Steven Pearlstein on Baumol’s disease
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Steven Pearlstein on Baumol’s disease

Why cheaper computers lead to higher tuition

Steve Pearlstein explains one of the most important outcomes of an economy with rising productivity, Baumol’s disease:

No matter how innovative people were in coming up with new technology and new ways of organizing their work, Baumol and Bowen reasoned, it would still take a pianist the same 23 minutes to play a Mozart sonata, a barber 20 minutes to cut the hair of the average customer and a first-grade teacher 12 minutes to read her class “Green Eggs and Ham.” Based on this observation, the duo predicted that the cost of education and health care would inevitably outstrip the price of almost everything else.

People who don’t understand the concepts in this column should probably not talk about economic policy until they do.

3 thoughts on “Steven Pearlstein on Baumol’s disease

  1. Higher tuition isn’t the greatest example of Baumol’s effect, because the cost of instruction has not been rising. Rising tuition has largely gone towards rising maintenance and operations costs and, to a lesser extent, towards increased student services. (You might blame cheap computers for this, but dorm wifi access isn’t the big cost driver.) As one would expect, the cost increases have been largest at private for-profit colleges which have incentives for raising prices. The tuition increases at public schools have largely been a result of declining government subsidies pushing more of the cost onto students and away from taxpayers at large.

  2. @Rafe,

    This was a fascinating read, thanks for posting! I don’t disagree with the premise or conclusion but I do feel there is a lot that could be done to cut the cost of higher education.

    @Seth,

    I would argue the opposite. Government subsidies are still increasing, especially in the form of cheap and easy credit. Of course, that credit comes with strings (such as you can’t discharge the debt in bankruptcy). Various types of federal loans and grants all add up to the available money to be spent on college, and this increased demand does drive up prices. While no one wants to admit it, more students going to college is inflationary. Schools fight over the best by building newer and more expensive amenities, many of which don’t even have a direct impact on education. With students (and their families) having to pay so little of the cost up front, far too many of them are choosing poorly.

    Our politicians love to talk about “investing” in education, but giving loans or grants to someone to get a history degree worth $200k very seldom makes any type of economic sense. I’m also reminded of the UNC-CH academic scandal. The chairman of the African and Afro-American studies program at the heart of it was making $170k to teach Swahilli. I’m sorry, I don’t see ANY scenario in which the state is seeing any return close to that amount. There are also “Chief Diversity Officers” at all the UNC system campuses that make in the mid-$100ks (I think the one at UNC is getting close to $200k). It’s just insanity.

    Our Universities need to trim down, get rid of a bunch of degree programs and electives that do not make economic sense and get back to the business of turning out high educated individuals who can make an impact.

    At least, that’s my $0.02…and don’t even get me started on the “everyone should go to college” crap that is pushed in our high schools. Of course, I guess this dovetails into a post you made a few days ago about vocational IT.

  3. I was inadvertently thinking about the symptoms of Baumol’s cost disease recently (without knowing it)—after paying a $700 bill for some hospital lab work (after my insurance’s “~50% discount”). I thought to myself—how many iPads could I have purchased with that? And then the other day I ordered a new faucet and drain for my bathroom sink. Granted there are much cheaper faucets out there, but I wanted a nice one, and the total for both came out to just over $600. It struck me that these disparate things (a service, a high-tech product, and a low-tech product) all essentially cost the same. But it’s the high cost of that service that burns me the most, because it “seems” out of whack in relation to the other two. The Baumol Effect gives me some context as to why that might be the case.

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