The Imminent Capitalist Reckoning

Have you ever heard of the economist William Baumol? Probably not, because economists are almost always boring and often little more than hacks that rich people invest in to help them save money on taxes. But Baumol appears to be one of the rare economists to stumble upon a genuine insight. One of his ideas is known as Baumol’s cost disease (always name your smart discoveries after yourself), which essentially states that if large capital investments are used to automate the mass production of goods, the price of those goods will fall and the costs of services – i.e., tasks that humans must in large part perform – will rise as a result. Because wages for workers benefiting from increasingly automated, increasingly efficient, mass-production will rise, these workers will be more able and willing to pay higher prices for services. When this happens, prices and wages for service workers will rise. Thus, even though Beethoven’s Fifth remains Beethoven’s Fifth whether it be played in the 18th century or the 23rd, God willing, the players and conductors in the 23rd will be payed much more than the player and conductors were payed in the 18th. And, since the playing of Beethoven’s Fifth can’t be automated the way manufacturing a diaper can be, the cost of the Fifth, relative to the cost of the diaper, will increase.

Put another way, as the ability of capital to mass produce dead objects/goods increases, the relative price of these dead objects will decrease against that which cannot be mass-produced – again, i.e., tasks that humans must in large part perform.

One more try: as people experience income growth and can purchase many goods with less money, they will pay more for things that are less easily automated, aka people-performed work aka services. If you still don’t understand at this point you should probably stop reading and make loud fun of me for being a bad writer and explainer.

So, why the apocalyptic title? Well, think about the most important things an economy needs to provide a person in order for that person to survive and thrive. In my opinion they are, in some order: healthcare, housing, food, and education; the latter being somewhat optional if the first three can be assured without it. Under the current state of affairs in developed countries, food is mass-produced and automated. This process has enormous moral and ecological costs and probably isn’t sustainable in the long run, but for now delivers relatively low-priced food at decent quality. Thus, we see on the below charts from the St. Louis Federal Reserve that the cost of food (graph A) since 2000 has closely tracked the cost of the broader Consumer Price Index (CPI) basket of common goods (B), the widely used metric for inflation.

Afredgraph (food).pngBfredgraph (todo)

Above, we see that both the cost of food and the CPI have tripled (3x) since 1980. As I said, there are enormous shortfalls in the current process by which we produce and distribute food, but generally speaking it’s at least a partial compliment to the current economic system in the U.S. (oh, by the way it’s called capitalism) that food is affordable. Of course, the same cannot be said for food production and (lack of) consumption worldwide, but at least the U.S. economic system has taken care of a fundamental need of its citizens in this regard.

However, the same cannot be said in the least for two other vital services – healthcare and education. Here is the cost of the former (C) against the CPI (B):

Cfredgraph (healthcare).pngBfredgraph (todo)

Since 1980, the CPI has approximately tripled (3x), while the healthcare CPI has approximately quintupled (5x).

Now, here is the cost of education (D) against the CPI (B):

Dfredgraph (ed).pngBfredgraph (todo_1993).png

Since indexed data on the cost of education was first available in 1993, the cost of education has more than tripled (3x), while the CPI has increased by just over 1.7x.

Now we get to housing. Obviously an essential commodity, housing is a kind of hybrid – part good, part service. It takes serious capital investment – specifically raw materials and heavy machinery – to build a home, but also significant technical and labor expertise that only skilled humans can perform. Housing prices are also driven by the finite quantity of available land, which is particularly acute in certain areas of the U.S. where land is especially valuable (think NYC or San Francisco or most anywhere else the highest-paying jobs are located, which is a problem for another post). So housing’s characteristics don’t exactly align with Baumol’s framework, but I’m including it here because, whether it aligns with Baumol or not, housing is really important to have. Access to quality housing you can afford is one of the most important things to have in life and a literal foundation for almost everything else, particularly when the road map for being prosperous in the U.S., for most people, goes straight through land/home ownership.

Fortunately since 1980, the price of housing (E) has risen at roughly the same pace as the price of everything else (B).

EHousing 1980.pngBfredgraph (todo)

To sum up: while the prices of education and healthcare have soared, the prices of food and housing have risen at approximately the same pace as the standard measurement of inflation. This is obviously not ideal, but hey, a .500 batting average is great in baseball right? Perhaps if things stay this way – half of life’s necessities reasonably accounted for, half exploding in cost – revolution can be stalled and the current order can continue much as it has for the last 72 years.

But there’s another piece to the puzzle. After all, a capitalist economy isn’t solely defined by how much things cost – money has to be made to buy things. Silly you if you think people can consume goods just because they exist. The chart below (F) depicts nominal weekly earnings for everyone in the U.S. since 1980, when data was first captured.

Fmedian nominal wage growth everyone

Graph states that things aren’t so bad. Median weekly earnings have risen about 4x since 1980. This well outpaces the 3x growth of food, housing, and the basket of goods comprising the inflation measure – CPI. It doesn’t quite match up to the 5x increase in the general cost of healthcare, but it’s not too far off either.

With the cost of education, the picture gets a little worse. The growth in median income since 1993, when data was first available for the cost of education, is less than 2x, while the growth in the cost of education is over 3x. Still, like healthcare, that’s not so far off right? Except when you consider that it is education itself – more specifically the college degree – that is required to experience the income growth depicted above. The college degree can only be achieved if the college degree can paid for, but, as we see, the cost of the college degree is outpacing the ability of the post-degree income to pay for the degree. Simpler: The cost of college is outpacing the benefit. So, in the future, student debt will continue to increase or people will just be unable to get degrees. But again, it could worse. After all, this chart keeps us at the .500 batting average we need to be transcendent baseball players.

This outcome wouldn’t be so bad if a person could get a decent job without a college degree, but, as the chart below (G) demonstrates, that is increasingly difficult. Without the college degree to boost things, the picture becomes much, much worse.

wage growth no college

Median weekly income for those without degrees has grown about 2.4x since 1980 and about 1.6x since 1993. To recap:

  • Cost of healthcare has increased 5x since 1980.
  • Cost of food has increased 3x since 1980.
  • Cost of housing has increased 3x since 1980.
  • Cost of a education has increased 3x since 1993 (and remember, the benefits of a college degree are diminishing).

College is increasingly becoming more expensive and less valuable, while the costs of other key goods continue to rise at a solid pace at or above the rise in incomes, or explode in the case of healthcare. And those without bachelor’s degrees, remember in the U.S. that’s two-thirds of the population, are really hurting.

So, we’re fucked right? Well, not quite. There are plenty of ways around this – e.g., if it could be possible to get a good-paying job without a college degree, government cost controls/subsidies for healthcare/food/education/housing, college could get cheaper some other way, massive technological breakthroughs could automate some of these services or food production in ways that lower costs dramatically – but the reality is that, if this continues, there will be another word for what our economy will become: feudalism. And there are a lot of good reasons the West kicked feudalism to the curb, chief among them being that feudal societies sucked. People stopped tolerating them for a reason. Unfortunately, things got pretty nasty for most when that moment happened. It would be great if we could avoid a repeat of that outcome, but, judging from the recently released Trump budget and the fact that Paul D. Ryan is Speaker of the House of Representatives, we’re barreling straight for a repeat, full speed ahead.

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