Eric Helland and Alex Tabarrok sort out the various proposed explanations. For example, concerning (lower) education, they write,
no metric of school quality shows any improvement that would appear to justify a cost increase of more than five times. Improvements in quality do not appear to explain increases in cost.
. . . Contrary to the usual story, the number of teachers per 100 students has increased since 1950. . . The number of other staff per 100 students also has increased, but at least since 1980 the increase has, if anything, been at a slower rate than the increase in teachers per student.
The rising cost of labor inputs is the best explanation for the rising cost of education
They focus on the Baumol Effect, about which I wrote
for everything that gets cheaper, something else has to get relatively more expensive. If efficiency shoots up in one sector, then in relative terms it has to decline elsewhere.
Baumol effect is either a labor market disease or a symptom with multiple causes. We need to make up our mind on this.
The quote focuses on more labor quantity, not higher cost of labor, but I’m sure it’s true that education wages have risen rapidly too.
Identifying a Baumol effect doesn’t explain anything. That assumes a lack of normal increases in labor productivity. It doesn’t explain why. A better understanding of why there isn’t sufficient competitive pressure to provide these increases and what we can do about it is the crux of the problem, because it is pretty obvious that such efficiencies do exist in these sectors.
These sectors are reinvestments by consumers in themselves. As a society becomes wealthier, these reinvestments become relatively larger after lower level hierarchical needs are satisfied.
Identifying a Baumol effect doesn’t explain anything. That assumes a lack of normal increases in labor productivity. It doesn’t explain why.
I would think that’s obvious. Teaching kids to read isn’t vastly more labor-efficient now than it was 400 years ago*, but making [insert manufactured good here] is vastly more labor-efficient. Therefore, the opportunity cost of hiring teachers, as expressed in terms of [manufactured good], has increased.
*Why would it be? Kids haven’t changed much. Reading hasn’t changed much.
*Why would it be? Kids haven’t changed much. Reading hasn’t changed much.”
You could say something similar about brain surgery.
There is no reason why learning couldn’t be subject to the same radical rethinking and technological advancement as any other good or service in the economy.
First, brain surgery is also fairly labor intensive and is also rising in cost. Second, brain surgery has changed greatly in the past 400 years – back then it would have been considered a stupid idea that would obviously kill the patient.
In point of fact, we’ve had lots of “radical rethinkings” of education aimed at “technological advancement”. Thus far, they haven’t worked particularly well. There’s certainly been nothing comparable to the Industrial Revolution. I’ve seen some estimates that a simple shirt, made by pre-industrial techniques with minimum-wage labor, costs about $3,000 – the industrial revolution increased labor efficiency by a *lot* for certain classes of goods.
Tl;dr – when somebody says there’s no reason why [highly desirable thing] is impossible, but experts have consistently failed at [highly desirable thing], the most likely explanation is that there is a reason that why it doesn’t work, but somebody doesn’t know the reason.
You are arguing in circles. The classic Baumol example is the number of musicians is needed to play a Beethoven string quartet. That asserts a circumstance where an activity is intrinsically fixed in approach over time, competing against labor usage that isn’t.
You originally argued that education was like that. Teaching someone was locked in as one person guiding another in a standard classroom setting.
We have weird dynamics going on with education that insulates it from normal cost pressure. Costs provide exclusivity and signal prestige. Public money is heavily involved, and teachers exert collective political power on the system. All of these things can change or be ignored. Education inefficiency is not inevitable.
Education may not have the same potential process simplicity as manufacturing a shirt, but it doesn’t have to continually get more expensive and it can improve substantially.
@Tom- I agree that there’s more to the rising cost of education than pure Baumol effect. There seems to be a great deal of inefficiency from signaling effects and questionable administration costs. However, I objected to your comment about “normal increases in labor productivity” as it seemed to express a belief that profoundly different economic activities should be expected to have similar rates of labor productivity growth. I can imagine no good reason to expect that.
As to whether education can improve substantially, I’m less optimistic. There are lots of reports of new educational methods that work better, but the initial promise never seems to hold up over time and at scale. We’ve had a lot of changes in subject matter and emphasis, but I can’t really say that our education system works better overall than it did 100 years ago, or that it has the potential to.
