
Identifying Sources of Cost Disease - kespindler
http://www.kurtsp.com/identifying-sources-of-cost-disease.html
======
twobyfour
Here's a major one the article missed: short-sightedness.

In industry and commerce, that may be optimizing for short-term cost-cutting
over long-term efficiency.

In education, that might be standards and incentives that lead schools to
"teach the test" so the teacher/school gets a positive evaluation this
semester - rather than investing in teaching how to learn or instilling a love
of learning.

In healthcare, that might be high costs and bureaucratic obstacles that deter
people from seeking evaluative and preventative care - at the cost of much
more expensive later-stage treatments down the line.

In real estate, it could be crappy building materials and lower standards of
craftsmanship that help build faster and cheaper but result in more problems
and higher utility and eventually maintenance costs down the line.

In infrastructure, it can be deferring maintenance so you can cut taxes -
resulting in more expensive repairs when things fall apart completely for want
of a bit of paint or grease.

And so on ad nauseum.

~~~
tmbsundar
In quality circles this is known as cost of poor quality. We might need Deming
type thinking again to counter the short term thinking.

 __* Deming 's chain reaction: __*

[http://www.transformationforum.org/Chain_Reaction.html](http://www.transformationforum.org/Chain_Reaction.html)

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js8
I think the problem is that the neoclassical theory of perfect competition is
just flatly wrong, and markets actually tend to monopoly (oligopoly) pricing
over time. (So the "perfect competition" is more an exception than a rule in
the real world.) There is plenty evidence for this, see e.g. Keen & Standish:
[http://www.albany.edu/~gs149266/Keen%20&%20Standish%20(2006)...](http://www.albany.edu/~gs149266/Keen%20&%20Standish%20\(2006\).pdf)

One simple way to see this, really, is to consider a simple example (curiously
omitted from economic textbooks) of a supply chain: You have two markets and
three entities - producers, distributors and consumers, where producers sell
to distributors and distributors sell to consumers. Now consider, in the case
of competition, what should be the margin of the distributor in the
equilibrium? That is, why should all the cost decrease be propagated to the
consumers?

In reality, "equilibrium" prices are probably oligopolistic determined by some
"relative market power", which is really about how much you can "screw" your
customers. And health care and education are matter of life and death for most
people, so yeah, high prices, unless there is a big factor that will put an
end to that (which happens outside the U.S. through regulation and government
price negotiation).

~~~
Jabanga
>And health care and education are matter of life and death for most people,
so yeah, high prices

Food is also a matter of life and death.

The difference between food and healthcare/education is that the former is not
as heavily subsidised as the latter.

>And health care and education are matter of life and death for most people,
so yeah, high prices, unless there is a big factor that will put an end to
that (which happens outside the U.S. through regulation and government price
negotiation).

This is incorrect. The cost disease is a global phenomenon affecting most
advanced economies.

~~~
taneq
> Food is also a matter of life and death.

And we have a pretty well established cultural understanding that you don't
let people starve, no matter how poor they are. And yet somehow the equivalent
understanding that you don't let people die of preventable diseases, no matter
how poor they are, is somehow controversial.

~~~
Jabanga
It's not the preventable diseases that are the most costly to treat. But
regardless of semantics, I know what you mean. The reason is that the
consequences of guaranteeing everyone enough food are different than the
consequences of guaranteeing everyone top-of-the-line (i.e. doing everything
we can to keep sick people alive) healthcare.

Food has become so cheap that almost everyone can afford enough to eat without
direct subsidies (e.g. indirect subsidies, like welfare payments, are enough).
So such an understanding doesn't result in the creation of pervasive
government programs that utterly dominate the market for food and inflict it
with the cost disease.

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calafrax
Very interesting observations and a very complex subject with many factors.

One theory of economics is that it only actually works if very few of the
market participants act like rational economic actors.

In the example of higher education, for instance, universities used to be a
great value for students. Now they are approaching break-even on average in
terms of cost-benefit for students, with some students losing and some
winning.

That is a market based outcome and is exactly what a market should do but
people don't like it.

In the past maybe professors and administers thought in non-market ways, such
as that they should impart knowledge for the good of society, etc, etc, as
opposed to rationally optimizing their income.

~~~
taneq
> That is a market based outcome and is exactly what a market should do but
> people don't like it.

Maybe... _whispers_ maybe not everything is best determined by the free
market?

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kevinr
Serious question: do any reputable economists besides Tyler Cowen believe in
cost disease?

~~~
redy
Cost disease is definitely a real thing but you should be very wary of the
diagnoses proposed by these amateur (libertarian) bloggers. Even a cursory
analysis reveals that attempts to blame regulation, utilization, or government
spending do not hold water -- all you have to do is compare the US to France,
Germany and Japan.

A more plausible theory is that cost disease is largely due to (1) regulatory
capture and weak institutions, (2) coordination costs between various
institutions and (3) what ultimately boils down to corruption (public
officials acting with private interests). If you really want to understand
rising costs in health-care, military, and construction you should pay close
attention to the rise in outsourcing and pseudo-government agencies (eg US
defense contractors, supposedly "private" corporations where 70%+ of revenue
comes from the government).

