There is also a story of sclerosis and stagnation. Sure, lots of frivolous consumer goods have gotten cheaper but healthcare, housing, childcare, and education, all the important stuff, has exploded in price.
I think the idea that this chart demonstrates sclerosis and stagnation in these industries—at least in the meaningful sense of our economy getting worse at producing or affording these things—is largely a subtle misunderstanding of what the chart actually shows. (To be clear, this is not an idea that you lean on much in this post, but I still think it’s important to try to clarify some misconceptions.)
Prices are relative: it only makes sense to discuss the price of X relative to Y, rather than X’s absolute price level. Even inflation is a relative measure: it shows the price of a basket of goods and services relative to a unit of currency.
With this context in mind, we should reconsider what it means for the items at the top of the chart to have “exploded in price”. There are several possible interpretations:
These items have become more expensive relative to a unit of US currency (true, supported by the chart)
These items have become more expensive relative to average hourly wages (true, supported by the chart)
These items have become more expensive relative to an average consumer’s income (mostly not true, not supported by the chart)
If the economic stagnation narrative were accurate, we would expect:
Claim (3) above to be true, as this would indicate that an average consumer finds these items harder to purchase. Conversely, if a service’s price decreases relative to someone’s income, it becomes more affordable for that person, even if its price increases relative to other metrics.
The chart to accurately represent the overall price of healthcare, housing, childcare, and education, rather than misleading sub-components of these things.
However, I argue that, when correctly interpreted under the appropriate measures, there’s little evidence that healthcare, housing, childcare, and education have become significantly less affordable for an average (not median) consumer. Moreover, I claim that the chart is consistent with this view.
To reconcile my claim with the chart, it’s crucial to distinguish between two concepts: average income and average wages. Income encompasses all money received by an individual or household from various sources, including wages, non-wage benefits, government assistance, and capital investments.
Average income is a broader and more appropriate way to measure whether something is becoming less “affordable” in this context, since what we care about is whether our economy has stagnated in the sense of becoming less productive. I personally think a more appropriate way to measure average income is via nominal GDP per capita. If we use this measure, we find that average incomes have risen approximately 125% from 2000-2023, which is substantially more than the rise in average wages over the same time period, as shown on the chart.
Using average wages for this analysis is problematic because it overlooks additional income sources that people can use to purchase goods and services. This approach also introduces complexities in interpretation, for example because you’d need to account for a declining labor share of GDP. If we focused on wages rather than average income, we would risk misinterpreting the decrease in average wages relative to certain services as a real decline in our ability to afford these things, instead of recognizing it more narrowly as a shift in the price of labor compared to these services.
A closer examination of the chart reveals that only four items have increased in price by more than 125% over the given period: Medical Care Services, College Textbooks, College Tuition and Fees, and Hospital Services. This immediately implies that, according to the chart, childcare and housing have actually become more affordable relative to average incomes. For the remaining items, I argue that they don’t accurately represent the overall price levels of healthcare and education. To support this claim, let’s break down each of these components:
Regarding Medical Care Services and Hospital Services, Random Critical Analysis has (to my mind) convincingly demonstrated that these components of the CPI do not accurately reflect overall healthcare prices. Moreover, when using the right standard to measure average income (nominal GDP per capita), he concludes that healthcare has not become significantly less affordable in the United States in recent decades.
Regarding College Tuition and Fees, this is not a measure of the quality-adjusted price level of college education, in the sense that matters here. That’s because colleges are providing a fundamentally different service now than they did in the past. There are more staff members, larger dorm complexes, and more amenities than before. We shouldn’t mistake an increase in the quality of college with whether education is becoming harder to produce. Indeed, given that a higher fraction of people are going to college now compared to decades ago, the fact that colleges are higher quality now undermines rather than supports a narrative of “stagnation”, in the economically meaningful sense.
Regarding College Textbooks, I recall spending a relatively small fraction of my income in college on textbooks, making me suspect that this component on the chart is merely cherrypicked to provide another datapoint that makes it seem like education has become less affordable over time.
To avoid having this comment misinterpreted, I need to say: I’m not saying that everything has gotten more affordable in the last 25 years for the median consumer. I’m not making any significant claims about inequality either, or even about wage stagnation. I’m talking about a narrower claim that I think is most relevant to the post: whether the chart demonstrates substantial economic stagnation, in the sense of our economy getting worse at producing certain stuff over time.
Don’t forget Baumol’s cost disease: if one part of the economy gets a lot more productive per labor-hour, then wages in other parts will go up to compensate. I don’t think that the number of employees per patient in a hospital or the number of employees per student in a university is lower today than it was in the 1980s, even if hospitals and universities have improved in other ways.
In my view, Baumol’s cost disease is poorly named: the name suggests that certain things are getting more expensive, but if “more expensive” means “society (on the whole) cannot afford as much as it used to” then this implication is false. To be clear, it is definitely possible that things like healthcare and education have gotten less affordable for a median consumer because of income inequality, but even if that’s true, it has little to do with Baumol’s cost disease per se. As Scott Alexander framed it,
The Baumol effect cannot make things genuinely less affordable for society, because society is more productive and can afford more stuff. However, it can make things genuinely less affordable for individuals, if those individuals aren’t sharing in the increased productivity of society.
