Fleabag and Killing Eve

Fleabag (Amazon) and Killing Eve (BBC America) are two television shows written by the absolutely brilliant Phoebe Waller-Bridge who also stars in the former. I tweeted:

Image result for fleabagFleabag 2nd Season even better than 1st. An indelible portrait of toxic femininity. No accident that the brilliant Phoebe Waller-Bridge also wrote Killing-Eve featuring a different female killer but in male style and fantasy form rather than the more mature & realistic Fleabag.

Not everyone understood the tweet and some were confused. How could Fleabag be about toxic femininity when Waller-Bridge is a feminist? Fleabag is misunderstood because people try to frame it in terms of victimhood and Waller-Bridge is having none of that. Her method for illustrating the equality of the sexes is to show that women can be just as evil as men. Fleabag is much darker and more religious and mystical than most people realize.

I have written somewhat elliptically in what follows so as not to give much away but….mild spoiler warning. Herewith some observations.

Killing Eve features the serial killer, Villanelle. In one episode, she kills her lover using perfume. What could be a better metaphor for toxic femininity than that? Although they appear very different, Villanelle and Fleabag have much in common. Both of them, for example, are sociopaths.

Fleabag says as much herself, “I’m a greedy, perverted, selfish, apathetic, cynical, depraved, morally bankrupt woman.” But even more telling is that the other characters tell us that Fleabag is a sociopath. “You know exactly what you are doing,” “You only do what you want,” “You know what you are going to do,” or words to that effect are said many times. To understand Fleabag the show, you need to take these words seriously and backcast them to the events that happened before Season One. Namely, in a fit of sexual jealousy, Fleabag decided that if she can’t have what she wants then no one will. She wills it. It happens.

In doubt? Consider the scene at the funeral of Fleabag’s mother. Is she upset? Distraught? In tears? No, she looks radiant. She is more beautiful, more composed, more at peace on the day of her mother’s funeral than any day before and everyone tells her so. “I have never seen you looks so good,” “You look glorious,” and my favorite, “Gosh, grief really agrees with you.” Her body tells the truth. It is a mistake to wish this away.

In Season One, Fleabag is only just realizing the power that her sociopathy and sexual charisma bestow upon her and at first she is frightened. By S2, however, she is in command and we see her using her intense sexual charisma to bend men to her will. Men worship her and she treats them like objects and playthings. In one case, she literally has her boyfriend on his hands and knees scrubbing the floors. It’s hilarious.

FB is not the only example of toxic femininity in the series. The stepmother is an older version of Fleabag who also uses her sexual charisma to get what she wants. She has Fleabag’s father by the balls and to prove it she hangs them on the wall (I am not making this up). Fleabag cannot defeat the passive-aggressive stepmother because her sexual powers work only over men (notice the Kristen Scott Thomas scene and recall that FB didn’t get what she really wanted pre Season One). The stepmother is in fact a kind of witch who uses words to destroy those around her even though the words themselves are pleasant sounding. The stepmother also fashions a voodoo doll, a statue of Fleabag’s mother–whom she has replaced–that is notably beheaded.

The real plot of Season Two is that Fleabag is bored by how easy it is to control men and so she goes after bigger game. Can she top her pre-Season One triumph? Can she steal a man from God? Priest and witch enter into a battle of wits and wills. The Priest thinks he is going to exorcise her demons. This is a feminist show. He doesn’t.

The priest is a very interesting character. He is specifically introduced as a new priest, i.e. a new church, and he is young and cool and sexy. He is also a complete failure. Is Waller-Bridge, who was schooled by nuns, saying the new church fails or the church in general? Either way, despite being celestially warned, the priest fails God, he fails the Church and, perhaps most of all, he fails Fleabag. To be saved, Fleabag needed to find an incorruptible man, one who truly believes that there are bigger things than sex and dominance and worship of self. Instead, she finds in the church nothing but hypocrisy. In choosing sex over God and devotion to others, the Priest violates a sacred trust just as the pedophile priests violated their sacred trust (and Waller-Bridge makes clear the family resemblance). It does not take much imagination to see that the Priest will soon meet his fate in an alcoholic stupor (many hints are given).

In the final scene Fleabag walks into the sunset contentedly, like a talented Mrs. Ripley. The priest leaves in the opposite direction pursued by a demon symbolizing his failure to guard his flock.

Addendum: By the way, we never learn Fleabag’s name. She is a temptress who kills. Thus, another good name for Fleabag would be Killing Eve.

Special Features of the Baumol Effect

I explained the Baumol effect in an earlier post based on Why Are the Prices So D*mn High?. In this post, I want to point out some special features of the Baumol effect that help to explain the data. Namely:

  • The Baumol effect predicts that more spending will be accompanied by no increase in quality.
  • The Baumol effect predicts that the increase in the relative price of the low productivity sector will be fastest when the economy is booming. i.e. the cost “disease” will be at its worst when the economy is most healthy!
  • The Baumol effect cleanly resolves the mystery of higher prices accompanied by higher quantity demanded.

First, in the literature on rising prices it’s common to contrast massive increases in spending with little to no increases in quality, as for example, in contrasting education expenditures with mostly flat test scores (see at right). We have spent so much and gotten so little! Cui Bono? It must be teacher unions, administrators or the government!

All of that could be true but the Baumol effect predicts that more spending will be accompanied by no increase in quality. Go back to the classic example of the string quartet which becomes more expensive because labor in other industries increases in productivity over time. The price of the string quartet rises but does anyone expect that the the quality rises? Of course not. In the classic example the inputs to string quartet playing don’t change. The wages of the players rise because of productivity increases in other industries but we don’t invest any more real resources in string quartet playing and so we should not expect any increases in quality.