France, Japan, China -- these are in fact highly centralized economies which
means that they are able to operate national, robust healthcare and military
systems with surprising efficiency. UK, Brazil, India and of course the USA
(par excellence) -- these are highly decentralized and federalized economies
which means large scale initiatives are very prone to succumbing to the
dangers referenced above.

~~~
panarky
> attempts to blame regulation, utilization, or government spending do not
> hold water

Agreed. These amateur ideologues latch onto anything that seems to support
their beliefs with very little hard thinking.

> ultimately boils down to corruption ... highly decentralized and federalized
> economies

Maybe, but Western nations are arguably more centralized today compared to 50
years ago.

70 years ago the US won a world war and rebuilt Europe and Japan. 60 years ago
the US built the interstate highway system. 50 years ago the US put people on
the moon.

Can you imagine the US doing any of these things today? Today we can't win a
war in one country (not to mention fighting in the Pacific and Atlantic
simultaneously).

The space shuttle is gone with no replacement.

And we can't even maintain the roads and bridges that our grandparents built
from nothing.

These were years with great decentralization and with no computers. Organized
crime played a much larger role in the economy.

What's changed in the last 5 or 6 decades?

~~~
redy
> 60 years ago the US built the interstate highway system.

I think this is the point. The US spent roughly half a trillion dollars to
build ~40,000 miles of road. There was a great deal of corruption as well as
massive political conflict between federal, state and city agencies. Compare
this to what the Nazis did in 1935 when the government hired 150,000 men and
put them to work and finished construction five years later.

The point here isn't that decentralization is bad. But it's not difficult to
see why these large federalized states like the US, India, Brazil do
infrastructure so poorly.

> What's changed in the last 5 or 6 decades?

The rise of highly sophisticated private actors that are, in fact, very, very
good at extracting public monies. This is most visible in the military where
the cost of outsourcing is so obscene that even Congress cannot deny it and
now "in-sourcing" is a thing -- but really it afflicts almost everything the
government does. This combination of decentralized, unsophisticated, weak
government actors trying to match wits with highly sophisticated, numerate
private actors is, in the end, a recipe for pillaging of the public treasury.
(In fact one could argue that the 2008 global financial crisis is ultimately
the best example of such pillaging.)

Another way to look at this is to understand that what people call "cost
disease" is the other side of the growing _pricing power_ of private firms.
And, ultimately, these firms can charge such high prices because they have
worked very hard to guarantee that governments will pay them. (See eg Medicare
where by law the program cannot negotiate prices.)

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nullc
When I read Scott Alexander's post I couldn't shake the notion that he could
have saved himself a lot of writing if he simply read up on how CPI is
calculated and noticed that it's a very limited measure of real inflation.

~~~
taneq
I don't think saving himself writing is high on the list of that dude's
motivations. :P

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nwah1
The main concept this is completely neglecting is economic rent.

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rbcgerard
Here is an example: School district budget: 11.3m

Salaries: 4.5m

Benefits: 3m

That's for ~220 students and ~30 full time teachers...

[http://www.edline.net/files/stream/5D3207F7E11684C4-0000015B...](http://www.edline.net/files/stream/5D3207F7E11684C4-0000015BE8DF4EC2/050817+Budget+Presentation-
Budget+Hearing.pdf)

~~~
tasty_freeze
Request URL is not accessible. Try logging in to access the resource.

$51K is being spent per student per year? And $150K salary and $100K benefits
per teacher? Even if there is a school district with that budget, it is hardly
representative of most school districts.

~~~
rbcgerard
[http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Edu...](http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Education/Board_Meeting_Presentations/2016-2017)

they have some part time teachers - but that is about the gist of it...and the
outcomes not super impressive for the money...

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Jabanga
The cost disease can't be cured gracefully, for too many people have a vested
interest in maintaining the delusion that government is not inefficient.

The source of the cost disease is the growing control of government over
sectors of the economy.

In education:

[https://academic.oup.com/qje/article-
abstract/111/3/671/1839...](https://academic.oup.com/qje/article-
abstract/111/3/671/1839935/How-Teachers-Unions-Affect-Education-Production)

In healthcare, the cost disease began when Medicare programs began being
created around the world.

Even within sectors, we see the pattern. For example, the two fields of
medicine which have seen the least cost growth are cosmetic [1] and laser eye
surgery. Not only have costs risen the least, but the quality of some
procedures in these fields has improved tremendously over the last two
decades. Both are electives, so there are fewer mandates requiring that they
be covered by insurance and fewer redistributive programs to subsidise them.

[1] [http://healthblog.ncpa.org/wp-
content/uploads/2013/06/HA1-06...](http://healthblog.ncpa.org/wp-
content/uploads/2013/06/HA1-06-17-2013.jpg)

