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.
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:
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.
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