In just the same way, to the extent that greater spending on education, health care, or car repair is due to the rising opportunity costs of inputs we should not expect any increase in quality. (Note that increases in real resource use such as more teachers per student should result in increases in quality (and perhaps they do) but by eliminating the price increase portion of the higher spending we have eliminated a large portion of the mystery of higher spending with no increase in quality.)

Second, explanations of rising prices that focus on bad things such as monopoly power or rent seeking tend to imply that price increases should be largest when the economy is doing poorly. In contrast, the Baumol effect predicts that increases in relative prices will be largest when the economy is booming. Consider health care. From news reports you might think that health care costs have gotten more “out of control” over time. In fact, the fastest increases in health care costs were in the 1960s. The graph at left is on a ratio scale so slopes indicate rates of growth and what one sees is that the growth rate of health expenditures per person is slowing. That might seem good but remember, from the Baumol point of view, the decline in relative price growth reflects slowing growth elsewhere in the economy.

Third, holding all else equal, the only rational response to an ordinary cost increase is to substitute away from the good. But in many rising price sectors we see not only greater expenditures (driven by increased prices and inelastic demand) but also greater quantity demanded. As I showed earlier, for example, we have increased the number of doctors, nurses and teachers per capita even as prices have risen. John Cochrane correctly noted that this is puzzling but it’s a bigger puzzle for non-Baumol theories than for Baumol. For non-Baumol theories to explain increases in the quantity purchased, we need two theories. One theory to explain the increase in price (bloat/regulation etc.) and another theory to explain why, despite the increase in price, people are still purchasing more (e.g. income effect). The world is a messy place and maybe that is what is happening. But the Baumol effect offers a cleaner answer.

A Baumol increase in relative price is always accompanied by higher income so it’s much easier to explain how price increases can accompany increases in quantity as well as increases in expenditure. The Baumol story for increased purchase of medical care even as prices increase, for example, is no more mysterious than why people can take more leisure when wages increase–namely the higher wage means a higher income for any given hours and people choose to take some of this higher income in leisure. Similarly, higher productivity in say goods production increases income at any given production level and people choose to take some of this higher income in services.

Summing up, if we examine each sector–education, health care, the arts, etc.–on its own then there are always many possible explanations for why prices might be increasing. Many of these explanations have true premises–there are a lot of administrators in higher education, health care is highly regulated, lower education is government run. But, on closer inspection the arguments often don’t fit the data very well. Prices were increasing before administrators were important, health care is highly regulated but so is manufacturing, private education is also increasing in price, the arts are not highly regulated. It’s impossible to knock down each of these arguments in every industry, so there is always room for doubt. Indeed, the great difficult is that these factors often do result in higher costs and greater inefficiency but I believe those are predominantly level effects not effects that accumulate over time. Moreover, when one considers the rising price industries as a whole these explanations begin to look ad hoc. 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.

Addendum: Other posts in this series.

The NYTimes is Woke

Many trends develop over decades but I’ve never seen change so rapid as the breathtaking success of what one might call social justice concerns. Beginning around 2010-2014 there appears to have been a inflection point. Here from Zach Goldberg on twitter are various words drawn from Lexis-Nexis.

 

 

 

 

 

 

 

 

And here from David Rozado is a longer list all drawn from the NYTimes. Rozado has a page where you can graph the trends for words of your own choosing.

 

The Road Ahead for America’s Colleges & Universities

We briefly cover higher education in Why Are the Prices So D*mn High? If you are interested in a longer treatment that covers many more issues I highly recommend Archibald and Feldman’s The Road Ahead for America’s Colleges & Universities. Archibald and Feldman reach the same conclusion we do with regard to dysfunction versus the cost disease:

We have offered two contending viewpoints about the drivers of college cost, and we have made a judgement between them. The dysfunction stories form the dominant narrative in public discussion, but we think it’s a story with weak foundations. Yet we agree that the status quo likely costs more than it could or perhaps should. You might notice that we mounted no defense of lazy rivers. Still, the cost consequences of true excesses probably are small. The major drivers of college costs are as follows (1) higher education is a service, and productivity growth in services lags productivity growth in goods; (2) higher education relies on highly educated service providers, and the income gap in favor of highly-educated workers has grown; and (3) higher education institutions adopt technology to meet a standard of care, even if meeting that standard pushes up cost.

In addition to discussing costs, Archibald and Feldman look at the demand for college, the role of the federal and state governments, online education, policy proposals such as free college and much more. Throughout their book they are data driven, analytic, and judicious.

The Baumol Effect

After looking at education and health care and doing a statistical analysis covering 139 industries, Helland and I conclude that a big factor in price increases over time in the rising price of skilled labor. Many industries use skilled labor, however, and even so prices decline so that cannot be a full explanation. Moreover, why is the price of skilled labor increasing? The Baumol effect answers both of these questions. In this post, I’ll explain the effect drawing from Why Are the Prices so D*mn High.

The Baumol effect is easy to explain but difficult to grasp. In 1826, when Beethoven’s String Quartet No. 14 was first played, it took four people 40 minutes to produce a performance. In 2010, it still took four people 40 minutes to produce a performance. Stated differently, in the nearly 200 years between 1826 and 2010, there was no growth in string quartet labor productivity. In 1826 it took 2.66 labor hours to produce one unit of output, and it took 2.66 labor hours to produce one unit of output in 2010.

