Category: Law
The history of American corporate nationalization
I wrote this passage some while ago, but never published the underlying project:
The American Constitution is hostile to nationalization at a fundamental level. The Fifth Amendment prohibits government “takings” without just compensation to the owners, and that is sometimes called the “takings clause.” Since the United States did not start off with a large number of state-owned enterprises, there is no simple and legal way for the country to get from here to there. Government nationalization of private companies would prove expensive, most of all to the government itself. More importantly, the strength of American corporate interests has taken away any possible pressures to eliminate or ignore this amendment.
The lack of interest in state-owned enterprises reflects some broader features of the United States, most of all a kind of messiness and pluralism of control. An extreme federalism has bred a large number of regulators at federal, state, and local levels, often with overlapping jurisdictions. Each level of government digs its claws into the regulatory morass, and not always for the better, but this preempts nationalization, which would centralize power and control in one level of government. That is not the American way.
A tradition of strong state-level regulation was built up during the mid- to late 19th century, when the federal government did not have the resources, the reach, or the scope to do much nationalizing. America developed some very large national commercial enterprises, such as the railroads, Bell (a phone company), and Western Union (a communications and wire service), which were quite large and far-ranging before the federal government itself had reached a mature size. At that time local government accounted for about half of all government spending in the country and the federal government had few powers of regulation. It wasn’t quite laissez-faire, but America could not rely on its federal government and this shaped the later evolution of the country. To handle these booming corporate entities, America created more state-level regulation of business than was typical for the other industrializing Western countries. That steered Americans away from nationalization as a means for distributing political benefits or disciplining corporations[1]
This policy decision to rely so much on multiple levels of federalistic regulation comes with a price. American failures in physical infrastructure have been the other side of the coin of American successes in business. A strong rule of law, combined with so many legal checks and balances and blocking points, has carved out a protected space for private American businesses. They can operate with relatively secure property rights. At the same time, those same laws and blocking points make it hard to get a lot of things built when a change in property rights is required, whether government or business or both are doing the building. The law is used to obstruct growth and change, and for NIMBYism — “Not In My Backward,” and more generally for giving any litigation-ready interest group a voice in any decision it cares about. Can you imagine a sentence like this being written about China?: “The [New York and New Jersey] Port Authority sent out letters inviting tribe representatives to join the environmental review project, inviting the Shawnee Tribe of Oklahoma and the Sand Hills Nation of Nebraska.”[2]
In America background patriotism sustains a rule by general national consensus, and so the American government doesn’t need extensive state-owned companies to build or maintain political support through the creation of so many privileged insiders. The American paradox is this: the reliance on the law reflects a relatively strong and legitimate government, but the multiplication of that law renders government ineffective in a lot of practical matters, especially when it comes to the proverbial “getting things done,” a dimension where the Chinese government has been especially strong.
You should note that although the United States has not so many state-owned enterprises, the American government still has ways of expressing its will on business, or as the case may be, favoring one set of businesses over another. In these latter cases it can be said that American business is expressing its will over government through forms of crony capitalism, a concept which is spreading in both America and China.
The United States has evolved a subtle brand of corporatism and industrial policy that is mostly decentralized and also – this is an important point — relatively stable across shifts of political power. America uses its large country privileges to maintain access to world markets and to protect the property rights of its investors, usually without much regard for whether they are Democrats or Republicans. For instance the State Department works hard to maintain open world markets for films and other cultural goods and services. Toward this end America has used trade negotiations, diplomatic leverage, foreign aid, and also explicit arm-twisting, based on its military commitments to protect allied nations in Western Europe and East Asia. America already had successful entertainment producers, it just wanted to make sure they could earn more money abroad, and that is why the American government usually insists on open access for audiovisual products when it negotiates free trade treaties. Yet in these deals there is not much if any explicit favoritism for one movie or television studio over another, or for one political alliance over another. Democrats are disproportionately overrepresented in Hollywood, but Republican administrations protect the interests of the American entertainment sector nonetheless. It’s about the money and the jobs, not about shifting political coalitions. You’ll note that the independence from particular political coalitions gives the American business environment a particular stability and predictability, to its advantage internationally and otherwise.
[1] See Millward (2013, chapter nine, and p.222 on chartering powers).
