Tuesday, October 16, 2012

James Kwak on Baumol's Cost Disease

James Kwak writes here about Baumol's cost disease in health care and other industries. Along the way, he makes a point that seems misleading:
Baumol’s argument, somewhat simplified, goes like this: Over time, average productivity in the economy rises. In some industries, automation and technology make productivity rise rapidly, producing higher real wages (because a single person can make a lot more stuff). But by definition, there most be some industries where productivity rises more slowly than the average. The classic example has been live classical music: it takes exactly as many person-hours to play a Mozart quartet today as it did two hundred years ago. You might be able to make a counterargument about the impact of recorded music, but the general point still holds. One widely cited example is education, where class sizes have stayed roughly constant for decades (and many educators think they should be smaller, not larger). Another is health care, where technology has vastly increased the number of possible treatments, but there is no getting around the need for in-person doctors and nurses. The problem is that in those industries with slow productivity growth, real wages also have to rise; otherwise you couldn’t attract people to become classical musicians, teachers, or nurses.
But as Jay Greene points out in this Wall Street Journal piece, real wages for teachers have grown by only 11% over the last 40 years. A more significant reason that K-12 education is more expensive today is that it employs 50% more people:
In 1970, public schools employed 2.06 million teachers, or one for every 22.3 students, according to the U.S. Department of Education's Digest of Education Statistics. In 2012, we have 3.27 million teachers, one for every 15.2 students.


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