Fortunately, most other sectors of the economy have experienced substantial growth in labor productivity since 1826. We can measure growth in labor productivity in the economy as a whole by looking at the growth in real wages. In 1826 the average hourly wage for a production worker was $1.14. In 2010 the average hourly wage for a production worker was $26.44, approximately 23 times higher in real (inflation-adjusted) terms. Growth in average labor productivity has a surprising implication: it makes the output of slow productivity-growth sectors (relatively) more expensive. In 1826, the average wage of $1.14 meant that the 2.66 hours needed to produce a performance of Beethoven’s String Quartet No. 14 had an opportunity cost of just $3.02. At a wage of $26.44, the 2.66 hours of labor in music production had an opportunity cost of $70.33. Thus, in 2010 it was 23 times (70.33/3.02) more expensive to produce a performance of Beethoven’s String Quartet No. 14 than in 1826. In other words, one had to give up more other goods and services to produce a music performance in 2010 than one did in 1826. Why? Simply because in 2010, society was better at producing other goods and services than in 1826.

The 23 times increase in the relative price of the string quartet is the driving force of Baumol’s cost disease. The focus on relative prices tells us that the cost disease is misnamed. The cost disease is not a disease but a blessing. To be sure, it would be better if productivity increased in all industries, but that is just to say that more is better. There is nothing negative about productivity growth, even if it is unbalanced.

In this post, I will discuss some implications of the fact that productivity is unbalanced. See the book for more discussion and speculation about why productivity growth is systematically unbalanced.

The Baumol effect reminds us that all prices are relative prices. An implication is that over time prices have very little connection to affordability. If the price of the same can of soup is higher at Wegmans than at Walmart we understand that soup is more affordable at Walmart. But if the price of the same can of soup is higher today than in the past it doesn’t imply that soup was more affordable in the past, even if we have done all the right corrections for inflation.

We can see this in the diagram at right. We have a two-good economy, Cars and Education. The production possibilities frontier shows all the combinations of Cars and Education that we can afford given our technology and resources at time 1 (PPF 1). Now suppose society chooses to consume the bundle of goods denoted by point (a). The relative price of Cars and Education is given by the slope of the PPF at that point. That price/slope tells us if we give up some education how many more cars can we get? In a market economy the price has to be given by the slope of the PPF because that is the only price at which people will willing consume the bundle of goods at point (a), i.e. it’s the equilibrium price.

Now at time 2, productivity has increased which means that with the same resources we can now have more of both goods.  Productivity of Car production has increased more than that of Education production, however, so the curve shifts out more towards Cars than towards Education. Suppose society continues to consume Cars and Education in the same proportions, i.e. at point (b). The price of education must increase–and all that means is that if we give up a unit of education at point b we will get more cars than before which is the same as saying that if we want more education at point b we must give up more cars than before, i.e. the price has increased.

Notice, however, that although the price of education has increased, education is not less affordable. Indeed, at point (b) we are consuming more of both goods–broadly speaking this is exactly what has happened–namely, the price of education has increased and we now consume more of it than ever before.

When we recognize that all prices are relative prices the following simple yet deep facts follow:

  • If productivity increases in some industries more than others then, ceteris paribus, some prices must increase.
  • Over time, all real prices cannot fall.

In Figure 22 the economy moves from point (a) to point (b). If we graph the same transition over time it will look something like Figure 23.

Looking at such graphs, our attention naturally is drawn to the rising cost of education. Why are costs rising so quickly? Entranced by such graphs, we may enter into a detailed analysis of the special factors of education—regulation, unionization, government purchases, insurance, international trade, and so forth—to try to explain the dramatic increase in costs. Yet the rising costs in the education sector are simply a reflection of increased productivity in the car sector. Thus, another deep lesson of the Baumol effect is that to understand why costs in the stagnant sector are rising, we must look away from the stagnating sector and toward the progressive sector.

Finally, there is one other addition to the Baumol effect which is not often recognized but worth drawing attention to. In Figure 22, I assumed that preferences were such that people wanted to consume the same ratio of goods over time so we moved from point (a) to point (b). But suppose that as we get wealthier we get tired of more cars and would like relatively more education so we move towards point (d). As we move from point (b) to point (d) we are taking resources away from car production, resources which were probably well-suited to making cars, and instead moving them towards education where they are probably less well suited. As a result as we move from point (b) to point (d) we are driving up the price of education as we try to turn auto workers into teachers. In this case, the Baumol effect gets magnified. We could alternatively move from point (b) to point (c) which would turn teachers into less productive auto workers thus driving down the price of education (i.e. increasing the price of cars). Thus, depending on preferences, the Baumol effect can be magnified or ameliorated.

As a society it appears that with greater wealth we have wanted to consume more of the goods like education and health care that have relatively slow productivity growth. Thus, preferences have magnified the Baumol effect.

Next week, I will wrap up the discussion by explaining some features of the data that the Baumol effect fits much better than do other theories.

Addendum: Other posts in this series.

The Tremendous Value of Increases in Life Expectancy

In this post I shall argue two things which together may confuse people. First, that life expectancy is so valuable that the money the US spends on healthcare relative to Europe could be well spent. Second that the extra spending is not in fact due to higher quality and does not explain rising prices over time.

