Major Update on Cost Disease

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.

If we measure the Baumol effect in healthcare using "salary and benefits" where there's no increase in salary and the increase in benefits all goes to increased healthcare costs, that seems like a form of circular reasoning or begging the question. We've only concluded that healthcare costs increased because healthcare benefits increased.

They have a good argument that the Baumol effect explains a significant fraction of cost disease.

Much of their point is that it's not surprising that some industries have better productivity growth than others.

But they don't have a full explanation of the extent to which productivity growth varies by industry. Why do medical productivity trends appear much worse than auto repair productivity trends? What caused the pharmaceutical industry to become less productive?

Their partial answer seems to be Hansonian:

A key distinction is when labor is an input into the good or service and when labor, in essence, is the service. Consumers do not care how much labor is used as an input into the production of a car, but they do care how much labor input is used in a massage, artistic performance, or doctor’s visit.

That's pointing in the right general direction, but I expect a full explanation would also involve consumers being unwilling or unable to switch to companies that offer cheaper services.

Your images don’t work because you’re not actually linking to images—you’re linking to pages on Imgur.

Your first link should be: https://i.imgur.com/HGvfMLx.png

And your second link should be: https://i.imgur.com/FOMPCw2.png

Good news, Scott Alexander replied on June 10, 2019!

https://slatestarcodex.com/2019/06/10/book-review-the-prices-are-too-dmn-high/

and on June 17th too.

https://slatestarcodex.com/2019/06/17/followup-on-the-baumol-effect-thanks-o-baumol/

Salary and expenditures are related, but not apples-to-apples. The first thing that popped to mind is healthcare. Here's a reference link which mostly overlaps the above graph's timeline:

http://www.healthsystemtracker.org/wp-content/uploads/2014/11/Slide2.png

Next would be administrative costs...we'd have to see if district salaries are counted and averaged into teacher expenditures...since it's all about the children, and what it costs the public (taxes) to pay the teachers (and everyone who supports them within the educational system).

Is part of the discrepancy the inclusion of more people (administrators, support personnel, etc., who are not necessarily paid more, but who are more numerous) in the "expenditure per educator" but not the "salary of educators" measurements?