I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
Yeah, and it's also almost the same reason why gentrification tends to happen when the wealthy move into an area, and why prices for things decrease when the wealthy leave.
>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
TIL! I’m entirely inexpert in the topic and posted as a curious layperson.
That said, some of what’s in the article only makes sense to me in the context of a system that’s at least somewhat like what I tried to describe. Maybe you can enlighten me?
> This effect is an example of cross elasticity of demand.
Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor? Eg land, healthcare, unskilled labor (as an input, in the case of skilled labor as the output—doctors and engineers in my comment)?
In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs. Is that not the effect?
>...Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor?
This isn't necessary to explain Baumol cost disease.
Different kinds of workers may also be substitutes for one another, or complements. However, the quartet doesn't need to share a particular set of inputs with car manufacturing for Baumol's mechanism to operate.
>...In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.
Yes. Baumol cost disease is a way to explain the upward pressure on the cost of lower productivity labor-intensive services. It isn't an economic law, it is a tendency. It doesn't guarantee that every business will be able to pass those costs on to customers, or that every business will survive or that every worker will receive the same wage increase, etc.
Ok, I did more reading and it sounds like my old framing was just sort of incomplete? Basically, people and firms are little black holes of unmet demand for all sorts of things.
When the productivity shock happens, some of the latent unmet demand in the now-high-productivity sector(s) is for stuff in other high-productivity sectors (iPhones, memory), and is eventually met. Other latent demand is for stuff in low-productivity sectors (housing, childcare, education, healthcare, construction) and that drives up prices until/as people eventually move into those sectors.
The Wikipedia entry actually says 2, or something very similar:
> The rise of wages in jobs without productivity gains results from the need to compete for workers with jobs that have experienced productivity gains and so can naturally pay higher wages.
Supply of doctors doesn't go down only because hospital raise wages to compete with the new lucrative thing.
There are plenty of people that want to become doctors, but only so many of them are people that you want to be doctors, and if you don't pay enough they'll do the lucrative thing.
Doctors are just not a good example to use though as an example here. Healthcare costs have risen as one would expect due to Baumol’s cost disease, but Dr salaries have generally not gone up as much as one would have expected. Medicine is such a tightly controlled market that lots of things are distorted - Medicare decides how much they will compensate, etc. Many more qualified people would like to become Drs but are not allowed too (From 1980 to 2005, the number of medical students stayed flat despite population increases - this is slowly been increasing the last 20 years along with the number of residency positions.)
It also preferentially benefits as a function of margin. If Nvidia's prices double, it logs two thirds of that as earnings. For Kroger it turns into like a penny of extra profit for every dollar of price rises.
In theory if people are giving all of the money to Nvidia, then it's because they find it valuable (in this case companies purchasing GPUs) so even if the GPUs weren't so expensive in theory there would still be economic value derived from the transactions.
This is absolute NO, this is more like certain groups of people have figured out a way to maximize their profits and this seems like a type of scheme that works. Ordinary people are on the receiving end of these decisions if anything, at times they do get something out of it
So someone correct me but I think this is sort of an accounting trick. When Microsoft buys an Nvidia GPU for $100, it will claim that it lasts 5 years, so writes down $20 in the expense column for this year. Meanwhile Nvidia takes all the profit at time of sale, $100. So for each GPU bought, SP500 logs $80 of profit, even though no money entered or left the SP500.
(Yes of course the GPU cost something to make, but the margins on these things are very high. The point is that revenue is immediate while capital expenses are amortized. And capital expenditure has gone way up lately.)
There is a cost to produce something based on raw materials and then the possible price you can charge from the customer based on demand and supply.
The term Value is pretty vague here. Its more of a perceived value so its hard to put a number against it, there is no direct way to translate it to something more concrete.
May be bit orthogonal, one way I can think of it is to map to physical needs like clothing, housing, food and medicine?
It is really only the perceived value which matters to a business - that's the value at which you can sell or replace your asset on the market. Offers above that price, you sell (and replace if needed). Offers below that price, you don't.
If it costs more to produce (and sell) the asset than you can sell it for, you're losing money and assets go down. If it costs the same, then in this example the net change in S&P assets would be zero.
> there is no direct way to translate it to something more concrete.
There's an incredibly easy way to do that, sell it.
If Nvidia takes $20 of parts and sells it for $100, they created $80 of value. If we had VAT, that's what would be taxed (minus things like r and d but, for simplicity...).
that definitely $80 of value for Nvidia added but does it really added something to whole system? if some physical goods moved from one company to another with generation of VAT, does it really add up to economy as whole or just one seller made bad decision and loosed some $, other gained few $ but overall balance of value just still same.
I don't want to pick on you but this is a major pet peeve of mine. A lot of people view the economy as a fixed size of value. As a result, when someone is a millionaire, they consider that million dollars to be something extracted from others. That's a very Feudal view of economics. What's usually the case is that millionaire add a million dollars of value by creating a more valuable product from raw materials.
This example is an easy example. Before Nvidia, there was just a pile of silicon and copper worth $20. It doesn't take $80 to turn that thing into something that is worth $100. The value within the economy increased.