I don’t think that the number of employees per patient in a hospital or the number of employees per student in a university is lower today than it was in the 1980s, even if hospitals and universities have improved in other ways.
I think this is likely wrong, at least for healthcare, but I’d guess for education too. For healthcare, Random Critical Analysis has written about the data, and I encourage you to look at their analysis.
I think the idea that this chart demonstrates sclerosis and stagnation in these industries—at least in the meaningful sense of our economy getting worse at producing or affording these things—is largely a subtle misunderstanding of what the chart actually shows. (To be clear, this is not an idea that you lean on much in this post, but I still think it’s important to try to clarify some misconceptions.)
Prices are relative: it only makes sense to discuss the price of X relative to Y, rather than X’s absolute price level. Even inflation is a relative measure: it shows the price of a basket of goods and services relative to a unit of currency.
With this context in mind, we should reconsider what it means for the items at the top of the chart to have “exploded in price”. There are several possible interpretations:
These items have become more expensive relative to a unit of US currency (true, supported by the chart)
These items have become more expensive relative to average hourly wages (true, supported by the chart)
These items have become more expensive relative to an average consumer’s income (mostly not true, not supported by the chart)
If the economic stagnation narrative were accurate, we would expect:
Claim (3) above to be true, as this would indicate that an average consumer finds these items harder to purchase. Conversely, if a service’s price decreases relative to someone’s income, it becomes more affordable for that person, even if its price increases relative to other metrics.
The chart to accurately represent the overall price of healthcare, housing, childcare, and education, rather than misleading sub-components of these things.
However, I argue that, when correctly interpreted under the appropriate measures, there’s little evidence that healthcare, housing, childcare, and education have become significantly less affordable for an average (not median) consumer. Moreover, I claim that the chart is consistent with this view.
To reconcile my claim with the chart, it’s crucial to distinguish between two concepts: average income and average wages. Income encompasses all money received by an individual or household from various sources, including wages, non-wage benefits, government assistance, and capital investments.
Average income is a broader and more appropriate way to measure whether something is becoming less “affordable” in this context, since what we care about is whether our economy has stagnated in the sense of becoming less productive. I personally think a more appropriate way to measure average income is via nominal GDP per capita. If we use this measure, we find that average incomes have risen approximately 125% from 2000-2023, which is substantially more than the rise in average wages over the same time period, as shown on the chart.
Using average wages for this analysis is problematic because it overlooks additional income sources that people can use to purchase goods and services. This approach also introduces complexities in interpretation, for example because you’d need to account for a declining labor share of GDP. If we focused on wages rather than average income, we would risk misinterpreting the decrease in average wages relative to certain services as a real decline in our ability to afford these things, instead of recognizing it more narrowly as a shift in the price of labor compared to these services.
A closer examination of the chart reveals that only four items have increased in price by more than 125% over the given period: Medical Care Services, College Textbooks, College Tuition and Fees, and Hospital Services. This immediately implies that, according to the chart, childcare and housing have actually become more affordable relative to average incomes. For the remaining items, I argue that they don’t accurately represent the overall price levels of healthcare and education. To support this claim, let’s break down each of these components:
Regarding Medical Care Services and Hospital Services, Random Critical Analysis has (to my mind) convincingly demonstrated that these components of the CPI do not accurately reflect overall healthcare prices. Moreover, when using the right standard to measure average income (nominal GDP per capita), he concludes that healthcare has not become significantly less affordable in the United States in recent decades.
Regarding College Tuition and Fees, this is not a measure of the quality-adjusted price level of college education, in the sense that matters here. That’s because colleges are providing a fundamentally different service now than they did in the past. There are more staff members, larger dorm complexes, and more amenities than before. We shouldn’t mistake an increase in the quality of college with whether education is becoming harder to produce. Indeed, given that a higher fraction of people are going to college now compared to decades ago, the fact that colleges are higher quality now undermines rather than supports a narrative of “stagnation”, in the economically meaningful sense.
Regarding College Textbooks, I recall spending a relatively small fraction of my income in college on textbooks, making me suspect that this component on the chart is merely cherrypicked to provide another datapoint that makes it seem like education has become less affordable over time.
To avoid having this comment misinterpreted, I need to say: I’m not saying that everything has gotten more affordable in the last 25 years for the median consumer. I’m not making any significant claims about inequality either, or even about wage stagnation. I’m talking about a narrower claim that I think is most relevant to the post: whether the chart demonstrates substantial economic stagnation, in the sense of our economy getting worse at producing certain stuff over time.
Don’t forget Baumol’s cost disease: if one part of the economy gets a lot more productive per labor-hour, then wages in other parts will go up to compensate. I don’t think that the number of employees per patient in a hospital or the number of employees per student in a university is lower today than it was in the 1980s, even if hospitals and universities have improved in other ways.
In my view, Baumol’s cost disease is poorly named: the name suggests that certain things are getting more expensive, but if “more expensive” means “society (on the whole) cannot afford as much as it used to” then this implication is false. To be clear, it is definitely possible that things like healthcare and education have gotten less affordable for a median consumer because of income inequality, but even if that’s true, it has little to do with Baumol’s cost disease per se. As Scott Alexander framed it,
I think this is likely wrong, at least for healthcare, but I’d guess for education too. For healthcare, Random Critical Analysis has written about the data, and I encourage you to look at their analysis.