly and not really all that more valuable was imagining like if you had the choice, would you rather have pay for a college education today, like a, you know, modern college education?
Or would you rather have a college education equivalent to the one that your parents had and then get you know, I forget what it was, seven thousand dollars a year, eight thousand dollars a year or something for four years. Which of those who deal seems better to you? And for most people it's like, oh yeah, I would much rather have the whatever forty two thousand dollars and college education equivalent to my parents. That seems better, but we don't really have that option now.
Exactly. Now let me go back for a minute to why this is kind of a deep point, because this does imply that if there are differential increases in productivity across industries, then some prices must increase. And why is this is because fundamentally all prices or relative prices, what a price tells you is the opportunity cost of something. We're used to kind of thinking about prices as a measure of affordability. So if you compare prices at Safeway versus Wegmans and you find prices at Safeway, the price of bread is cheaper.
Therefore, bread is more it's cheaper, more affordable at Safeway. That's fine when you're thinking cross, actually, but when you're thinking over long periods of time, price does not correlate with affordability. And that's because prices are opportunity costs. So the reason why education has become more expensive is that to buy a little bit more education, we now must give up more cars and. More software and more video games, and why must we give up more of these things?
Because we've become more productive at producing those things. So it's the very fact that we've become more productive. That's the opportunity cost, is the opportunity cost of the education and health care which have gone up. And so that's what driving the higher price. It's not that this is making education less affordable and indeed more people are buying more education over time, not less.
I think that people would say, like if the economy was healthy in some sense, then I could still get the same quality education that my parents got. But just, you know, cheaper. And and now in today's world, I have the option to pay more for a more luxury product in education. And and I can do that if I want. But I you know, if the world is actually getting better, if we're getting more productive, I should be able to, you know, buy the same product that my parents had access to.
And the fact that it seems, at least I think to people that they can't do that, that in order to to have options on the job market, they have to spend a lot more than their parents did for the same sort of degree of options. Does that not seem right?
I don't think so. At least that is mixing several different issues, such as distribution and equality. So before we get into that, let's let's just let's go back, for example, to the to the string quartet. Right. So people can still afford to go hear the string quartet. It's just that you have to give up a lot more other goods to do that. And that's because we've become more productive at producing these other goods. Here's another way of thinking about why, even in a perfectly fantastic working economy, healthy economy, some prices must rise.
It's because prices or opportunity costs and all opportunity costs cannot fall, right? Sort of. By definition, all opportunity costs cannot cannot fall. So we have to see so long as there's some differential productivity, it has to be the case that some prices rise. Now, this can still mean relative to incomes. You know, people are better off. Right. And so I think that's where the distributional aspect comes in, is that this is true sort of on average.
But if you are if your salary is sort of not keeping up, then it can feel like these things are becoming increasingly unaffordable. But for the economy as a whole, that is not the case.
OK, so I had a question for you that might help as a side effect, might help me understand at this point that we've been discussing something that I'm confused about what the Bommel effect is, how does it predict which sectors are going to see a wage increase? So so, you know, in the example of the musicians and one other industry, like, I don't know, carpenters or something like, it's sort of easy to understand people, you know, moving from or like being tempted to move from music to carpentry of carpentry has become much more productive.
And so wages go up and in music. But if you're talking about the whole economy where some sectors are becoming more productive and others aren't really are not as much, what is the overall effect that we should expect to see under the bomb effect? Is it like all sectors have wage increases or like all sectors with skilled labor have wage increases? Does it have anything to say about which sectors we should expect to have more wage increases than others?
Right. So in the book, we're particularly focused on what we think has been driving the Bommel effect in the last 50 years or so, and that is the increase in the price of skilled labor. Right. So we know that particularly the United States, but lots of other places as well, the return to skilled return to education has been going up. So that means that if you have an industry which uses lots of skilled labor but also does not have productivity increases, those are the industries which are going to be particularly hard hit.
Now, maybe your question is also getting at kind of this deeper point, which is why do some industries have low productivity and other industries have high productivity?
That is a separate question I'm also interested in. So you have something to say about that. Please do.