[2] That is from Howard (2014, p.10).
Contemporary TC again: Let us hope that I was at least partially correct…
Dean Ball on state-level AI laws
He is now out of government and has resumed writing his Substack. Here is one excerpt from his latest:
Several states have banned (see also “regulated,” “put guardrails on” for the polite phraseology) the use of AI for mental health services. Nevada, for example, passed a law (AB 406) that bans schools from “[using] artificial intelligence to perform the functions and duties of a school counselor, school psychologist, or school social worker,” though it indicates that such human employees are free to use AI in the performance of their work provided that they comply with school policies for the use of AI. Some school districts, no doubt, will end up making policies that effectively ban any AI use at all by those employees. If the law stopped here, I’d be fine with it; not supportive, not hopeful about the likely outcomes, but fine nonetheless.
But the Nevada law, and a similar law passed in Illinois, goes further than that. They also impose regulations on AI developers, stating that it is illegal for them to explicitly or implicitly claim of their models that (quoting from the Nevada law):
(a) The artificial intelligence system is capable of providing professional mental or behavioral health care;
(b) A user of the artificial intelligence system may interact with any feature of the artificial intelligence system which simulates human conversation in order to obtain professional mental or behavioral health care; or
(c) The artificial intelligence system, or any component, feature, avatar or embodiment of the artificial intelligence system is a provider of mental or behavioral health care, a therapist, a clinical therapist, a counselor, a psychiatrist, a doctor or any other term commonly used to refer to a provider of professional mental health or behavioral health care.
First there is the fact that the law uses an extremely broad definition of AI that covers a huge swath of modern software. This means that it may become trickier to market older machine learning-based systems that have been used in the provision of mental healthcare, for instance in the detection psychological stress, dementia, intoxication, epilepsy, intellectual disability, or substance abuse (all conditions explicitly included in Nevada’s statutory definition of mental health).
But there is something deeper here, too. Nevada AB 406, and its similar companion in Illinois, deal with AI in mental healthcare by simply pretending it does not exist. “Sure, AI may be a useful tool for organizing information,” these legislators seem to be saying, “but only a human could ever do mental healthcare.”
And then there are hundreds of thousands, if not millions, of Americans who use chatbots for something that resembles mental healthcare every day. Should those people be using language models in this way? If they cannot afford a therapist, is it better that they talk to a low-cost chatbot, or no one at all? Up to what point of mental distress? What should or could the developers of language models do to ensure that their products do the right thing in mental health-related contexts? What is the right thing to do?
The State of Nevada would prefer not to think about such issues. Instead, they want to deny that they are issues in the first place and instead insist that school employees and occupationally licensed human professionals are the only parties capable of providing mental healthcare services (I wonder what interest groups drove the passage of this law?).
Data on the effects of censorship in early modern England
We use a panel-data framework to study the effects of print censorship on early-modern England’s cultural production. Doing so requires distilling dispersed qualitative information into quantitative data. Integrating the historical record implicit in a large language model (LLM) with facts from secondary sources, we generate an annual index of print censorship. Applying a machine-learning (ML) algorithm to a major corpus, we construct document-level measures of the innovativeness (quality) and volume (quantity) of cultural production. We use pre-existing topic-model estimates to apportion each document among distinct cultural themes-three affected by censorship and five unaffected. We thereby assemble a yearly theme-level panel for 1525-1700. We use local projections to estimate censorship’s dynamic effects. Paradoxically, censorship raises the level of innovativeness in censorship-affected themes relative to non-affected themes. Censorship has a temporary chilling effect on the quantity of cultural production, with output recovering within a decade. Our findings are robust to the use of an instrumental-variable approach addressing the endogeneity of censorship. Our findings are unchanged when using three alternative LLMs to produce the censorship index. Using LLMs and ML to measure hard-to-quantify phenomena like censorship and cultural production, we provide new insights into the drivers of cultural evolution.
Here is the full paper by Peter Murrell and Peter Grajzl. Via the excellent Kevin Lewis.
