Comment by simonh a day ago
The Baumol effect says wages for doctors will also have to go up. Society can afford this because it now has commensurately more resources due to increased efficiency. It’s a tide that raises all boats, precisely because of this effect. This is why a taxi in London costs and pays better than the same service in Cairo.
> it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs
Nobody with an existing job actually has to switch professions for Baumol to occur. As the pay gap widens, more kids would study finance and fewer kids would consider retail an adequate career, leading to a relative shortage of retail labor, raising retail wages.
Your premise is that the people who work in retail have the option of studying finance or medicine. Suppose they work in retail because they scored at the 20th percentile on entrance exams and couldn't get into college.
High frequency trading does create benefits. It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks. They will also get taxed more, benefiting other tax payers.
The Baumol effect is sometimes described as a disease. It isn’t. It’s fundamentally redistributive.
> It speeds up market corrections, increases liquidity, and means buyers and sellers get quicker execution closer to consensus market value.
This is the BS that Wall St says whenever people complain about them doing it. Nobody actually benefits from getting their liquidity in 8ms instead of 8.2ms, and in fact it costs them the money the high frequency trader was making compared to having the exchange's computers do it without taking a margin for itself.
> If financiers and doctors are wealthier, they have more disposable income, some of which they will spend in retail, benefiting retail clerks.
Or they'll further outbid the people in retail on things like housing, making them poorer yet.
> They will also get taxed more, benefiting other tax payers.
Only if the other taxpayers actually get taxed less instead of the government giving the extra money to cronies.
Exactly. Even though Baumol himself used the phrase "Cost Disease", I think that framing distracts from the fact that it is a result of something desirable happening, namely increased efficiency in some sectors. You could also posit a case where some sectors become less efficient, due to badly conceived regulations, exhaustion of non-renewable resources, an unchecked monopoly, or some other factor, but you don't need a special mechanism to explain why prices rise in such a scenario.
> ...consider a case where finance becomes much more productive... leading to fewer people becoming doctors because finance is much more attractive.
This is the opposite of what one would expect from a sector whose efficiency increases, as modeled by Baumol. See the first bullet in the article: "The share of total employment in sectors with high productivity growth decreases, while that of low productivity sectors increases" (also see the detailed analysis in the Technical Description section). It might be theoretically possible that induced demand could still increase overall employment in a sector as its efficiency increases, but I think you have to make an argument why that would be true. During the industrial revolution, automation eliminated 98% of the labor required to produce a yard of cotton cloth, but between 1830 and 1900 the number of weavers in the US increased by a factor of 4, because demand increased due to lower prices [0]... although the US population also increased by a factor of 6, so as a percentage of the workforce weavers still declined, even as people consumed much more cloth per capita.
[0] James Bessen, Learning by Doing - The Real Connection between Innovation, Wages, and Wealth (2015), pp. 96–97.
I picked finance for my example because demand is practically unlimited. People only need so many clothes, but when your business comes from making money directly, there’s a lot of room for growth.
Imagine some new math allows HFT to make more money. HFT firms wouldn’t start laying off quants. They’d probably hire more to try to capture more of that new money, and they’d have more money available for hiring.
> Society can afford this because it now has commensurately more resources due to increased efficiency.
Does it though? Suppose that Wall St has discovered a strategy, like high frequency trading, that produces nothing but allows the one doing it to extract a margin that would otherwise have gone to the second-fastest trader. Many people are employed in a competition to be the fastest because being the fastest is rewarded but it's a zero-sum game where nothing useful is produced and the players each have to continuously spend resources to keep running faster in order to stay in the same place.
What benefit is the person now paying more for healthcare getting in exchange for this?
> It’s a tide that raises all boats, precisely because of this effect.
What if it's not all boats? Suppose it causes doctors to get paid more because people who have the wherewithal to become doctors could also work in finance, but it doesn't cause retail clerks to get paid more because Wall St isn't hiring them away from their existing jobs, and in the meantime they now have to pay more for healthcare.