OK, so I mean, I think that's a really complicated, deep question. There's definitely something about services which seems to be resistant. Let me tell one story, which I think is kind of fun and interesting, and this is what I called the tale of two Bury's in the nineteen thirties. You had strawberries, of course, and you also had huckleberries. In fact, huckleberries go back to the pilgrims and the native. They consumed a lot of huckleberries.
They were very popular. And even the 1930s, there was quite a bit of consumption and production of huckleberries and strawberries and huckleberries were about the same price. However, it turns out that huckleberries for peculiar genetic reasons, they're very difficult to cultivate. They don't domesticate very easily. You only find them in the wild. This, in fact, is why Huckleberry Finn is called Huckleberry, because he's hard to domesticate. He's wild. Yeah, yeah.
That's a cute name I write. Didn't occur to me that it meant wild thing.
Yeah, it is a wild thing, hard to civilize. And so since the 1930s, what we've seen is a tremendous increase in strawberry production, strawberries, the domesticated really easily. And so we've seen like an increase in productivity and strawberry production of at least 40 times or so in huckleberry production. People are still have to go to the wild to pick them. So what is the result? Well, the result is these things used to be priced about the same.
But today you can get two pounds of strawberries for four fifty and two pounds of huckleberries will cost you one hundred dollars, literally. You could find that on the Internet. So what has happened is you've had a twenty five times increase in the relative price or 20 times the increase in the relative price of huckleberries. And the fundamental reason is that, you know, productivity in huckleberry production has not gone up. And this is why I also think that some of the solutions which some of my libertarian colleagues, I'm a libertarian, I consider myself a libertarian.
But some of the solutions which my libertarian colleagues have have offered to some of the problems of health care and education and so forth. I don't think they really work. Like, for example, my colleague Bryan Caplan says what we need more immigration and I'm all for more immigration. And it is true, if we had a lot more like low skilled laborers come in, yes, they could pick huckleberries. The wages of those unskilled laborers would be low so you could get more huckleberries.
But that might drive the price, you know, to like eighty five dollars instead of one hundred dollars for two pounds until you solve the fundamental productivity problem. The these are just orders of magnitude. The the immigration solution is an order of magnitude off which you really need. Right.
So I guess I it makes sense to me why we wouldn't see large productivity gains in education, at least until we solve the societal problem of of making online education work.
And I don't know if that'll involve, you know, figuring out a signalling solution or figuring out, I don't know, whatever. For the moment, I can see why we can't have huge gains in productivity and in education. It seems like we should be able to have bigger gains in productivity and medical care because there's more opportunity for for like innovating on the actual technology there as opposed to just like, well, like like the concert. It just like takes this many people to teach this many people or to like perform for this many people, just kind of the hard limit we're bumping up against.
So I mean, maybe if that's correct, maybe a rule like a guideline for which sectors are not going to are going to fall behind in terms of productivity gains are the ones where, like most of the service that's being provided is just like the face to face contact of human and human.
Right, exactly. So I think when you can capitalize, turn some service into a capital version of that answer. Yeah. Then you can you can indeed expect productivity improvements. And I think we see some evidence for that, like laser eye surgery, for example. You know, laser eye surgery has come down in price because I think one reason, perhaps multiple reasons, but one reason for that is because it's almost all the laser. Right. The physician actually only spends like five minutes with you and it's just a laser and software and zap, zap, that's that's up.
And you have this surgery done really by robot. So if we can do more of that. OK, a related question, something the economist Noah Smith pointed out just the other day in his column is that wages for people with advanced degrees.
So I assume that would be a good proxy for skilled labor. Wages for people with advanced degrees haven't risen nearly as fast as costs of health care and education, which seems like it undermines the Baumol effect story. Like because the story you're telling, I think, is wages have gone up in other sectors, so average wages have risen and, you know, just among skilled labor. And as a result, in response, health care and education and other like not productive sectors have to raise their wages in order to compete with these other, you know, increasingly productive sectors that are going to attract all the skilled labor away from them.
But but then doesn't it seem perverse that that salary is that wages would go up even more in health care and education if if what they're doing is just responding to increase wages in other sectors?