Jeff Asher on manipulating crime data
Jeff Asher: Within a city, within a district, there are times, either by mistake or by intention, that an agency will manipulate a certain type of crime. There are times where things will get underreported. There will be mistakes. There are times where things will get over reported and there will be mistakes. But because there’s 18,000 individual agencies reporting data, usually when the data is wrong, it’s obviously wrong.
It’s like Chicago reporting, you know, six murders in a month when the city averages over 20, and in some years more than that. Way more than that. It’s when you’ve seen these sharp drops in crime all of a sudden when a data reporting system changed. But to manipulate national crime data would be virtually impossible. I think that’s the value of being able to go and get it from each individual city. You can draw your conclusions and audit agencies that look wrong and still come to the correct conclusion. And I’ll note the FBI has seven major categories of crime that they collect. And there are ten different population groups. Every one of those population groups in every category of crime reported a decline in 2024, per the FBI. So it’s not a big blue city thing. It’s a small city thing. It’s a suburb thing. It’s a rural county thing. It’s a big city thing. It’s everywhere…
But of the 30 cities that reported the most murders to the FBI in 2023, murders are down in 26 of them. We’re seeing a 20% drop in murder, a 10% drop in violent crime, a 13% drop in property crime. Whereas in 2024 murder fell a lot and auto theft fell a lot, now it’s pretty much that everything is falling a considerable amount.
Here is his full dialogue with Paul Krugman. And here is Jeff’s YouTube channel on the same topics. Yes, I know public disorderliness is up in some regards. But do not use that as an excuse to mood affiliation with an extremely negatively view of the trends!
Free the Patient: A Competitive-Federalism Fix for Telemedicine
During the pandemic, many restrictions on telemedicine were lifted, making it far easier for physicians to treat patients across state lines. That window has largely closed. Today, unless a doctor is separately licensed in a patient’s state—or the states have a formal agreement—remote care is often illegal. So if you live in Virginia and want a second opinion from a Mayo Clinic physician in Florida, you may have to fly to Florida, unless that Florida physician happens to hold a Virginia license.
The standard framing says this is a problem of physician licensing. That leads directly to calls for interstate compacts or federalizing medical licensure. Mutual recognition is good. Driver’s licenses are issued by states but are valid in every state. No one complains that Florida’s regime endangers Virginians. But mutual recognition or federal licensing is not the only solution nor the only way to think about this issue.
The real issue isn’t who licenses doctors. It’s that patients are forbidden from choosing a licensed doctor in another state. We can keep state-level licensing, but free the patient. Let any American consult any physician licensed in any state. That’s competitive federalism—no compacts, no federal agency, just patient choice.
A close parallel comes from credit markets. After Marquette Nat. Bank v. First of Omaha (1978), host states could no longer block their residents from using credit cards issued by national banks chartered elsewhere. A Virginian can legally borrow on a South Dakota credit card at South Dakota’s rates. Nothing changed about South Dakota’s licensing; what changed was the prohibition on choice.
Consider Justice Brennan’s argument in this case:
“Minnesota residents were always free to visit Nebraska and receive loans in that state.” It hadn’t been suggested that Minnesota’s laws would apply in that instance, he added. Therefore, they shouldn’t be applied just because “the convenience of modern mail” allowed Minnesotans to get credit without having to visit Nebraska.
Exactly analogously, everyone agrees that Virginia residents are free to visit Florida and be treated by Florida physicians. No one suggests that Virginia’s laws should follow VA residents to Florida. Therefore, VA’s laws shouldn’t be applied just because the convenience of modern online tools allow Virginians to get medical advice and consultation without having to visit Florida.
In short, patients should be allowed to choose physicians as easily as borrowers choose banks.
*Saving Can-Do*
The author is Philip K. Howard and the subtitle is How to Revive the Spirit of America. The book is short, to the point, in the “abundance + state capacity” genre. Excerpt, noting I will not double indent:
“Three major changes are needed to restore the authority to achieve results: a new legal framework, a new institution that can inspire trust in ongoing decisions, and a special commission to design the details of these changes.
New legal framework defining official authority.
Here’s a sketch of what a new infrastructure decision-making framework might look like:
- Separate agencies should be designated as decision-makers for each category of infrastructure. The head of that agency should have authority to approve permits. For federal approvals, all decisions should be subject to White House oversight. For projects with national or reigonal significance, federal decisions should preempty state and local approvals.
