7/05/2019

Why the Prices Are So Damn High: A Deeper Look

"Where do Helland and Tabarrok go wrong? Their purely factual claims seem solid to me, but their interpretation of these facts is deeply misleading.

Let’s start with the obvious: government spends an enormous amount on both education and health care. This spending has dramatically increased over time. Imagine, then, what would have happened if government had practiced extreme austerity instead. Demand for labor in education and health care would clearly have increased far less, so wages in these industries would have risen far less, so the prices in these sectors would be much less damn high. So while Helland and Tabarrok are not wrong to invoke the Baumol effect, they are wrong to fail to blame government for dramatically amplifying it. If paying customers bore the full financial burden of education and health care, prices could easily fall by 50% or more."