By James Kwak
William Baumol and some co-authors recently published a new book on what is widely known as “Baumol’s cost disease.” This is something that Simon wanted to include in White House Burning, but I couldn’t find a good way to fit it in (and it would have gone in one of the chapter’s I was writing), so I it isn’t in there. (Baumol is cited for something else.) But in retrospect, I should have put it in.
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.