- Fifty years of accumulated mandates from multiple agencies should be restated as public goals that can be balanced against other public goals….a recodification commission is needed to reframe thousands of pages of detailed regulatory prescriptions into codes that are goal-oriented and honor public tradeoffs. But unti this canhappen, Congress should authoritze the executive brranch to approve permits “notwithstanding provisions of law to the contrary” — provided the executive branch identifies the relevanto provisions and provides a short statement of why the approvals are in the public interest.
- Processes should be mainly tools for transparency and should be understood by courts as general principles reviewed for abuse of discretion, not as rules requiring strict compliance. NEPA has been effectively rewritten by judicial fitat, so it should be amended to return to its original goals — to provide enviromental transparency, public comment, and a political judgment.
- The jurisdiction of courts must be sharply limited. Lawsuits should be allowed foro approvals that transgress boundaries of executive responsbility, not inadequate review of process, unless these are so deficient as to be arbitrary.
Changing law is always politicall difficult, but the second challenge is perhaps even harder: creating new institutions that can inspire trust.”
TC again: All worth a ponder.
Are Juries Racially Discriminatory?
We implement five different tests of whether grand juries, which are drawn from a representative cross-section of the public, discriminate against Black defendants when deciding to prosecute felony cases. Three tests exploit that while jurors do not directly observe defendant race, jurors do observe the “Blackness” of defendants’ names. All three tests—an audit-study-style test, a traditional outcome-based test, and a test that estimates racial bias using blinded/unblinded comparisons after purging omitted variable bias—indicate juries do not discriminate based on race. Two additional tests indicate racial bias explains at most 0.3 percent of the Black-White felony conviction gap.
That is from a new NBER working paper by
Did the Minnesota housing reform lower housing costs?
Yes:
In December 2018, Minneapolis became the first U.S. city to eliminate single-family zoning through the Minneapolis 2040 Plan, a landmark reform with a central focus on improving housing affordability. This paper estimates the effect of the Minneapolis 2040 Plan on home values and rental prices. Using a synthetic control approach we find that the reform lowered housing cost growth in the five years following implementation: home prices were 16% to 34% lower, while rents were 17.5% to 34% lower relative to a counterfactual Minneapolis constructed from similar metro areas. Placebo tests document these housing cost trajectories were the lowest of 83 donor cities (p=0.012). The results remain consistent and robust to a series of subset analyses and controls. We explore the possible mechanism of these impacts and find that the reform did not trigger a construction boom or an immediate increase in the housing supply. Instead, the observed price reductions appear to stem from a softening of housing demand, likely driven by altered expectations about the housing market.
That is from a new paper by Helena Gu and David Munro. Via the excellent Kevin Lewis.
Why the tariffs are bad
I am delighted to see this excellent analysis in the NYT:
Mr. Tedeschi said that future leaders in Washington, whether Republican or Democrat, may be hesitant to roll back the tariffs if that would mean a further addition to the federal debt load, which is already raising alarms on Wall Street. And replacing the tariff revenue with another type of tax increase would require Congress to act, while the tariffs would be a legacy decision made by a previous president.
“Congress may not be excited about taking such a politically risky vote when they didn’t have to vote on tariffs in the first place,” Mr. Tedeschi said.
Some in Washington are already starting to think about how they could spend the tariff revenue. Mr. Trump recently floated the possibility of sending Americans a cash rebate for the tariffs, and Senator Josh Hawley, Republican of Missouri, recently introduced legislation to send $600 to many Americans. “We have so much money coming in, we’re thinking about a little rebate, but the big thing we want to do is pay down debt,” Mr. Trump said last month of the tariffs.
Democrats, once they return to power, may face a similar temptation to use the tariff revenue to fund a new social program, especially if raising taxes in Congress proves as challenging as it has in the past. As it is, Democrats have been divided over tariffs. Maintaining the status quo may be an easier political option than changing trade policy.
“That’s a hefty chunk of change,” Tyson Brody, a Democratic strategist, said of the tariffs. “The way that Democrats are starting to think about it is not that ‘these will be impossible to withdraw.’ It’s: ‘Oh look, there’s now going to be a large pot of money to use and reprogram.’”
