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Considerations on Cost Disease (slatestarcodex.com)
369 points by apsec112 on Feb 10, 2017 | hide | past | web | favorite | 232 comments



The question I'd ask in response to this post is "So where did the money actually go?"

I suspect inequality and wealth transfer explains much more of the observed trends than the author acknowledges at the end. In each of the verticals discussed, there have been strong (albeit sometimes less obvious) trends for consolidation among institutions and organizations. This includes companies, government contractors, and even vendors in ecosystems we tend to think of as decentralized like local schools, where significant consolidation might be occurring over time at the level of food suppliers like Aramark, utility companies, or diesel fuel suppliers for school buses.

These organizations' compensation and capital structures, in turn, likely grew increasingly unequal over time. Stockholders, stakeholders like executives, and intermediaries like insurance companies in those organizations likely extracted more and more capital relative to traditional stakeholders like the college students, physicians, and teachers addressed in the post.

Wealth transfer from traditional stakeholders (college students, physicians, teachers) to organizational stakeholders (execs, stockholders, suppliers in consolidating markets) seems like both a cause and a consequence of the 'cost disease' discussed in the post.


I think he's trying not to be too opinionated about the cause of the problem, mainly highlighting that the problem exists.

Amongst people who are aware of cost-disease, conservatives and libertarians normally see the cause as excessive regulation and occupational licencing, whilst liberals jump to increasing corporate power and market failure.

Determining which if these is the true cause is tricky, and can quickly become political. However, it is important for everyone to acknowledge the problem.


The original formulation of Baumol's cost disease is that it's a relative effect caused by increasing efficiency in automatable fields making non-automatable fields look bad.

If a job has to be done by a human in the West, of course it's expensive compared to those that have either been outsourced to cheaper humans or turned over to machines.

The "exchange rate" between human-produced goods and machine-produced goods looks worse and worse over time. The classic example is whenever you hear someone describing "flatscreen TVs" as a lavish expense. They're not. All TVs are flatscreen and you can get perfectly adequate ones for under $100. Whereas ladies' haircuts can easily exceed that - after all, it's a job you can't export to the Far East. And a college education costs several hundred televisions.


Baumol's model is interesting. It's definitely part of the story.

It seems that there are other factors at play as well though. Scott shows that wages haven't risen as fast as costs in many of the problem sectors, and that there is significant cost variation between countries with similar wealth levels.


An extension to Baumol would be that not only have wages in non-productive industries had to keep up with wages in productive industries but capital spending rates in non-productive industries have kept up with capital spending rates in productive industries. At least in education and health care, you see buildings, equipment, administrators and so-forth taking more and more of the expenses relative to the salaries of service provider.

Admittedly that's automatic given cost increases without concomitant salary increases but I think one can this to standards of capitalization of productive industries bleeding over to non-productive industries. And there's a constant belief/hope/snake-oil that these increases in capital spending will make the industries productive. Indeed, the "captains" of these would never frame the industries as static, non-productive support industries.


Except that that doesn't seem to be the case. A house in 1960 costs an inflation adjusted $100,000 today - The average house last year sold for about $300,000. So we can say infrastructure is 3 times as expensive - that doesn't seem to account for the 10x cost increase.


Obviously, the kind of thing I speculate on above is an industry-by-industry effect.

However, as mentioned in the article, the average house that is built today is larger than a house built in 1960 and that can account for some of the increase also.

Moreover, a 3x increase in one cost factor is a good start on explaining a 10x increase in overall costs. You can't expect any economic process, from grocery bills upwards, to yield an exactly proportional result between two "back of the envelope" estimates, now can you? One inflation estimator might not be akin to another etc, etc.


You're switching between labor/machines and western labor/eastern labor without explicitly flagging that. Those are different things.


The distinction is actually western labor vs. other labor/machines.


This is a good point. These areas are not operating in a Moore's law domain. Even while computers get better and faster exponentially their costs are dropping more linearly. Whereas other domains rely on finite resources: real estate & talent which spurs demand side competition & inflation.


