High Inflation is Tied to Natural Scarcity, Baumol’s Cost ‘Disease’ and Bullshitization of Work

Podcast available at https://soundcloud.com/user-280580802/18-high-inflation-is-tied-to-natural-scarcity-baumols-cost-disease-and-bullshitization-of-work

The wave of automation should suggest that prices in the economy should substantially decrease as increasing technological content that displaces workers should reduce the number of workers employed in that sector. Assuming that there is no monopoly power in an industry (quite an untenable assumption given the expansive and centralizing project of Amazon and other firms), increasing technological content should decrease prices. Indeed, car prices are about stagnant, because globalization and automation have reduced the employment count in the car sector. Some sectors, however, have exploding costs. We have to explore why inflation is continuing to rise in certain sectors like health care, education and child care, which increase at rates faster than wages. I would also add housing costs onto the list, which is certainly way higher in the big cities along the coast than what you see in the graph below.

Image result for inflation by industry

Source: Investor’s Business Daily (2018)

The shortest explanation is that the high inflation sectors are not heavily penetrated by technology. Perhaps with increasing advances in computing power and the capability of artificial intelligence, these expensive sectors can begin to shed workers, but this is quite unlikely for now. I also doubt that automation can solve all causes for price inflation. I argue here that three factors are pushing up prices in health care, education, caring and housing: (1) natural and socio-economic scarcities surrounding land and the attractiveness of big cities, (2) Baumol’s cost “disease”, which is about the rising costs for high prestige occupations and low elasticity of demand for low productivity sectors, and (3) the rise of bullshit jobs, i.e. workers, who get paid a lot but don’t produce anything meaningful to society.

Natural and socio-economic scarcity, and attractiveness of big cities

Capitalism tends to lead to urbanization and concentrate capital in these urban areas, which means most of the economic activity and jobs are concentrated in those cities and perhaps a few adjacent suburbs that are part of the metropolitan area. The countryside tends to lose out, because it tends to focus on agriculture and in some cases manufacturing industries, which tend to lose out in employment terms as automation and robots take over these sectors. Service sector jobs then become the vast majority of employment, and they tend to thrive in regions with greater population concentration, as it becomes easier to sell and market personal service products when the customer base is larger. You have to be where the customers are, and there are some exceptions as with tradable services, e.g. you can outsource accounting services to a foreigner as long as he knows the tax laws of your country. In contrast, agriculture and manufacturing generally do not require customer interfacing, so production happens further out in the countryside to be shipped to the cities, where the customers are.

The conclusion is that urbanization increases, drawing more and more people to want to live in cities, where the jobs are, and then all the comforting infrastructure that one takes for granted. Living in the countryside, there are barely any universities, hospitals, art museums or fancy restaurants. And once you get access to them in the cities, you don’t really want to abandon these conveniences. Urbanization creates competition for housing, which tend to be scarce. Many city governments then encourage the building up of suburbs and the creation of skyscrapers and high-rise buildings to accommodate the increasing urban population. But overall, the private rental market, which is out for more profit, is generally quite happy to have more people moving in, while the housing stock cannot keep up with the number of people living in and moving into the city. Developers like very restrictive zoning laws that slow down the building of new housing stock, so you have more tenants bidding for the same amount of housing stock, which bids up rental prices to the point, where certain neighborhoods are only affordable for the upper middle class.

One of the most shocking scarcity-related urban economies is in San Francisco, which simultaneously concentrates the high-tech sector, i.e. well-paid engineers and computer programmers, and low-income service workers that collect the garbage, nourish, sell clothes, cut the hair, take care of and educate the children of these high-tech workers. The scarce land and the very high salaries of the tech and professional workers allows developers to push up rent prices, and thereby force the low-wage workers to either move out to the far suburbs and spend 3-4 hours a day just commuting to their work, or live in their cars and become homeless. It can be quite a challenge to find a place to shower or a toilet, and there is the concern that defecation and urination in public worsen the sanitary conditions and lead to a new plague in the city.

Even among professional workers in Silicon Valley, the people that can afford to move out and tele-commute from a cheaper location will do so. People are paying a premium to live in the most bustling urban economy, but it is not really a choice if we know that the more remote locations become economic wastelands. Angus Deaton notes that the mortality rate is increasing among less-educated, white males in the countryside, and that is reinforced by the deindustrialization and automation of the manufacturing economy, which could lower TV and electronics prices, but is also hollowing out job opportunities outside the urban economies.