That is from Andrew Duehren, bravo.
The Tragedy of India’s Government-Job Prep Towns
In Massive Rent-Seeking in India’s Government Job Examination System I argued that the high value of government jobs has distorted India’s entire labor market and educational system.
India’s most educated young people—precisely those it needs in the workforce—are devoting years of their life cramming for government exams instead of working productively. These exams cultivate no real-world skills; they are pure sorting mechanisms, not tools of human capital development. But beyond the staggering economic waste, there is a deeper, more corrosive human cost. As Rajagopalan and I have argued, India suffers from premature imitation: In this case, India is producing Western-educated youth without the economic structure to employ them. In one survey, 88% of grade 12 students preferred a government job to a private sector job. But these jobs do not and cannot exist. The result is disillusioned cohorts trained to expect a middle-class, white-collar lifestyle, convinced that only a government job can deliver it. India is thus creating large numbers of educated young people who are inevitably disillusioned–that is not a sustainable equilibrium.
The Economist has an excellent piece on the lives of the students including Kumar who is studying in “Musallahpur Haat, a suburb of Patna where dozens of coaching centers were concentrated, and the rent was cheap.”
…About half a million students are currently preparing for government exams in Musallahpur….For most government departments the initial tests are similar, and have little direct bearing on the job in question. Would-be ticket inspectors and train-drivers must answer multiple-choice questions on current affairs, logic, maths and science. They might be asked who invented JavaScript, or which element is most abundant in the Earth’s crust, or the smallest whole number for a if a456 is divisible by 11. Students have no idea when their preparations might be put to use; exams are not held on a fixed schedule.
…Kumar made his way to the bare, windowless room his friend had arranged for him to rent and started working. Every few days, he’d check the Ministry of Railways website to see if a date had been set for the exams. The days turned into weeks, then months. When the covid pandemic erupted he adjusted his expectations – obviously there would be delays. The syllabus felt infinite and he kept studying, shuttling between libraries, revision tutorials and mock test sessions. Before he knew it he’d been in Musallahpur nearly six years.
As his 30s approached, Kumar began to worry about running out of time. There is an upper age limit for the railway exams – for the ones Kumar was doing it was set at 30. As a lower-caste applicant he was allowed to extend this deadline by three years. His parents urged him to start thinking about alternative careers, but he convinced them to be patient. His father, who was struggling to keep up the allowance, reluctantly sold some of the family’s land to help support him, and Kumar studied harder and longer.
In my post, I emphasized the above-average wages and privileges, which is true enough, but even by Indian standards many of the jobs aren’t great and The Economist puts more focus on respectability and prestige (the sad premature imitation I discussed):
Indian society accords public-sector jobs a special respect. Grooms who have them are able to ask for higher dowries from their brides’ families. “If you are at a wedding and say you have a government job, people will look at you differently,” said Abhishek Singh, an exam tutor in Musallahpur.
Railway jobs in particular still have a vestigial glow of prestige.
…[Kumar] had been preparing for junior engineer and assistant train-driver jobs, but decided to apply for the lowest rung of positions too, the Group D roles, to increase his chance of getting something. An undergraduate degree and six years studying in Patna could lead to him becoming a track-maintenance worker. “I never imagined it would come to this,” he said sadly.
And yet he wouldn’t trade it. A short drive from his room in Musallahpur, a glitzy mall has just been built. There are jobs going there which pay close to what he might earn in a Group D role. But Kumar baulked at the suggestion he might become a barista. “I am educated with a technical degree,” he said. “My family hasn’t sacrificed so much for me to work in a coffee shop. People only work there if they have no other choice.” No one from his parents’ generation would respect a barista. But they admired, or at least understood, a job on the railways.
India’s government job system squanders talent, feeds on obsolete and socially-inefficient prestige hierarchies, and rewards years of sterile preparation with diminishing returns. It’s inefficient, of course, but behind the scenes it’s devastating to the young.
Hat tip: Samir Varma.
Say it ain’t so, Cecil…
New British cars may have to be fitted with breathalyser technology and black box-style recorders under Labour plans to align with EU vehicle safety laws.