What explains rising prices in some sectors of the economy? A common argument, at least from economists, is that there may be unmeasured improvements in quality. I don’t think that there have been marked improvements in quality in education so that argument doesn’t get off the ground (see my earlier post and the book for evidence). But health care quality has increased. Moreover, the value of life is so high that the improvements in quality could justify the cost increases. Here from Why Are The Prices So D*mn High is a back of the envelope calculation:

The United States spends about 5 percent more of GDP on health-care than do other developed countries. US GDP is almost $20 trillion, so 5 percent is approximately $1 trillion. The US population is 325 million, so the United States spends an extra $3,000 per person each year on healthcare. Is the expense worthwhile?

A value of a statistical life-year of around $200,000 is a mid-range, widely used estimate in the United States. Thus, if the extra US spending generated an extra $3,000 per $200,000 of a life-year, it would pay for itself. In other words, for the extra US spending to be worthwhile it must generate 3,000/200,000 × 365 = 5.45 extra days of statistical life, and, of course, it must do so every year. In recent years, life expectancy in the United States has increased by about 52 days a year. Thus, a little more than 10 percent of the increase in actual life expectancy must be a result of the extra US spending for that spending to be worthwhile. That hardly appears impossible. It’s also not impossible that the increase in life expectancy was not caused by the extra spending.

The bottom line is that the value of life is so high that US levels of spending could be worthwhile, but the high value of life and the difficulty of measuring the effectiveness of healthcare makes the question impossible to answer with certainty.

Nevertheless,I don’t think the increases in quality explain the increases in cost:

…even if the spending on healthcare is well justified by the improvements in life expectancy, it does not follow that the cause of higher spending is the improvement in life expectancy. As with education, many of the increases in life expectancy come from better knowledge, which does not necessarily cost more to use. It does not cost much more to treat an infection with antibiotics than with bloodletting; perhaps it costs less. We do use more technology in healthcare than in previous years—this includes computerized tomography (CT) scanners, magnetic resonance imaging (MRI) systems, and positron emission tomography (PET). Technology, however, is falling in price. At some point one would expect that decreases in the cost of existing technologies would overwhelm increases in costs owing to the introduction of new technologies. As with education, it would be peculiar if the only place in which technology raised costs was in healthcare (but see Joseph P. Newhouse for a strong argument that healthcare costs are driven by technology.)

Let’s put this argument more generally. Most increases in quality *over time* are similar to increases in productivity, i.e. A in A*f(K,L), an unpriced factor. Computers today are much higher quality than in the past. Indeed, so much so that today’s computers couldn’t be bought at any price not that long ago but we don’t pay more because what makes them higher quality is general knowledge.

In my view, most quality increases over time are due to improvements in knowledge. In other words, quality increases over time are much more about better recipes than better cooks. As a result, at a given point in time, higher quality is associated with higher prices but over time higher quality is more often associated with *lower* prices. Thus, in general, higher quality is not a good explanation for higher prices over time.

Tomorrow: The Baumol Effect.

Addendum: Other posts in this series.

Physician and Nurse Incomes Have Increased Tremendously

There has been a lot of ink spilled over the rising cost of health care and in Why Are the Prices So D*mn High? Helland and I do not cover every theory and cannot satisfy every objection. Our goal is more modest. We can say that one major factor in rising health care costs is the rising price of skilled labor.

We argue that there is a direct, obvious, and measurable cause of higher costs in healthcare—namely, the price of skilled labor. No profession other than physicians has seen such large increases in incomes over the past 50 years. Figure 19 shows the real income of physicians from 1960 to 2016, indexed to 100 in 1960. Since 1960 the real income of physicians has increased by a factor of three. By comparison, barbers and bus drivers have seen essentially no increase in real incomes. Median incomes are up only modestly whereas mean incomes, which are pulled up by outliers, are up by only 50 percent.

Moreover, nurse incomes have risen in lock-step with those of physicians.

At the same time, we have hired more physicians and more nurses per capita. As Figure 20 shows since 1960 the number of physicians and the number of nurses has more than doubled.

With more physicians and more nurses each making more, it’s not surprising that the cost of medical care would increase.

Addendum: Other posts in this series.

Gross Domestic Error

Pierre Lemieux at EconLib catches a surprising error from The Economist which wrote this week:

There was some head-scratching this week, as data showed Japan’s economy growing by 2.1% in the first quarter at an annualised rate, defying expectations of a slight contraction. Most of the growth was explained by a huge drop in imports. Because they fell at a faster rate than exports, gdp rose.

Nope. Imports do not influence Gross Domestic Product, at least not in the mechanical way suggested by The Economist. Here’s how Tyler and I explain it in Modern Principles:

It’s important to remember the Domestic in Gross Domestic Product. When we add C+I+G we are adding up all national spending but some of that spending was on imports, goods that were not produced domestically. So we subtract imports from national spending to get national spending on domestically produced goods, C+I+G – Imports.

…Here is a mistake to avoid. The national spending approach to calculating GDP requires a step where we subtract imports but that doesn’t mean that imports are bad for GDP! Let’s consider a simple economy where I, G, and Exports are all zero and C=$100 billion. Our only imports come from a container ship that once a year delivers $10 billion worth of iPhones. Thus when we calculate GDP we add up national spending and subtract $10 billion for the imports, $100-$10=$90 billion. But suppose that this year the container ship sinks before it reaches New York. So this year when we calculate GDP there are no imports to subtract. But GDP doesn’t change! Why not? Remember that part of the $100 billion of national spending was $10 billion spent on iPhones. So this year when we calculate GDP we will calculate $90 billion-$0=$90 billion. GDP doesn’t change and that shouldn’t be surprising since GDP is about domestic production and the sinking of the container ship doesn’t change domestic production.