I think that position is simplistic at best. Sure, it would explain an relative increase in human-intensive services compared to machine-empowered ones. What if fails to explain, though, is:

1. A sustained, inflation-adjusted increase in human-intensive services over time. Specially when combined with stagnation in the compensation of this (supposedly) expensive, and specialized Labor over the same period of time.

2. A perceived trend of decrease in quality of the service, in a futile attempt to keep #1 under control.

If I where to venture an explanation of that would take automation and technology into account, I'd try to approach the problem from a systems theory point of view and suggest that maybe we are observing an overzealous attempt at partial automation.

This industries, as you correctly pointed out, cannot be fully automated/outsourced. This however does not prevent upper management from trying to achieve at least a part of the goodness that is benefiting other, more malleable, industries. They will of course try to automate some non-critical part of their workflows, which will upset the balance between the different subsystems of the whole and place more burdens in the critial parts. This, paradoxically, will force them to hire more personnel to keep the operation afloat, which then seeds the way for future interventions when technology advances makes posible the automation of some of those extra positions.

Even in a very bread-n-butter manufacturing environment, that type of death-cycle is extremely damaging. Take a look at Eliyahu M. Goldrat's novel "The Goal" to see a fictional example unravel.


Baumol's cost disease predicts growth in prices above inflation. After all, inflation is overall growth in prices, and consists of things that suffer from cost disease as well as things that actually get cheaper (TVs, etc).


In the end they are perhaps both right, but focus on only part of the picture (because of their social myopia).

Increasing corporate power begets more regulations that favor them (via minutae that their lawyers can manage, but that new entrants will run afoul) that begets increased corporate power.


Both causes arguably play a role. Debt also plays an important role. Creating debt is a great way to stuff, at least for a while.

Edit: ... hide stuff ...

Although "stuff" works too, I guess.


In the case of public k-12 schools, I've observed that there's an incredible amount of flailing when it comes to the curriculum, and every time they thrash about and change course a ton of money is spent on consultants (training, implementation) and new materials. I suspect there are also admin and support positions that exist mostly due to the strain caused by all of this (curriculum experts and such). This is constant, but they can also count on each new US President to create some initiative that makes them spend a bunch of money every 4-8 years.

My guess is this was not the case in the 60s and 70s, or not to the same degree. I know, I know, "new math" and all that, but that may have been just the beginning of this trend of constant curriculum strategy churn, which seems to be getting worse with each passing year.

I wonder what educational material and consulting company revenues look like over the last 5-6 decades?


You hit on a problem I hear from my high school teacher girlfriend. It typically looks like:

1. One or several motivated schools attempt a new style of teaching / grading / curriculum. 2. It succeeds amazingly. 3. Other schools rush to grab some of that success.

The issue is that the causality between #1 and #2 is: "A motivated admin & teaching staff all working in the same direction can improve outcomes". While #3 is assuming: "a magic curriculum will do it for us".

Then after adopting the new-hotness fails, repeat with another new idea.


I've even seen (though my wife, who's a teacher) admin that doesn't understand how replicability works, and takes on some new discipline strategy or teaching approach for their school(s), spending a bunch of money on it and wasting a ton of teachers' time, but jettisoning large parts of it they're not comfortable with... thus obviously to any observer with a lick of sense destroying any hope it had of succeeding. It's painful to watch.

I think most of the motivation for this (in general, not the specific failure mode in the previous paragraph) is blame-shifting. If you're switching stuff around you're trying something. It's a sign that you're working so hard to improve things. If it's some consulting-corporation-blessed system you don't need to justify it personally—they say it's good and sell it for you! If (when...) it fails, maybe the system was at fault, maybe the company, but at least there are potential targets for blame that aren't you.

And the only people who've lost are everyone who's not in school admin or education consulting/supply, so you know, just teachers, students, taxpayers, parents. No biggie.


Even worse is the similar pattern of

1. A school produces great results. 2. A consultant comes and mines that school for "best practices". 3. Other schools pay the consultant a small fortune to replicate those practices.

Where the successful school may not even have updated anything in the last decade; they just have a particularly good combination of dedicated staff, helpful administration, and well-supported students. Particularly bad is trying to replicate something from a suburban school full of privately-paid tutors and parents reviewing the nightly homework in a setting where lunch and school supplies are a major hurdle for many families.