“to decrease the college wage premium and the relative price of goods and services that use college-educated workers, we need to increase the educational attainment of the US workforce.”—Helland and Tabarrok, pp. 71-72
Helland and Tabarrok ignore your null hypothesis and Bryan Caplan’s case that educational attainment in the USA already is mostly a socially-wasteful arms race in ‘signaling.’
Although Helland and Tabarrok briefly address regulatory costs, they don’t come to grips with two mechanisms that your essay highlights: “Demand delinked from outcomes” and “Subsidize demand, restrict supply.”
Arnold, in your estimate or intuition, are these two mechanisms comparable in magnitude to the pure Baumol effect?
100 years ago people envisioned a future in which productivity increases would allow lives of leisure. A three day workweek. A six hour day. Early retirement. Man free to do what he wished with his time rather than what he had to do.
Instead, most anyone with skills of any kind has been thrown into work, we even threw our wives into work, for long hours, long days, and long careers. Mostly to pay for services like education and healthcare, as well as zero sum bidding up of certain real estate. It’s not clear what we got in return was worth all those extra hours at the grindstone, but we never really were given a very graceful option for opting out.
Actually, we are all generally starting careers later and retiring earlier than 100 years ago. And that’s for ‘normal’ people. There are also these folks, and these. The option of opting out IS there.
” If efficiency shoots up in one sector, then in relative terms it has to decline elsewhere.”
Isn’t this just a tautology? If something is higher than something else, then it is higher than something else.
Perhaps it’s just a personality disorder, but every cell in my body shrieks with skepticism when I read something like what Tabarrok claims: “In contrast, the Baumol effect appears capable of explaining the pricing behavior of a wide variety of industries over a long period of time using a simple but powerful and unified theory.” And when a college professor claims the solution to anything is more college degrees one is well advised to check they still have their wallet in their trousers.
There are a number of weaknesses in the Grand Baumol Cost Disease Model Explanation of Everything relative to the Subsidize Demand, Restrict Supply model.
First, the alleged mechanism by which the former is supposed to work is labor market competition. I have yet to step onto a college campus and be trampled by a herd of recruiters in hot pursuit of a college professor. And colleges and universities appear to have no problem at all recruiting for adjuncts at much, much lower total compensation levels. Except maybe in law schools and medical schools where individual professors would appear to have meaningful opportunities elsewhere.
Internet sources indicate that an average salary for a college professor is about $95,000. One is hard pressed to think of another occupation with pay at that level for similarly skilled individuals.
And then there is the wide gap between average salaries at taxed institutions versus untaxed institutions. Helland and Tabarrok’s notion that no administrative cost-saving efficiencies could be achieved in the education (he rules out bloat as a contributing factor to college prices) seems ludicrous at best. Bloat cannot be a contributing factor they reason because it has been relatively constant across the past several decades, completely ignoring the enormous disruptive cost-savings achieved in reducing administrative overhead and middle management generally over the same period brought on by the different merger and acquisition waves over the same period. There appears to be no market for corporate control in the tax-exempt segment of the education industry but Helland and Tabarrok have nothing to say about that.
Helland and Tabarrok don’t discuss any possible distortionary effects of government subsidies to the education in either the form of student loan guarantees, tax exemption for “non-profit” institutions, or the steadily increasing number of occupations for which there is a regulatory requirement for a college degree. Nor as others have mentioned, the restrictions on employer use of intelligence testing on candidates that has given college degrees so much of their value in signalling. Apprenticeships as an alternate route to employment have largely been extirpated by the rent-seeking higher education industry.
Helland and Taborrok claim that using a text analysis database to count binding constraints in the wording of regulations, as codified in the Code of Federal Regulations, they can demonstrate that “the primary factor explaining
long-run trends in prices is differences in productivity growth
rates rather than regulation.” Hubris thy name is quantification. Apparently we are to believe that a “thou shalt not frac” regulation is fungible with a “thou shalt not frak thy student” regulation and the failure to find correlations between “shalt not” word counts and other variables means something relevant.
Then there are other means by which higher ed rent seeks. Accrediting bodies generally impose baccauleate core distribution requirements to ensure all the different departments get a share of the booty despite the lack of any real demand for the courses they offer. This in turn boosts the number of faculty necessary to offer a college thereby creating various public choice advantages.
Why do so many campus’s have vast tracts of unused real estate? I don’t think Baumol’s Cost Disease explains that.
Oh well, I tire even myself. If it were put to a vote, Subsidize Demand, Restrict Supply would win mine.