The Government said copying European rules would drive down costs…
Here is the full Telegraph article. It seems more complicated than that, instead the car has to allow for the possibility of installation of such a device, without the use of the device, or the device, being required per se. So the black box is more concerning to me. It would mean that a complete monitoring of your whereabouts and driving behavior could become possible. There are Event Data Recorders in most newer US cars, but to date they are not used for very much. Perhaps the American ethos prevents slippery slope on this one?
These are not just extreme paranoid fears. When driving with a Spanish rental car this summer, the car issued an annoying, recurring beep every time it was being driven over the speed limit, even by small amounts. For one thing, the road synchs with the beeping device do not always accurately reflect the posted speed limits. For another, often the speed limit would suddenly fall by 20km, but of course you should decelerate rather than slamming on the brakes. For another, it can be dangerous to always drive below or even at the speed limit, especially when overtaking and I do mean sane rather than crazy overtaking.
So on these issues matters could indeed get much worse.
Red Flags for Waymo in Boston
The British Locomotives Act of 1865 contained a red flag provision for cars:
…while any Locomotive is in Motion, [one of the three required attendants] shall precede such Locomotive on Foot by not less than Sixty Yards, and shall carry a Red Flag constantly displayed, and shall warn the Riders and Drivers of Horses of the Approach of such Locomotives, and shall signal the Driver thereof when it shall be necessary to stop, and shall assist Horses, and Carriages drawn by Horses, passing the same.
Not to be outdone the Boston City Council is debating a law on self-driving cars that includes:
Section 6. Human Safety Operator
Any permit process must include the following requirements: (a) an Autonomous Vehicle operating in the City of Boston shall not transport passengers or goods unless a human safety operator is physically present in the vehicle and has the ability to monitor the performance of the vehicle and intervene if necessary, including but not limited to taking over immediate manual control of the vehicle or shutting off the vehicle; and (b) that Autonomous Vehicles and human safety operators must meet all applicable local, state and federal requirements.
The EU-USA trade deal
Sorry people, but you can fill in the links with Perplexity and Grok, both great for this purpose.
Olivier Blanchard is upset that Europe got such a raw deal, various people in the FT agree. I would say that is itself data about broader European economic and security policies, and needs to be taken very seriously. The Europeans are not stupid negotiators by any means, rather they are in a weak negotiating position for reasons that are largely their own fault and reflect underlying weaknesses of their basic economic and political model.
You can hate what Trump did, but for a “stupid” administration they, by their own standards at least, did a remarkably good job of it.
Justin Wolfers seems upset that Trump is raising taxes on Americans. (I am too!) But that feels kind of weird to me. And it is nice to see that Europeans get somewhat lower taxes, though many European leaders are upset about that. They should in fact buy more from the United States, and their non-tariff barriers are significant.
Conor Sen notes that the USA has come up with a multi-trillion revenue source that does not seem to diminish corporate profitability, https://x.com/conorsen/status/1949785522567549283?s=61, and he is wondering how exactly people will react to that.
We can all agree that negative externalities are what should be taxed!
But those policies typically are unpopular, so in some instances you will understand public affairs more clearly by switching to the “what will be done?” perspective, rather than the “what should be done?” stance.
My best guess is that these tariffs will stick for the most part, and that you are seeing some early major steps for how the U.S. will resolve its fiscal position. Higher inflation will come too, and fiscally we will muddle through, albeit with notably lower real wages.
(To be clear, for a long time I have stated that I prefer to cut back on government-subsidized health care, rather than to lower real wages through these other means. You can always use the extra money and try to buy back some health! But I also never have thought I was going to get my way. When Matt Yglesias tells you that “health care polls well,” you should take that seriously and Matt also should realize a bit that puts him in more of the pro-Trump, pro-tariff camp than he might like to think.)
I think a Democratic administration, whenever we get one next, would rather spend the revenue from the tariffs than repeal them. By then the tariffs also will be what I call “emotionally internalized.” And the Democrats have not loved free trade for a long time anyway, despite their current rhetorical moves toward criticizing the Trumpers.
So most of all we need to revise our estimates of what the political equilibrium looks like here. We are receiving major pieces of information, and we must update our vision of the world to come.