I wonder if there's anything professionals developing software could learn from this by analogy.


Yes. The "silver bullet" is having people that care and those people are all pulling in the same direction.


Motivated team chooses technology X. Succeeds. Other team chooses X but forgets to have motivated people?


I think you've just described Agile.


The cost curriculum flailing can't be understated. Eg. of school textbook is ridiculous. Not just college level, all the k-12 texts have to be updated to match the very detailed curriculum requirements - and only textbook vendors track it, and then they put out new books. But it's now not only the books, because the curriculum changes, teachers need to develop new teaching plans and because it changes so often - they often need to buy workbooks or other materials to help keep up. Then there is the add-on electronic access (which is almost always some terrible 90's tech access gateway to quasi-pdfs, or some html+proprietary multimedia gateway). Meanwhile, kids are lugging around backpacks full of textbooks which are 2x the thickness they used to be (because the efficiency of production wasn't used to reduce costs - it was used to increase pagecount...).


I don't think this is a major part of the equation. Most states have at least a six year textbook purchase cycle. Often they try to stretch it out even further than that.

Let's do a Fermi calculation: 6 subjects x 1 / 6 of a text book per year x 1.1 for lost or destroyed textbooks * $200 per book = $220 in textbooks per year per student.

For scale, Mississippi has the lowest average spending per pupil in the nation -- $8,130 as of two years ago.

Granted there's workbooks and software too, but if you look at the budget of a school district, the lion's share is going to district personnel not books or computers or electricity or anything else external.

Disclosure: I work for an e-textbook company.


He actually touched on the answer of where it's all going: litigation, and the related indirect costs. (Sorry for the long quote, but can't clip much out.)

>Fifth, might the increased regulatory complexity happen not through literal regulations, but through fear of lawsuits? That is, might institutions add extra layers of administration and expense not because they’re forced to, but because they fear being sued if they don’t and then something goes wrong?

>I see this all the time in medicine. A patient goes to the hospital with a heart attack. While he’s recovering, he tells his doctor that he’s really upset about all of this. Any normal person would say “You had a heart attack, of course you’re upset, get over it.” But if his doctor says this, and then a year later he commits suicide for some unrelated reason, his family can sue the doctor for “not picking up the warning signs” and win several million dollars. So now the doctor consults a psychiatrist, who does an hour-long evaluation, charges the insurance company $500, and determines using her immense clinical expertise that the patient is upset because he just had a heart attack.

That is, a big fraction of medicine is "we have to cover this base for fear of being sued", and it's hard to look at external metrics to evaluate "this was a legit cost, vital to the patient's care" vs "this was just covering bases".

I would say that such "legal insurance" is subject to "Knightian uncertainty". It's not like "oh, 5% will get sued a year, which costs $50k each". There is wild variation in what juries award, what goes to trial etc. Needless to say, that forces the insurance/prevention cost up very high, even when it doesn't correspond to a jury verdict. Think about the cost to insure a satellite launch failure vs first contact with aliens.

Europe and Asia lack this cost because many of these incidents don't have to go to trial. "Oh, the operation botched your life? Boom, the social insurance gives you this nice predictable payout." Nothing lost in the legal black hold of jackpot justice.


But do you think this has happened much, much more in the industries under discussion than elsewhere? I've never heard anyone suggest education is expensive because of, say, the salaries of CEOs of test-prep companies. And if it's not the CEOs, but the general cost of test-prep, then this isn't an inequality argument but an inefficiency argument.


I don't really know the answer to this, but most of the areas he's talking about seem like they would suffer from inelastic demand?


Section IV addresses this question. Corporate profits may be part of it, but the author claims there's evidence that it's not much of it. He lays out 7 additional causes that may also be going on.


Nominal teacher salaries may be reverting back towards the mean salary, but teacher compensation is not. Public school teachers in the US have a unique compensation structure:

1. They're salaried at a middle-class level (in a major metro like Chicago, the median teacher salary is $70k).

2. The get an extraordinary amount of time off. There are large public school districts where teachers have a contractual maximum of 190 work days.