So I think there's a few things going on. First, it's very clear that the price of skilled labor wages for skilled laborers have gone up a lot. And that's a general feature of the US economy. In addition, in health care and in education in particular, we've just also bought a lot more inputs, which I count as part of the Bommel effect, because it's completely consistent with the normal effect. And that is we've now with more than doubled the number of physicians per capita with more than doubled the number of teachers per capita.
So that's interesting because I that didn't seem like part of the Bonnel effect to me.
Well, yeah. Yeah. So, I mean, here's an interesting point is that suppose you suppose you think that the reason why prices have gone up in these sectors of the economy is some inefficiency story, something. It could be government, it could be regulation, it could be monopoly power, you know, patents or any kind of story blowed administrative costs, know any kind of inefficiency story. If you have any inefficiency story, then consistent with what you were saying before, the only rational response is to consume less of that good.
Right. So demand curve slow down. And so if you have some some real cost driven explanation of some inefficiency driven explanation for why these costs are going up, the only rational response is to consume less of those goods. So to explain why people are actually consuming more education, more health care, you need some ad hoc additional theory. So you could say, well, the cost of education has gone up, but we're a more credentialed, holistic society.
So that's why we're consuming more, even though it's less efficiently provided. Or you could say, you know, the cost of health care has gone up, but we're consuming more because it's a positional good or something like that. Sorry, I misunderstood, but I. The thing that I was pouncing on there was you mentioned that we were increasing certain inputs, like we haven't actually talked about this yet, but I was going to bring up the fact that the student to teacher ratio has shrunk a lot over the decades.
So back in 1950 or so, it was like twenty seven students per teacher and now it's about 16 or less. In 2015, it was about 16. And that's a big difference from twenty seven to sixteen students per teacher. And that's so that was the type of thing that I thought was not an example of the Obama effect. That's not wages going up for teachers because we're trying to compete with other sectors. That's us as a society deciding, you know, oh, smaller class sizes are going to help our children learn.
And so we're, you know, going to try to reduce class sizes or something, right?
It is. And it isn't. It is in the following sense. Do you have any of the inefficiency stories? You should consume less with the Bommel story. Because the increase in price is driven by the fact that we're becoming more productive, every increase in price also comes with more income, greater resources. So it's not at all inconsistent with the Bommel story that with higher relative prices, you consume more of these goods. It fits the Bommel story quite neatly with one kind of one theory can explain both why the price is going up and why you might consume more of these goods.
So it's not necessary in the Bommel story that you consume more of these goods. If Taste's were such that you didn't really care about the goods, very much so. You know, people consume far fewer domestic servants than they used to write house cleaners, drivers, things of that nature. And I think that's because the price has been has gone up so much of these services and the substitutes are actually so good that people have shifted away from them. You have a washing machine instead of a washing machine, right?
You have a car instead of a car and a driver. Right. So it's possible that you consume less. But it's also completely consistent with the Bommel story that you could see more of these goods. And and that is not true of other theories. So let me see if I understand let's assume you're correct when you say that it's almost all Baumol effect, like almost all of the rising prices and health care and education is due to the Bommel effect.
I had assumed that that would mean that the increase in prices that we see in education and health care would be basically identical to or almost identical to the increase in salaries in that field. That that's what it would mean for the rising prices to be almost all due to the Baumol effect. And that if if the salary increase was only like, you know, a substantial but still a fraction of the total increase in prices, then there must be something else going on besides the Bommel effect, because it's it's not you know, the causality is not flowing through salaries.
Is that not what you're saying?
So so I will admit to maybe a little bit of hyperbole that it's all the money, but it's all in trying to catch you out there.
No, no, no, no, no. It's not what you're saying yet.
No, no, no. That is a fair is a fair question. When I say what I say is all baumol effect. What I have in mind is that if you want to explain these really long run trends, like why has education been increasing in price for the last sixty five years at least, and probably the last one hundred years, then I think basically it's all kind of Baumel Baumol effect, right? Every industry has got its own foibles and it's got its own ups and downs.
