Scott Alexander reviews a book attributing rising service costs to the Baumol effect, finding it convincing but raising some concerns about conflicting data and affordability issues.
Longer summary
Scott Alexander reviews the book 'Why Are The Prices So D*mn High?' by economists Alex Tabarrok and Eric Helland, which attributes rising costs in services like healthcare and education to the Baumol effect. The authors argue that as productivity increases in some sectors, wages rise across all sectors, making labor-intensive services relatively more expensive. Scott finds their case convincing but raises some concerns, including data on stagnant real wages, conflicting information on professional salaries, and the apparent decrease in affordability of services like education, which the Baumol effect shouldn't cause. He seeks further clarification on these points to fully accept the Baumol effect as the primary explanation for cost disease.
Shorter summary