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>there is more to an economy than manufacturing. Not really. Most developed economies are basically 70% Baumol's cost disease[1]. The 20% of the American GDP t

>there is more to an economy than manufacturing. Not really. Most developed economies are basically 70% Baumol's cost disease[1]. The 20% of the American GDP that goes to healthcare, half of the military budget that goes into salaries, public services, the police isn't billed on productivity. Those are non-tradeable services whose compensation inflates with growth in the productivity gaining sectors of the economy. That's why you can go not to a wealthy Tier 1 city in China, but to a Tier 2 or 3 city and it has better public services despite having like 10% of the per capita budget of a US city. Most compensation is.. fake. If you want to know what an economy does look at the stuff they make. [1]https://en.wikipedia.org/wiki/Baumol_effect https://en.wikipedia.org/wiki/Baumol_effect

ryani 2y ago
How is "Baumol effect" different from supply and demand for any limited resource? Let's say that some new use for copper is discovered, that drastically increases the demand for copper. The cost of existing items that use copper is going to go up, even if those items are no more productive than they used to be, because the new items are now in high demand. You can see this effect in real life with GPUs; it's much more expensive to buy a gaming graphics card today than it was a decade ago, because GPUs are in high demand for other applications. So, increasing the productivity of labor in some sector is going to do the same thing supply and demand does to anything else -- the cost of labor goes up, but not as much as the productivity in that sector, and the producers of labor will enjoy higher demand.
- Barrin92 2y ago
  >How is "Baumol effect" different from supply and demand for any limited resource? It isn't, but nominal growth as a consequence of demand without increase in real output makes you no better off, that's the "fake" part. More practical example than graphics cards is houses. Large chunk of the US market, constantly goes up in price, but not because housing is becoming more productive. It's because money from other sectors spills over. Good for landlords, bad way to measure real economic activity. You'd be better off if you could roll houses from the conveyor belt and collapse prices. Rising education prices don't reflect greater quality in education, faster teachers, or more graduates, i.e. output, which is what we ought to care about, but just higher spending funded by real gains in other sectors.
grumpy-de-sre 2y ago
Not to shill too hard but was recently in Northern china for a month, mixture of Tier 1 and Tier 2 cities (including cities in major decline [1]). A lot of folks say China is decades in the future, this is not my belief. They are ahead in some major areas for sure but in other areas they are still a developing nation. China just does it's own thing and doesn't concern itself too much with the whims and concerns of the west. One thing was abundantly clear however, China does not suffer from financially engineered Baumols disease. It was incredibly refreshing to spend time in a "functioning" society. Housing abundance, cheap EVs / public transport, great services, lively small businesses etc (no abandoned high streets). If I were to guess this is probably because productivity growth so far has been able to keep up with the expansion of money supply. Where as the west tried to print itself out of structural deflation with a decade of ZIRP/QE. How do you avoid deflation in an aging society? Is it even avoidable? I guess we'll find out [2]. 1. https://www.scmp.com/economy/china-economy/article/3133397/chinas-rust-belt-population-plummeted-last-decade https://www.scmp.com/economy/china-economy/article/3133397/c... 2. https://www.wsj.com/world/china/china-xi-debt-economic-plan-13aaeec1 https://www.wsj.com/world/china/china-xi-debt-economic-plan-...

ryani 2y ago

How is "Baumol effect" different from supply and demand for any limited resource? Let's say that some new use for copper is discovered, that drastically increases the demand for copper. The cost of existing items that use copper is going to go up, even if those items are no more productive than they used to be, because the new items are now in high demand. You can see this effect in real life with GPUs; it's much more expensive to buy a gaming graphics card today than it was a decade ago, because GPUs are in high demand for other applications. So, increasing the productivity of labor in some sector is going to do the same thing supply and demand does to anything else -- the cost of labor goes up, but not as much as the productivity in that sector, and the producers of labor will enjoy higher demand.

Barrin92 2y ago
>How is "Baumol effect" different from supply and demand for any limited resource? It isn't, but nominal growth as a consequence of demand without increase in real output makes you no better off, that's the "fake" part. More practical example than graphics cards is houses. Large chunk of the US market, constantly goes up in price, but not because housing is becoming more productive. It's because money from other sectors spills over. Good for landlords, bad way to measure real economic activity. You'd be better off if you could roll houses from the conveyor belt and collapse prices. Rising education prices don't reflect greater quality in education, faster teachers, or more graduates, i.e. output, which is what we ought to care about, but just higher spending funded by real gains in other sectors.

grumpy-de-sre 2y ago

Not to shill too hard but was recently in Northern china for a month, mixture of Tier 1 and Tier 2 cities (including cities in major decline [1]). A lot of folks say China is decades in the future, this is not my belief. They are ahead in some major areas for sure but in other areas they are still a developing nation. China just does it's own thing and doesn't concern itself too much with the whims and concerns of the west. One thing was abundantly clear however, China does not suffer from financially engineered Baumols disease. It was incredibly refreshing to spend time in a "functioning" society. Housing abundance, cheap EVs / public transport, great services, lively small businesses etc (no abandoned high streets). If I were to guess this is probably because productivity growth so far has been able to keep up with the expansion of money supply. Where as the west tried to print itself out of structural deflation with a decade of ZIRP/QE. How do you avoid deflation in an aging society? Is it even avoidable? I guess we'll find out [2]. 1. https://www.scmp.com/economy/china-economy/article/3133397/chinas-rust-belt-population-plummeted-last-decade https://www.scmp.com/economy/china-economy/article/3133397/c... 2. https://www.wsj.com/world/china/china-xi-debt-economic-plan-13aaeec1 https://www.wsj.com/world/china/china-xi-debt-economic-plan-...