And, you know, in health care, you know, I tweeted that every theory about why health care is screwed up is true because health care is screwed up in every possible way.
Right. So I don't want to.
So I definitely think it's true. We could lower prices, you know, in health care if we did a bunch of things. But I think what would happen is you would lower the prices, which would be great. But until you solve the fundamental productivity problem, you would still continue to see this long run increase in relative price over time. So I think of the Bommel effect as like rising sea levels. You know, it's what dominates in the long run.
So that's kind of what I think is going on. And part of the Bommel effect, and maybe I'm a little bit part of the ball I include is part of the Bommel effect, the idea that we are purchasing more of these goods even as the prices go up. So I think the bubble effect can explain both of those things very easily. So I include both both the price increase and the quantity increase.
OK, OK, so here's another comparison that might help me understand what's being classified as the Baumol effect and what isn't. As I understand it, there has not been nearly as much of a rise in prices in health care and education in other countries that have experienced productivity growth like, you know, over the decades, like Germany or Japan or France. And it seems like the Baumol effect logic should apply to them as well. So why doesn't it?
Yeah, I don't think that's true. It is the first part.
The problem is that there hasn't been nearly as much of a rise in prices. Yeah. So what is what is certainly true is that other countries spend less on health care as a share of GDP than does the United States. The United States appears to be very expensive. If you look over time, however, every in every country expenditures are going up over time on health care. Everywhere you look, expenditures are going up. So similar amounts, though.
I mean, relative to productivity growth in each country.
So that's a good question.
I haven't done all of the the corrections relative productivity growth, so I don't want to say.
But yeah, it looks, you know, off the top of your head, if, like any of France, Germany and Japan have like roughly similar productivity growth to the U.S. in the last 20 years, I mean, every country and we can just eyeball the yeah.
I mean, every industrialized country has roughly similar productivity growth because they're growing at the technological frontier and that is diffused around the world among industrial countries. Oh, that makes sense. Quite, quite. Well, the you know, China the poor countries are catching up, so they have higher productivity growth. But among the industrial countries who are at the technological frontier, its ideas and those ideas spread pretty rapidly. In fact, this is this is an aside.
But it is kind of interesting, actually, that how how coordinated productivity growth among the developed countries is. And so you can actually see, like, you know, the US has a jump in productivity growth and a little while later know Australia will have a jump in productivity growth as these ideas often spread from the leader to other developed countries. Cool. Yeah, so so your sense is that Germany, Japan, France are seeing these kind of two hundred percent increases in price and health care?
Yeah, exactly. They're OK. They're certainly spending like that. Yeah, they're spending less than we are. But this is a wherever you go in the world or pretty much wherever you go in the world, people will be complaining about the rising cost of health care.
Right. I mentioned Scott Alexander a few minutes ago and he he wrote a review of your book, I guess, a month ago or so.
And it was a positive review. But he had this core disagreement with you. And that was really interesting. It was not it wasn't a disagreement over how to explain the economic fact. It was a disagreement over what the facts actually are. And Scott's conclusion was that wages for teachers, professors, physicians have not actually gone up very much in the last few decades, which is kind of the crux of the Bommel effects explanation. Do you? I don't know if you've had a chance to look at his graphs or, you know, his data, but do you understand why you're reaching different conclusions about the trend line?
Yeah, so he it was a little bit. So he had some good critiques for sure. But on the data question, I thought it was very peculiar. He had some graphs, but he actually doesn't even know where they come from. So he couldn't sort of identify the source of the I'm pulling from the census. It's just like I don't think there's any debate in the economics literature that wages for high skilled workers know high educated workers have gone up a lot.
That's like a stylized fact, you know, among economists and people who study this issue, that there's been an increasing return to skill and the wages of skilled workers are way up. The wages of unskilled workers are pretty flat, but the wages of skilled workers are way up.
So the only part of the data of the disagreement over data that I can remember with any confidence is over the salaries of teachers. And they're both of you are looking at the I guess it was the census. It's the NCIS agency of the government.
And I from what I could tell, Scott was looking at the salaries or the the average wage for teachers.