Overcoming the natural and socio-economic scarcity of housing requires changing government policy. To some extent, “natural” scarcity might be a misleading term given that government policy can eliminate or mitigate the scarcity. Suburban regions need to be revitalized by shifting government construction and public projects there. Furthermore, cities need a public housing building program. My hometown of Vienna has a public housing stock of 220,000 units or 25% of the total housing stock. What this allows the city to do is to limit high price increases in the private rental market by offering cheaper alternatives to people in the form of public housing. Furthermore, the large housing stock also means that public housing is an acceptable and in some cases even preferred housing option for middle class people, which allows for social mixing that can have greater positive consequences for working class people, e.g. they can benefit from more resources purchased from middle class people (HUD User). The fact that these policies are not happening reflects the power of developers and other forces of the status quo.

Baumol’s Cost “Disease”: Stagnant Productivity in Low-Elasticity Demand Goods and High-Prestige Occupations

While housing is associated with natural scarcity, education and health care are related to the cost “disease”. William Baumol came up with the concept of the cost “disease”, which is that certain highly-skilled professions do not increase in productivity, but their high social status and monopolization of credentialing (e.g. needing a PhD to become professor) allow them to command higher incomes as demand for their product is quite inelastic, i.e. even if prices increase a lot, people’s demand for the product does not decrease. College tuition has been soaring like crazy, and so do the college text books, which are monopolized by a few big publishers that collect huge rents including Elsevier, Cengage, Pearson, Houghton Mifflin or Springer. College text books are a giant fraud, because professors write the textbook once, and every year they release essentially the same content in a new “updated” edition, even if the only thing that changes is one graph on p.177 and the description right next to it. The textbook publishers run a racket that gives them guaranteed royalties as students need the textbook to pass the class. The few savvy students use pirated copies that can be downloaded online to escape the high prices, but they tend to be rare.

College productivity is essentially stagnant, as a graduate student seminar contains anywhere between 5 and 15 students per professor in 2019 (speaking from personal experience), the same number as hundreds of years ago, when the first universities opened their doors. Some popular undergraduate lecture courses (like introductory math or organic chemistry, quintessential for every pre-med student) might have giant enrollment, but the limit is the size of the biggest lecture hall that a university has. The only productivity-enhancing route in higher education is to expand massive open-online courses (MOOC), but that could result in declining quality instruction. In the absence of productivity enhancement, professors can still command high salaries given that they monopolize entry into their labor market by controlling the conferral of PhD graduates, and more importantly, because people will enroll in college no matter how much it costs.

The inelastic demand for college degrees is linked to the college wage premium, which is the gap in wages between college graduate and high school graduate wages. The evidence of labor economists is that this college wage premium has increased, though since the late-1990s, this trend comes from the decline of high school graduate wages and a stagnation of college graduate wages. In other words, entry into the middle class requires a college degree, but no longer guarantees entry to the middle class. Nonetheless, people have to participate in the rat race of getting into the most prestigious universities, and then hoping that they can make it to the middle class. As recessions hit and the neoliberal ideology prevails among state lawmakers, state subsidies for public universities decrease, which forces these universities to increase tuition further, which increases the loan burden of the population. Student loan debt is now over $1.5 trillion and is expected to increase further, thus trapping college graduates into debt slavery. How much longer this game can continue is not very certain, but for now it works as a hidden welfare state, as college delays the labor market entry of young people.

Hospital and health care inflation are also quite crazy. Aging populations pose an upward pressure on health care expenses, but the amount of patients that doctors and nurses can handle does not increase. If we have a dramatic spike in patients, we can’t expect a given nurse or doctor to increase their productivity, even though we see attempts of it, as doctors spend less time with their patients and try to quickly process them, which actually reduces the quality of care similar to education (e.g. the proliferation of adjunct faculty, who take on multiple courses to survive, thus being unable to pay attention to individual students). But stagnant productivity is still associated with rising salaries to doctors and nurses, because the American Medical Association is monopolizing the training of doctors (and colleges doing the same with the training of nurses), and sick patients are unlikely to forgo medical care when they get sick. Given the high out-of-pocket expenses in the US medical system, some people are avoiding medical visits, but at the cost of going to the emergency room anyway, when the disease is quite advanced, thus resulting in even higher costs and potential for medical bankruptcy. The dysfunctional present health care system allows doctors to over-bill patients and insurance companies, which makes US doctors the highest paid in the world.