We continue:

If we want to understand the role of imports (and exports) on GDP and national welfare. We have to go beyond accounting to think about economics. If we permanently stopped all the container ships from delivering iPhones, for example, then domestic producers would start producing more cellphones and that would add to GDP but producing more cellphones would require producing less of other goods. If we were buying cellphones from abroad because producing them abroad requires fewer resources then GDP would actually fall—this is the standard argument for trade that you learned in your microeconomics class. The standard answer could change, however, if there were lots of unemployed resources, an issue we will discuss in Chapter 32 and later chapters. The point we want to emphasize here is not whether trade is ultimately good or bad but rather that Y+C+I+G+NX is an accounting identity that can’t by itself answer this question.

Chernobyl

A classroom in Pripyat, the town built to serve the power plant.Chernobyl, HBO’s taut 5-part mini-series, is excellent and it sticks  close to the facts (although one female character played by Emily Watson is clearly made up). By all accounts, the series accurately represents life in the former Soviet Union and through a variety of means from color palette to casting and dialogue it does a remarkable job at capturing the political economy. One thing I learned (so far, it hasn’t all appeared yet) is that it could have been much, much worse but the Russians avoided the worst scenario with a combination of bravery, smarts and luck.

The number of cancer deaths from Chernobyl appears to be quite low. The WHO estimated an additional 9,335 deaths with about half of those coming from workers and nearby residents and other half more distant impacts, other estimates are higher. More recent analysis, however, suggests that Chernobyl and its aftermath had relatively small but significant effects across a large number of people. Here are two recent papers:

Chernobyl’s Subclinical Legacy: Prenatal Exposure to Radioactive Fallout and School Outcomes in Sweden by Almond, Edlund and Palme.

Abstract: We use prenatal exposure to Chernobyl fallout in Sweden as a natural experiment inducing variation in cognitive ability. Students born in regions of Sweden with higher fallout performed worse in secondary school, in mathematics in particular. Damage is accentuated within families (i.e., siblings comparison) and among children born to parents with low education. In contrast, we detect no corresponding damage to health outcomes. To the extent that parents responded to the cognitive endowment, we infer that parental investments reinforced the initial Chernobyl damage. From a public health perspective, our findings suggest that cognitive ability is compromised at radiation doses currently considered harmless.

and The long-run consequences of Chernobyl: Evidence on subjective well-being, mental health and welfare by Danzer and Danzer.

Abstract: This paper assesses the long-run toll taken by a large-scale technological disaster on welfare, well-being and mental health. We estimate the causal effect of the 1986 Chernobyl catastrophe after 20 years by linking geographic variation in radioactive fallout to respondents of a nationally representative survey in Ukraine according to their place of residence in 1986. We exclude individuals who were exposed to high levels of radiation—about 4% of the population. Instead, we focus on the remaining majority of Ukrainians who received subclinical radiation doses; we find large and persistent psychological effects of this nuclear disaster. Affected individuals exhibit poorer subjective well-being, higher depression rates and lower subjective survival probabilities; they rely more on governmental transfers as source of subsistence. We estimate the aggregate annual welfare loss at 2–6% of Ukraine’s GDP highlighting previously ignored externalities of large-scale catastrophes.

Hat tip: Jennifer Doleac and Wojtek Kopczuk.

Bloat Does Not Explain the Rising Cost of Education

In Why Are The Prices So D*mn High? Helland and I examine lower education, higher education and health care in-depth and we do a broader statistical analysis of 139 industries. Today, I will make a few points about education. First, costs in both lower and higher education are rising faster than inflation and have been doing so for a very long time. In 1950 the U.S. spent $2,311 per elementary and secondary public school student compared with $12,673 in 2013, over five times more (both figures in $2015). The rate of increase was fastest in the 1950s and 1960s–a point to which I will return later in this series.

College costs have also increased dramatically over time. For this book, we are interested in costs more than tuition because we want to know what society is giving up to produce education rather than who, in the first instance, is paying for it. Costs are considerably higher than tuition even today, although in recent years tuition has been catching up. Essentially students and their parents have been paying an increasing share of the increasing cost of higher education. Moreover, as with lower education, costs have been rising for a very long period of time.

I will take it as given that the explanation for higher costs isn’t higher quality. The evidence on tests scores is discussed in the book:

It is sometimes argued that how we teach has not changed but that what we teach has improved in quality. It is questionable whether studies of Shakespeare have improved, but there have been advances in biology, computer science, and physics that are taught today but were not in the past. However, these kinds of improvements cannot explain increases in cost. It is no more expensive to teach new theories than old. In a few fields, one might argue that lab equipment has improved, which it certainly has, but we know from figure 1 that goods in general have decreased in price. It is much cheaper today, for example, to equip a classroom with a computer than it was in the past.

The most popular explanation why the cost of education has increased is bloat. Elizabeth Warren and Chris Christie, for example, have both blamed climbing walls and lazy rivers for higher tuition costs. Paul Campos argues that the real reason college costs are growing is “the constant expansion of university administration.” Redundant administrators are also commonly blamed for rising public school costs.

The bloat theory is superficially plausible. The lazy rivers do exist! But the bloat theory requires longer and lazier rivers every year, which is less plausible. It’s also peculiar that the cost of education is rising in both lower and higher education and in public and private colleges despite very different competitive structures. Indeed, it’s suspicious that in higher education bloat is often blamed on competition–the “amenities arms race“–while in lower education bloat is often blamed on lack of competition! An all-purpose theory doesn’t explain much.