And you were looking at the expenditures per teacher.
And the expenditures show a you know, they're higher and they increase more over the years. And it just, you know, naively would seem to me that salaries are more directly getting at what we care about. Was there a reason you chose to use expenditures instead of salaries?
Well, I think we have to look at all types of compensation, and particularly is that the difference between expenditures and salaries that they they.
Yeah. So the expenditures includes what is it cost to get a teacher into the classroom. So it includes, you know, health care, it includes pensions, all of that kind of.
But it doesn't include like administrative or support staff or anything like that.
It doesn't include administrative or support staff. It does include it's not it's not it's not as pure a measure as I would like. It does include like things like a few things like textbooks. So there are small they're are small share and they can't be growing very much.
The two trends are actually they actually correlate pretty highly and both actually show big increases in payments to teachers from like the nineteen fifties to the 1980s and that it does kind of level off from the nineteen eighties onward. At the same time, you know, so long as they're getting higher payments relative to productivity growth, we would expect that to drive increases in cost. And we are hiring more teachers and more teachers aides as well. We're trying to yeah. Trying to substitute a way.
And it's not and it's not just teachers. I mean, we do it is true. We focus on the book, on the obvious teachers, physicians, nurses. But it you know, administrators, they have to be pretty skilled as well. Right.
And so labor costs in general are just a high fraction of any industry. And these industries are particularly high labor costs. And so it's just not. But if you include everybody, I think, again, this becomes even more plausible.
Yeah, I'm I'm now realizing that I think I would predict that a lot of the disagreement between you and Scott comes down to I'm guessing that he assumed the way I had originally assumed that that for the bomb effect to be the predominant theory. The rise in prices, it would have to only work through salaries, whereas your you're counting other things as Baumol effect that I hadn't realized and maybe Scott didn't realize it as well. So so like the rise in teacher compensation doesn't have to be as dramatic as I would have assumed in order to, you know, count as evidence.
So I feel like I understand the disagreement better. So that's cool.
Well, I was just going to say there's another interesting aspect of the Obama effect, and that is there is if you just focus on education and health care, then kind of a natural response is, well, this is government, right? Government definitely has a lot of impact.
And I'm going to ask about that. Yeah, yeah, yeah. So and what I like about the Bommel effect is that it explains what's going on in many different industries. And perhaps this is a defect of mine as an economist. But I like a theory, you know, that explains a simple theory that explains many things. And the ricardi in place. Right.
But here's a Robin. Exactly.
Exactly. Thank you for that. So here's another example. If you look at professional services, which is like law, accounting and architecture, things of that nature, they have gone up in price just as much as health care. And there's no big, you know, government regulation of accounting or architecture. There's no big government purchases of these things. Now, of course, it is true that, you know, all of these things are regulated because everything in our society is regulated.
But you have to look across actually. Does more regulation explain? Does it correlate with higher prices? And the answer is just no. These are you. Yeah.
A minute ago, it sounded like you were talking about government, like subsidizing the the cost of health care and education. Is that are you counting that as regulation or is regulation a separate thing that you're talking about now? Yeah, either.
I think there's there's different problems with all of these stories. Like let's the regulation story, I think does not fit your accounting, architecture, professional services, nor does the subsidy story. These these areas are not particularly subsidized. Here's another area which does not fit the subsidy story, and that is expenditures on pet care, on vets have also gone up just as much, if not by more than on human health care. And we don't have big subsidies.
And also there is very little third party payers is another thing which people blame. There's very little insurance. And in fact, in four pet care, I think the causality is going the other way in that it's the high price of pet care, which is actually increasing the demand for pet insurance rather than going the other way.
But isn't this this feels very shocking to me. If if what we're seeing is, in fact, that that these these industries in which the government is heavily subsidizing it and and, you know, the people who are making the purchasing decisions about what health care to to get are not the ones not mainly the ones footing the bill. If that isn't causing prices to go up a lot, then isn't that a shocking result?
I don't think so. You know, the subsidy is is is is tricky. And again, remember, what we're trying to explain is like this. Sixty five year, OK, long run trend. And I just don't think subsidy really does that. And and here's a way of thinking about it, is that it is true that a subsidy will drive up prices in the short run, but a subsidy is really just like an increase in income. And over time.