Similar to education, medical inflation could be reduced by technology as we see with the development of robot nurses in worker-starved Japan or robot surgeons that assist surgeons. IBM’s Watson program helps advise doctors with patient diagnosis and suggestions for treatment options, which is hard to argue with, because the Watson algorithm stores a vast wealth of medical knowledge, while human doctors store only the knowledge that they have learned themselves. Assuming, however, that we would not currently trust to be treated by robots and algorithms, doctors are still going to be required and if they are they want the high salaries, so medical costs will remain high.

Bullshitization of Work

Education and health care do not only have low-productivity workers like professors and doctors, but they have workers that have zero productivity, i.e. the workers in bullshit jobs. For mainstream economists, there is little understanding of zero-productivity jobs, because of the marginal productivity theory, which states that people are paid what they produce for the economy. In other words, if a job exists and pays a certain salary it must reflect the contribution of that worker to the economy. This perspective neglects the fact that it is not individuals who provide services to consumers but institutions, and these institutions can charge a very high fee if the demand is fairly inelastic, as we have seen in education and health care. They can then use the cash to do whatever they want with it. As a consumer, I can’t demand that my tuition should benefit only professors and my medical bills should only benefit doctors and nurses.

What happened in universities is that along with sky-rocketing university tuition fees the ratio of administrators to faculty increased substantially. Some of that increase is related to being more responsive to student demand for better services like gym facilities, academic advising or diversity and inclusion programs, which is not surprising given that colleges and universities are competing for high-quality students. But a lot of administrators are not interfacing with students whatsoever, and much of their time is devoted to writing meaningless reports that no one reads, and to attend meetings where nothing meaningful is said.

The US health care system is quite unique in requiring a giant administrative staff in hospitals, whose job it is not to care for patients, but to make sure that the patients are billed properly and to negotiate with insurance companies about proper reimbursement schedules. These are activities that are necessary within the logic of the US health care system, but not because it shelters, clothes, feeds or heals anyone. Similar to the many vice-deans, there are also many hospital administrators that are not producing anything meaningful, but their salaries have to be funded by sky-rocketing tuition and medical bills. Bullshit work is not restricted to education and the medical sector, and also exists in finance, marketing and other professional service work, but it appears to be rather pernicious in these two sectors because they are so necessary for our well-being.

It would be rather difficult to quantify how many bullshit jobs there are, and the best approximation are surveys of self-reported bullshit jobs. That is precisely what David Graeber, who coined the term, points out. He cites a UK and Dutch survey that suggest that between 37 to 40% of workers believe that they are working in bullshit jobs (Vitaud 2018). The best way to describe bullshit jobs is by analyzing the logic of feudalism. While in a typical capitalist setting, efficiency and productivity should increase, in a feudal setting it is status and reputation that need to be maximized. It is not the number of tangible output that measures your reputation, but the number of underlings serving under you. My office has 20 staffers, while your office only has 10, so I am of higher status than you.

Even when automation advances, there is no guarantee that bullshit jobs are going to decrease, because much of the bullshit work happen in professional and administrative settings, where the price-setting and economic decisions are made. It will also be difficult to attempt to outlaw bullshit work, as there is likely going to be much resistance against such a move. The only effective remedy against the proliferation of bullshit jobs is the universal basic income, which allows people, who hate meaningless work to quit and find more meaningful and interesting things to do, even when the market remunerates these activities less. Work-related depression is likely going to decline.

Conclusion

There are many reasons why inflation in certain sectors continue, and force people to work hard to be able to attain these necessities. Some of it relate to natural and socio-economic scarcities surrounding urbanization and housing; Baumol’s cost “disease” of stagnant productivity in education and health; and the proliferation of bullshit jobs among professional service workers. If automation continues to advance and could affect workers in education and health, then these prices could come down. Similarly, rent costs can be controlled by public housing and suburbanization initiatives, and bullshit jobs and the associated cost inflation can be reduced by a universal basic income. Unless we see these changes, the cost of living is likely to continue to increase.

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