More importantly, the data reject the bloat theory. Figure 8 shows spending shares in higher education. Contrary to the bloat theory, the administrative share of spending has not increased much in over thirty years. The research share, where you might expect to find higher lab costs, has fluctuated a little but also hasn’t risen much. The plant share which is where you might expect to find lazy rivers has even gone down a little, at least compared to the early 1980s.

Nor is it true that administrators are taking over the public schools, see Figure 10.

Compared with teachers and other staff, the number of principals and administrators is vanishingly small, only 0.4 per 100 students over the 1950–2015 period. It is true, if one looks closely, that the number of principals and administrators doubled between 1970 and 1980. It is unclear whether this is a real increase or a data artifact (we only have data for 1970 and 1980, not the years in between during this period). But because the base numbers are small, even a doubling cannot explain much. A bloated little toe cannot explain a 20-pound weight gain. Moreover, the increase in administrators was over by 1980, but expenditures kept growing.

If bloat doesn’t work, what is the explanation for higher costs in education? The explanation turns out to be simple: we are paying teachers (and faculty) more in real terms and we have hired more of them. It’s hard to get costs to fall when input prices and quantities are both rising and teachers are doing more or less the same job as in 1950.

We are not arguing, however, that teachers are overpaid!

Indeed, it is part of our theory that teachers are earning a normal wage for their level of skill and education. The evidence that teachers earn substantially above-market wages is slim. Teachers’ unions in public schools, for example, cannot explain decade-by-decade increases in teacher compensation. In fact, most estimates find that teachers’ unions raise the wage level by only approximately 5 percent. In other words, teachers’ unions can explain why teachers earn 5 percent more than similar workers in the private sector, but unions cannot explain why teachers’ wages increase over time.

If the case for unions as a cause of rising teacher compensation in public schools is weak, it is nonexistent for increased compensation for college faculty, for whom wage bargaining is done worker by worker with essentially no collective bargaining whatsoever.

A signal to where we are heading is this:

If increasing labor costs explain the increasing price of education but teachers are not overpaid relative to similar workers in other industries, then increasing labor costs must lead to higher prices in the education industry more than in other industries.

Read the whole thing. Next up, health care.

Addendum: Other posts in this series.

Viral Markets in Everything

The Persistence of Chaos is an Airgapped Samsung 10.2-Inch Blue Netbook (2008) that is running Windows XP SP3 and 6 pieces of malware that collectively caused some $95 billion in damages. One of the worms trapped on the computer, for example, is:

SoBig

SoBig was a worm and trojan that circulated through emails as viral spam. This piece of malware could copy files, email itself to others, and could damage computer software/hardware. This piece of malware caused $37B in damages and affected hundreds of thousands of PCs.

The terms of sale include the following:

The sale of malware for operational purposes is illegal in the United States. As a buyer you recognize that this work represents a potential security hazard. By submitting a bid you agree and acknowledge that you’re purchasing this work as a piece of art or for academic reasons, and have no intention of disseminating any malware. Upon the conclusion of this auction and before the artwork is shipped, the computer’s internet capabilities and available ports will be functionally disabled.

The current high bid is over $1,200,750.

Hat tip: Paul Kedrosky.

Why Are the Prices So D*MN High?

Why have some prices increased since 1950 by a factor of four while other prices have decreased by a factor of four? Technology is making so many goods and services much cheaper than in the past–that seems to be the normal situation–so why do some industries seem not only to be not progressing but actually retrogessing? As Scott Alexander put it, why are some industries so weird?

Those are the questions that motivated my latest piece, a short book with Eric Helland just released by the Mercatus Center titled, Why are the Prices so D*mn High?

In approaching this question I had some ideas in mind. I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect. That conclusion radically changes one’s evaluation of price increases and decreases over the long run and it changes what, if anything, one might try to do to address such price changes.

Next week I will examine some of the evidence that pushes me towards this verdict. I’ll also take a closer look at the Baumol effect, which is mistakenly called the cost disease.

Let’s note here, however, what we need to explain. For the most part, we don’t see quick, big changes in prices that then level off. That in itself is interesting since policy tends to be discontinuous. We might expect a big regulation, for example, to cause a big increase in prices as industries adjust but then growth should return to normal. Instead, what we see and need to explain is slow, steady rising relative prices that happens over decades. Indeed, in some cases, such as education, prices have been increasing faster than average for more than a century! Puzzle over that over the long weekend. More next week!

Addendum: Other posts in this series.

America’s Cities Are Unlivable. Blame Wealthy Liberals

Farhad Manjoo writing in the New York Times brings the fire:

Then there is the refusal on the part of wealthy progressives to live by the values they profess to support at the national level. Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism. Cities are the standard geographical unit of the global economy. Dense urban areas are quite literally the “real America” — the cities are where two-thirds of Americans live, and they account for almost all national economic output. Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. More than that, metropolises are good for the psyche and the soul; density fosters tolerance, diversity, creativity and progress.

Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills. This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. The bill would have erased single-family zoning in populous areas near transit locations. Areas zoned for homes housing a handful of people could have been redeveloped to include duplexes and apartment buildings that housed hundreds.

…Reading opposition to SB 50 and other efforts at increasing density, I’m struck by an unsettling thought: What Republicans want to do with I.C.E. and border walls, wealthy progressive Democrats are doing with zoning and Nimbyism. Preserving “local character,” maintaining “local control,” keeping housing scarce and inaccessible — the goals of both sides are really the same: to keep people out.