Most of economic activity is growth. There is economic activity that isn't growth, which is what rent-seeking is.
Almost, the depreciation is 2 years, but for some reason they wrote it up like 5 for now. But anyone buy nvdia chips is already maxxed out on debt for the next 5 years and the new chips are here shortly. What happens to those 100's of billions in chips?? They get written off. We're already seeing them in cars. There is no shortage except on the scrutiny of the whole securities thing.
When BMW sell you a car, and you buy it on finance (hire-purchase etc.) where they are lending you the money to buy it, they recognise the entire sale value of the car there and then. They even pay tax on the cash they don’t yet have in their pocket.
Meanwhile, you amortise it over years.
For some reason, nobody argues that this isn’t a real sale of a real car.
If it’s all just circular financing, then tax day will be the reveal, as there will simply be no money to pay the corporation tax on the profits.
> Seven huge corporations recently announced that in 2024 they were allowed to collectively keep $1.4 billion in tax breaks from previous years that they had publicly admitted would likely be found illegal if investigated – all because the tax authorities were unable to identify and disallow them before the statute of limitations ran out.
36 comments
[ 1.9 ms ] story [ 5.7 ms ] threadA bubble that is obscuring that most of the economy is pretty weak.
It increasingly looks like everything is getting K-shaped. Not just the income of labor, but the earnings of corporations.
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
The wikipedia entry looks pretty well done:
https://en.wikipedia.org/wiki/Baumol_effect#cite_note-:11-4
That said, some of what’s in the article only makes sense to me in the context of a system that’s at least somewhat like what I tried to describe. Maybe you can enlighten me?
> This effect is an example of cross elasticity of demand.
Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor? Eg land, healthcare, unskilled labor (as an input, in the case of skilled labor as the output—doctors and engineers in my comment)?
In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs. Is that not the effect?
This isn't necessary to explain Baumol cost disease. Different kinds of workers may also be substitutes for one another, or complements. However, the quartet doesn't need to share a particular set of inputs with car manufacturing for Baumol's mechanism to operate.
>...In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.
Yes. Baumol cost disease is a way to explain the upward pressure on the cost of lower productivity labor-intensive services. It isn't an economic law, it is a tendency. It doesn't guarantee that every business will be able to pass those costs on to customers, or that every business will survive or that every worker will receive the same wage increase, etc.
When the productivity shock happens, some of the latent unmet demand in the now-high-productivity sector(s) is for stuff in other high-productivity sectors (iPhones, memory), and is eventually met. Other latent demand is for stuff in low-productivity sectors (housing, childcare, education, healthcare, construction) and that drives up prices until/as people eventually move into those sectors.
> The rise of wages in jobs without productivity gains results from the need to compete for workers with jobs that have experienced productivity gains and so can naturally pay higher wages.
Supply of doctors doesn't go down only because hospital raise wages to compete with the new lucrative thing. There are plenty of people that want to become doctors, but only so many of them are people that you want to be doctors, and if you don't pay enough they'll do the lucrative thing.
Why do you think that? Everything you wrote prior to that seemed to indicate further destabilization.
It also preferentially benefits as a function of margin. If Nvidia's prices double, it logs two thirds of that as earnings. For Kroger it turns into like a penny of extra profit for every dollar of price rises.
(Yes of course the GPU cost something to make, but the margins on these things are very high. The point is that revenue is immediate while capital expenses are amortized. And capital expenditure has gone way up lately.)
Different people/orgs get a different slice of that value.
The term Value is pretty vague here. Its more of a perceived value so its hard to put a number against it, there is no direct way to translate it to something more concrete.
May be bit orthogonal, one way I can think of it is to map to physical needs like clothing, housing, food and medicine?
If it costs more to produce (and sell) the asset than you can sell it for, you're losing money and assets go down. If it costs the same, then in this example the net change in S&P assets would be zero.
There's an incredibly easy way to do that, sell it.
If Nvidia takes $20 of parts and sells it for $100, they created $80 of value. If we had VAT, that's what would be taxed (minus things like r and d but, for simplicity...).
Yes.
I don't want to pick on you but this is a major pet peeve of mine. A lot of people view the economy as a fixed size of value. As a result, when someone is a millionaire, they consider that million dollars to be something extracted from others. That's a very Feudal view of economics. What's usually the case is that millionaire add a million dollars of value by creating a more valuable product from raw materials.
This example is an easy example. Before Nvidia, there was just a pile of silicon and copper worth $20. It doesn't take $80 to turn that thing into something that is worth $100. The value within the economy increased.
Most of economic activity is growth. There is economic activity that isn't growth, which is what rent-seeking is.
See the earlier discussion about DeepSeek's revenue: https://news.ycombinator.com/item?id=50163494
Meanwhile, you amortise it over years.
For some reason, nobody argues that this isn’t a real sale of a real car.
If it’s all just circular financing, then tax day will be the reveal, as there will simply be no money to pay the corporation tax on the profits.
https://itep.org/what-corporations-have-to-gain-from-the-gut...