Arnold Kling  

The Great Transformation

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Larry Summers writes,

The nature of the transformation is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone services, where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the price of food, housing, healthcare, energy and education.

Pointer from Mark Thoma.
Actually, I think that the trends in housing and energy costs are not so clear. In housing, size and quality have gone up, and it seems to me that the variation in cost from place to place is what has gone up (the cost of housing in Detroit is quite low these days). In energy, there is too much annual volatility to pick out a clear trend.

That leaves education and health care. There, the question I would raise is how to separate necessary consumption from status goods. I heard recently that Chris Whittle has started a K-12 school in New York with tuition of $40,000 a year--and the person who told me this said that $40 K is actually the going rate. I submit that this is a status good, as are degrees from top colleges. In health care, some of the scanning-just-to-see, surgical repair of baby-boomer knees, and futile end-of-life care also may fall into the category of status goods.

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CATEGORIES: Growth: Consequences

COMMENTS (11 to date)
Dave Schuler writes:

What's the market clearing price of healthcare? I don't think we have any idea. We're subsidizing each of healthcare and education so mightily, nearly $1 trillion each, that I don't think we have a basis for making a reasoned assessment of the price of healthcare as measured in television sets.

That we are also subsidizing the cost of transport of television sets from China to the U. S. makes it even more difficult.

RGV writes:

A related link on health care

MMJ writes:

From friends with children, yes, that is the going rate. But as in so many cities with awful public education systems, private school is not a "status good" but an unfortunate necessity.

Chris writes:

How is "scanning-just-to-see" a status good? My explanation would lean heavily on doctors doing it because insurance covers it and to reduce risk of later malpractice charges, with a little Hansonian "showing that you care" thrown in also.

DougT writes:

Degrees from top colleges may be status goods, but a private 4-year degree costs $200k from just about any institution. In-state tuition is subsidized, but that does not reduce the cost, just the incidence of the cost.

I would submit that health care and higher education costs epitomize the problem of third-party payment. With education, the student typically doesn't pay, the parents do.

Mrs. Davis writes:

The problem is that they have stagnated or fallen measured relative to the price of food, housing, healthcare, energy and education.

The problem is that there are cabinet departments to "address the needs" of consumers in each of these economic segments. And they will all go the way of the Post Office sooner or later.

sabre51 writes:

I agree with your comments at the end. Average household size has been decreasing for a long time up to the current recession; the choice of consumers to devote more money to space and privacy as other prices decrease would be very hard to separate from true increases in price for housing of the same quality. Speaking of which, this also has a very significant effect on income inequality, since household numbers are those used to justify the claim that median Americans have not seen income rise in 30 years despite per capita growth of whatever-it-was in that time (30% about, I think?). But that family with no growth is now 2.6 people instead of 3.1, or an income increase of ~15% per person in the median family. I get very frustrated by the fact that these complications introduced by using households are never addressed in the articles you read, even by great economists like Larry Summers!

On healthcare, I read an analysis which concluded that the price of health benefits (for example, decreasing your 5 year mortality rate from cancer by X%) in terms of dollars spent on health care has declined by ~14% since 1980. Of course, new technology also enables people to spend more of their income to achieve better health before it stops being beneficial, and healthcare is a normal good. So marginal cost of production falls and demand rises, in a system where producers do not really compete on price, so it should not be surprising to see healthcare spending as a portion of income rise even in the conditional case of lower true prices.

Wrote this quickly and it came out longer than I meant; I'll try to go back and find that article to provide a link.

Becky Hargrove writes:

One way to understand what has happened: consider increasing levels of debt that are created by restricting participatory human capital, in monetary terms. I'm not suggesting that we change that percentage of monetary participation, but that we allow trickle-down of knowledge participation at the lateral or non-monetary level. By so doing, new wealth can be released, real wealth capable of addressing the burden of debt from restricted economic participation. The prime reason we now have unpayable debt is that we invest endless resources into individuals (public schooling) who never gain the opportunity to 'pay it back'. Whereas, should we allow one another to teach and heal in relative terms as we learn through our lives, we decrease societal debts.

Disempowered Paper Pusher writes:

the cost of housing in Detroit is quite low these days

And wages are low there as well, making a large assumption that you can find a job. Funny how that works.

The Snob writes:


Choosing to live in a dense urban area is also a status good. In nearly all cases you could move to a suburb with very good public schools for less than it costs to live in a marginal part of the city. Also, some cities still have some degree of catholic or other religious K-12 schools which are moderately better than the public schools but not as soigné as the 40k kindergartens.

Floccina writes:

To me it seems that food has steadily gotten more a fordable.

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