The Rising Cost of Child and Pet Day Care
Everyone talks about the soaring cost of child care (e.g. here, here and here), but have you looked at the soaring cost of pet care? On a recent trip, it cost me about $82 per day to board my dog (a bit less with multi-day discounts). And no, that is not high for northern VA and that price does not include any fancy options or treats! Doggie boarding costs about about the same as staying in a Motel 6.
Many explanations have been offered for rising child care costs. The Institute for Family Studies, for example, shows that prices rise with regulations like “group sizes, child-to-staff ratios, required annual training hours, and minimum educational requirements for teachers and center directors.” I don’t deny that regulation raises prices—places with more regulation have higher costs—but I don’t think that explains the slow, steady price increase over time. As with health care and education, the better explanation is the Baumol effect, as I argued in my book (with Helland) Why Are the Prices So Damn High?
Pet care is less regulated than child care, but it too is subject to the Baumol effect. So how do price trends compare? Are they radically different or surprisingly similar? Here are the two raw price trends for pet services (CUUR0000SS62053) and for (child) Day care and preschool (CUUR0000SEEB03). Pet services covers boarding, daycare, pet sitting, walking, obedience training, grooming but veterinary care is excluded from this series so it is comparable to that for child care.
As you can see, the trends are nearly identical, with child care rising only slightly faster than pet care over the past 26 years. Of course, both trends include general inflation, which visually narrows the gap. When we normalize to the overall CPI, we get the following:
Over 26 years, the real (relative) price of Day Care and Preschool has increased 36%, while Pet Services have risen 28%. If regulation doesn’t explain the rise in pet care costs–and it probably doesn’t–then regulation probably doesn’t explain the rise in child care costs either. After all, child and pet care are very similar goods!
The similar rise in the price of child day care and pet day care/boarding is consistent with Is American Pet Health Care (Also) Uniquely Inefficient? by Einav, Finkelstein and Gupta, who find that spending on veterinary care is rising at about the same rate as spending on human health care. Since the regulatory systems of pet and human health care are very different this suggests that the fundamental reason for rising health care isn’t regulation but rising relative prices and increasing incomes (fyi this is also an important reason why Americans spend more on health care than Europeans).
Thus, my explanation for rising prices in child care and pet care is that productivity is increasing in other industries more than in the care industries which means that over time we must give up more of other goods to get child and pet care. In short, if productivity in other sectors rises while child/pet care productivity stays flat, relative prices must rise. Another way to put this is that to retain workers, wages in stagnant-productivity sectors must rise to match those in (equally labor-skilled) high-productivity sectors. That means paying more for the same level of care, simply to keep the labor force from leaving
But rising productivity in other sectors is good! Thus, I always refer to the Baumol effect rather than the “cost disease” because higher prices are not bad when they reflect changes in relative prices. As with education and health care the rising price of child and pet care isn’t a problem for society as whole. We are richer and can afford more of all goods. It can be a problem, however, for people who consume more than the average quantities of the service-sector goods and people who have lower than average wage gains. So what can we do? Redistribution is one possibility.
If we focus on the prices, the core problem is that care work is labor-intensive and labor has a high opportunity cost. One solution is to lower the opportunity cost of that labor. Low-skill immigration helps: when lower-wage workers take on support roles, higher-wage workers can focus on higher-value tasks. As I’ve put it, “The immigrant who mows the lawn of the nuclear physicist indirectly helps to unlock the secrets of the universe.” Same for the immigrant who provides boarding for the pets of the nuclear physicist.
Another solution is capital substitution—automation, AI, better tools. But care jobs resist mechanization; that’s part of why productivity growth is so slow in these sectors. Still, the basic truth remains: if we want more affordable day care—for kids or pets—we need to use less of what’s expensive: skilled labor. That means either importing more people to do the work, or investing harder in ways to do it with fewer hands.
Claims about DOGE and AI
The tool has already been used to complete “decisions on 1,083 regulatory sections” at the Department of Housing and Urban Development in under two weeks, according to the PowerPoint, and to write “100% of deregulations” at the Consumer Financial Protection Bureau (CFPB). Three HUD employees — as well as documents obtained by The Post — confirmed that an AI tool was recently used to review hundreds, if not more than 1,000, lines of regulations at that agency and suggest edits or deletions.
Here is the full story, I will keep you all posted…