Every industry is subject to increases in income. Right. So why have purchases of Coca-Cola increased? Our income goes up and we buy more soft drinks, but we don't say, oh, because income has gone up, therefore, prices must rise. Instead, we think that the ordinary aspect of markets is that technology and productivity more compensate or sometimes more than compensate for the increase in income. So, yeah, it's true a subsidy is going to drive things up in the short run, but in most industries we expect that to be more than compensated by improvements in productivity.
Well, I guess a subsidy is somewhat different from the the mismatch between who's deciding and who's paying, right. So that latter seems more distortionary to me.
Oh, it's definitely distortionary. And, you know, there's as I said, there's every theory about why health care screw it up is true. And, you know, we need we should do something about it. And yes, we could save many billions of dollars if these goods were allocated more rationally.
But I don't think there's going to be a large remaining effect even after. Yeah, we, you know, completely rationalized the health care industry.
Exactly. I think so long as we until we find a way to improve the productivity of high skilled labor and maybe, you know, artificial intelligence robots, that's our best chance to do this. But until that happens, I think this long run secular, if I may use that word again, increase in price is going to continue.
Got it. All right. Well, I guess that's a good place to stop.
I have so many more questions for you. But before I let you go, Alex, I wanted to ask you to nominate a book or more than one book, if you like, that had a significant influence on your life, whether that was on your choice of career or your thinking about some, you know, your worldview or something like that. Right. Anything come to mind?
Well, I feel that I need to burnish my libertarian credentials.
So after denying the significance of regulation. Yes. I'm wondering if you're going to get kicked out of all the parties. I know. Exactly. And parties.
Yeah. So I'm going to say Atlas Shrugged by Ayn Rand. Nice for you and you.
So I was. Well, I believe I'm sure you can guess I was a teenager, right? No big surprise there. That's where the book, I think, really has the opportunity to. Yeah. To be Formentera. The teens. Exactly. Kind of a rebel. And you want to be your own man and think for yourself and strike out on your own on new paths and create things.
And so for all of these reasons, Atlas Shrugged definitely changed my worldview view. And you. Yeah.
Have you, you know, returned to it once or more than once over the years and noticed that you feel differently about it? Or is it does it still hold the same effect on you as it did so yourself?
I think I've read it twice. Maybe. I don't know. I haven't read it. I haven't read it in many, many years. So I'm not one of these people who read it again every few every few years. It may be. Yeah, I have no big maybe I should go back and read it again and see.
I think it's so interesting that I can read these things that were so, either so influential or that, you know, that we loved when we were younger and see how our reaction changes.
For me, one of those like benchmark works of fiction is Rent the Musical, which I absolutely loved when I was 13, like like memorize the soundtrack, stalked the actors online, loved rent, and I revisited it several times, you know, every every like five to ten years and noticed that my interpretation of it is very different.
Yeah. And obviously rent stays the same, but I'm changing.
Yeah, that's yeah. That could be one of the things which got me into this drug actually was Rush the Canadian rock star in no way. Yeah, yeah, yeah.
And I still be a very popular teenager. I still listen to moving pictures. I still think it's one of the greatest albums ever. So maybe that's a sign that I'm not progressing well.
I have been to maybe only two concerts in my maybe three concerts in my life, but Rush was one of them. Oh.
So I'm not I'm I'm teasing from a place of love.
I Alex, thank you so much for coming on the show. It's been a pleasure. I will link to well, certainly your book. Why are the prices so damn high on the Mercatus Center website. Also to Marginal Revolution. Although I assume, you know, most, if not all of our audience is already familiar with Marginal Revolution. And I guess I'll probably pick a few of your blog posts discussing the book along with maybe some of Scott's and Brian.
So so people can kind of get a feel for the conversation that's been happening over the last two years about this topic.
Great. Thanks, Julia. All right. Well, this concludes another episode of Rationally Speaking. Join us next time for more explorations on the borderlands between reason and nonsense.