I applaud the fire, although it’s amusing to me that Manjoo treat this as big discovery (“I am struck by an unsettling thought.”). Look, this isn’t new! Progressives created zoning and other housing regulations to exclude people they didn’t like from “their” neighborhoods. Nor, by the way, is the desire to exclude limited to “wealthy” liberals (Manjoo surely knows this but is afraid of punching down). It’s also amusing that Steve Sailer has been making exactly the same point about hypocritical Malibu liberals for years, the only difference being that Manjoo wishes to shame liberals into giving up NIMBYism while Sailer wants to shame them into giving up national diversity. I call a pox on both their houses and support individual property rights at both the local and national levels.

One of the Greatest Environmental Crimes of the 20th Century

It was one of the fastest decimations of an animal population in world history—and it had happened almost entirely in secret. The Soviet Union was a party to the International Convention for the Regulation of Whaling, a 1946 treaty that limited countries to a set quota of whales each year. By the time a ban on commercial whaling went into effect, in 1986, the Soviets had reported killing a total of 2,710 humpback whales in the Southern Hemisphere. In fact, the country’s fleets had killed nearly 18 times that many, along with thousands of unreported whales of other species. It had been an elaborate and audacious deception: Soviet captains had disguised ships, tampered with scientific data, and misled international authorities for decades. In the estimation of the marine biologists Yulia Ivashchenko, Phillip Clapham, and Robert Brownell, it was “arguably one of the greatest environmental crimes of the 20th century.”

That’s from an excellent piece by Charles Homans in the Pacific Standard. The Soviets killed some 180,000 whales illegally, driving several species to the brink of extinction. But why? The obvious answer Is wrong:

…the Soviet Union had little real demand for whale products. Once the blubber was cut away for conversion into oil, the rest of the animal, as often as not, was left in the sea to rot or was thrown into a furnace and reduced to bone meal—a low-value material used for agricultural fertilizer, made from the few animal byproducts that slaughterhouses and fish canneries can’t put to more profitable use….Why did a country with so little use for whales kill so many of them?

The actual answer has a lot to say about the impossibility of rational economic calculation under socialism (and also the lesser but still important problem under capitalism of mispricing in the presence of externalities and the difficulty of aligning private and social incentives.) The answer did not appear until 2008 when, long after his death, the memoir of Alfred Berzin, a Soviet-era fisheries scientist, was translated and published. Homans summarizes:

The Soviet whalers, Berzin wrote, had been sent forth to kill whales for little reason other than to say they had killed them. They were motivated by an obligation to satisfy obscure line items in the five-year plans that drove the Soviet economy, which had been set with little regard for the Soviet Union’s actual demand for whale products. “Whalers knew that no matter what, the plan must be met!” Berzin wrote. The Sovetskaya Rossiya seemed to contain in microcosm everything Berzin believed to be wrong about the Soviet system: its irrationality, its brutality, its inclination toward crime.

You can find Bezin’s memoir here. It’s bitter, sardonic, sad and funny.

Whalers knew that no matter what, the plan must be met! Looking for whales they would go farther and farther from the islands and bring rotten baleen whales to the stations, those which could not be used for food. This was not regarded as a problem by anybody. The plan—at any price! And whalers were killing everything.

Why bring in rotten whales? Without prices the Soviets had to calculate in very crude terms, most notably gross output. In the famous cartoon, the nail factory is supposed to produce X tons of nails and finds the easiest way to do this is to produce a single large nail. The cartoon illustrated a real problem in the Soviet economy which many have documented including Bezin.

Another concept—no less frightening, ugly, and absurd—was that of “gross output.” This was a typical creation of socialism and would be impossible in any other system. Gross output: this is when nobody is interested in a living object itself, and the only thing they care about is the size of the catch. It is reports giving figures in tsentner [100 kilos, AT] and metric tons, even if it is fish that were thrown out, or rotten whales.

The whalers were paid well but it wasn’t just positive incentives. The history of the industry was never far from mind. Quoting Homans again:

Whaling fleets that met or exceeded targets were rewarded handsomely, their triumphs celebrated in the Soviet press and the crews given large bonuses. But failure to meet targets came with harsh consequences. Captains would be demoted and crew members fired; reports to the fisheries ministry would sometimes identify responsible parties by name.

Soviet ships’ officers would have been familiar with the story of Aleksandr Dudnik, the captain of the Aleut, the only factory ship the Soviets owned before World War II. Dudnik was a celebrated pioneer in the Soviet whaling industry, and had received the Order of Lenin—the Communist Party’s highest honor—in 1936. The following year, however, his fleet failed to meet its production targets. When the Aleut fleet docked in Vladivostok in 1938, Dudnik was arrested by the secret police and thrown in jail, where he was interrogated on charges of being a Japanese agent. If his downfall was of a piece with the unique paranoia of the Stalin years, it was also an indelible reminder to captains in the decades that followed.

Bezin, a scientist, writes about who got to the top in the Soviet system:

..As a rule, the people who became commissars were the ones who couldn’t find another job. They were not very smart but were very conceited, self important individuals, especially after they had been given a taste of power, and especially over other people. Those who were thinking about a career in the party system, who could speak loudly and authoritatively from a podium, and who curried favor with the boss, these people could climb the party ladder quickly, and high up.

…Russian people have a good sense of humor, and even when they should be crying they laugh…Here is [a Russian joke]: On the counter of a store there are different types of brains. Among them are commissar brains, which are being sold for a price many times higher than those of farm animals. “Why are the commissar brains so expensive?” asks a customer. The assistant replies, “Do you know how many commissars we have to slaughter to get one kilo of brains?”

