Major Update on 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):

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(2017)

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.

(2019)

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

Scott: ???

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(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!