The whole system was built on lies and had to be built on lies:

For seventy Soviet years the industry of lies was created, shaped, and perfected in the country. Lies were encouraged and cultivated, and people were forced to lie. Lies in art, lies in movies, on TV, on the radio, and in newspapers. One of my colleagues was saying: “Why do I need Crocodile? When I go to work I buy the newspaper Pravda and all the way to the institute I am dying from laughter.” Lies in the numbers of the Central Statistics Department. And facts about Chernobyl were lies, dreadful and inhumane, deserving of damnation. Lies about the history of our country, which the leaders of the country changed to suit their needs. To the latter, people reacted with a wicked grin: “An institute of experimental history has been created!”

…People were lying whether they needed to or not, and I would say that the lying was pathological and at all levels. From the most blatant lie at the international level…to naïve but proud lies like: “Soviet means the best.” Sometimes they were self-assured but silly, as for example in this poetic sentence: “As it’s known, the earth begins with the Kremlin”; or they were absolutely idiotic: “The whole Soviet country is song and dance all day long.” Just think of the meaning of these words! You could hear on radio and at concerts singing like: “Like an owner, a person walks through the boundless native land,” or “How wonderful it is to live in the Soviet country. . .” And all of these were promulgated in the 1930’s when the country was surrounded by the barbed wire of fearful GULAG’s . . .

Hat tip: The Browser.

Addendum: See the HBO series Chernobyl, brilliant cinematography and compelling storytelling, for a closely related story.

Anarchy is Worse than Socialism

Socialism is bad. I need no convincing. But the collapse of Venezuela is much worse than anyone would have predicted from socialism alone:

NYTimes: ….the drop in Venezuela’s economic output under Mr. Maduro has undergone the steepest decline by any country not at war since at least 1975.

By year’s end, Venezuela’s gross domestic product will have shrunk by 62 percent since the beginning of the recession in 2013.

Venezuela has lost a tenth of its population in the past two years as people fled, even trekking across mountains, setting off Latin America’s biggest ever refugee crisis.

Venezuela’s hyperinflation, expected to reach 10 million percent this year according to the I.M.F., is on track to become the longest period of runaway price rises since that in the Democratic Republic of Congo in the 1990s.

“This is essentially a total collapse in consumption,” said Sergi Lanau, deputy chief economist at the Institute of International Finance…

So what is causing the tremendous drop in economic activity? Ironically, it’s not too much government but too little. Outside of the capital, the government has practically abandoned its most basic responsibility of providing law and order. The result has been widespread looting. Ordinary theft is about stealing money or valuable “final” goods like diamonds or art works. In theory, the thief receives more or less what the owner loses. Looting, however, is a special kind of theft. Looting is theft plus destruction. The person who steals a candy bar is a thief. The person who breaks a store front window and steals a candy bar is a looter. Looters destroy intermediate goods and infrastructure and gain far less than owners lose. Looting is the worst kind of theft.

He said he lost his job at a hotel when looters ransacked it in March, ripping out even window frames and cable wiring. He now collects wild plums to sell for a few cents in the city’s parks. Most of his community’s diet now consists of wild fruits, fried corn pastries and bone broth, residents said.

Farther from the state capital, conditions are worse.

…The four stone quarries that are the island’s only industry have been idle since robbers stole all power cables connecting them to the grid last year. Local opposition activists estimate up to a third of the residents have emigrated from the island in the past two years.

“It used to be a paradise,” said Arturo Flores, the local municipality’s security coordinator, who sells a fermented corn drink from a bucket to local fishermen to round up his salary, which is equivalent to $4 a month. “Now, everyone is fleeing.”

On the other side of Zulia state, in the ranching town of Machiques, the economic collapse has decimated the meat and dairy industries that had supplied the country.

Power cuts have idled the local slaughterhouse, once one of the largest in Latin America. Armed gangs extort and rustle cattle from the surviving ranchers.

“You can’t produce if there’s no law,” said Rómulo Romero, a local rancher.

…“There’s no local, regional or national government here,” said José Espina, a motorbike taxi driver there. “We’re on our own.”

To say that socialism is better than anarchy is not to defend the rotten Chavez-Maduro regime. Instead I am pointing to the relevance of Mancur’s Olson’s model of the roving and stationary bandit. Olson explained why roving bandits evolve into stationary bandits:

Under anarchy, uncoordinated competitive theft by “roving bandits” destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can be better off if a bandit sets himself up as a dictator-a “stationary bandit” who monopolizes and rationalizes theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide a peaceful order and other public goods that increase productivity.

The process is working in reverse in Venezuela. In Venezuela, the stationary bandit regime is collapsing and it is being replaced by a regime of roving bandits.

The incentives Olson identifies will eventually result in a new stationary bandit or, if Venezuela is lucky, maybe even less banditry and better institutions. The process is already underway. Consider this:

Local shopkeepers have pulled together to repair power lines and keep telecom towers running, to feed public workers, and to procure diesel for backup generators.

“We have practically taken on the functions of the state,” said Juan Carlos Perrota, a butcher who runs Machiques’ chamber of commerce.

Local shopkeepers are repairing power lines, feeding public workers and taking over the power of the state. Awesome! ¡Viva la maquinaria de la libertad!

The process of rebuilding governance, however, is slow and the destruction of wealth and human life costly. Indeed, it’s a surprise that Venezuela has gone so far down this path. Stationary bandits are usually replaced by other stationary bandits. Juan Guaidó seems far superior to Maduro on every score but the real puzzle is how Maduro has held off the generals even as anarchy looms. Don’t the generals see that that the goose is dying?