3. Most importantly, many (most?) receive a defined-benefit pension plan. During the period of time this piece documents the teacher salary decline, virtually all competing jobs of every status lost defined-benefit pensions and switched to defined-contribution plans.

Further, the trend over the last 10 years has been towards tonier school districts paying spectacularly high teacher salaries. The perception in those districts is that a dollar spent on the schools (in any way) pays back more than a dollar in increased property values. So my kids at Oak Park River Forest high school have teachers --- not assistant principals, not coaches, not LD/BD specialists, just teachers --- making over $100,000. And bear in mind, if you normalize this back to a 50 week work year, that's closer to $140,000. With a defined-benefit pension.

And we're pikers compared to Buffalo Grove, which has several teachers making over $150,000.


So where are these numbers coming from?

A contractual maximum of 190 work days sounds a lot like 200 days a year, which is pretty normal (52 weeks with 4 off for vacation and 5 days a week = 190)

In California (I don't know Illinois) teachers get a pension, but DO NOT GET Social Security!

I see some clickbait articles searching about Buffalo Grove teachers, but those end up leading to data from ISBE. https://www.isbe.net/Documents/teacher_salary_14-15.pdf

The data from there doesn't come up to $150k even for maximums. They list $122-139k as the maximum from 2011-15 with median values of $67-74k.


The salaries for public employees of most of Chicago suburbs are public information. I'm not guessing: there's a web page that lists them all, by name. I know this because some friends and I were comparing notes on the salaries of teachers in our respective suburbs yesterday, on Slack. I don't have the link handy, but if you'd like to wager against me on this, I'm happy to take your money. :)

I do not understand your math on workdays. I am terrible at math, but it sure sounds to me like 48 work weeks in a year is 240 work days, not 200, or 190.


Yes I already responded that you are correct to the exact same comment on 200 days vs 2000 hours an hour before your comment.

I posted a link to exactly the salary information you are referring to in my unedited comment. They do not match those in the parent comment.


Sorry, I went through my browser history and it's Arlington Heights, not Buffalo Grove (they're adjacent and I get them confused). You would have won the bet!

What was the highest normal teacher salary you saw in Buffalo Grove? In Arlington Heights, it's $150,660.


Thanks for your understanding... we all make mistakes.


Cite on teachers/firefighters in CA not getting Social Security [1]. Amazing they get taxed for something they never benefit from.

The special-case where a non-teacher who paid into SS for years and then became a teacher losing out on years of SS he'd built up is very unfortunate.

[1] http://www.nbclosangeles.com/news/local/Ripoff-Social-Securi...


Also in CA, LAUSD I believe runs their schools year round. And that district alone has larger attendance and budgets than many entire states. But being both urban and higher cost, high attendance, and year-round has a weight that shifts the calculations for CA such that I suspect you can't do a back of the envelope calc and get an easy comparison.


190 = 5 × 38


thanks... an extra 10 weeks off for summer. it's 2000 hours per year that is typical.


Compared to 1975, though, women are far more engaged in the broader labor force. Back then, if you were a woman and you wanted to work, you could be a nurse or you could be a teacher, and that was about it. Yet teaching and nursing are skilled professions--your school district pays teachers quite a bit more these days in order to attract good teachers. There used to be more good teachers, so teacher costs were lower. So, too, with nurses. I don't expect that labor force engagement by women is the sole factor in "cost disease", but I bet it's one factor of several.

There are a lot of teachers in small towns in poor states making below-average money to offset the above-average costs in your [Animal name] [Nature feature] Chicago suburb.


My point doesn't hinge on Buffalo Grove teachers making 150k per year, although the trend towards suburban school districts paying this much (which was not the case 20 years ago) does offset some of Alexander's claims about teachers.

Even in rural school districts, teachers likely have a pretty reasonable deal: a reliably middle-class (for whatever region) salary, lots of time off, and a defined-benefit pension plan.


In rural school districts, teachers probably are getting a relatively better deal than other residents (compared to 1975), simply because of the hollowing out of the rural economy in the last 40 years.

Still, in the article, when he's discussing healthcare and education, labor force engagement was going off in my head like big flashing lights. I doubt cost disease has a single root cause, but I suspect this is part of it.

I also suspect that defined-benefit pensions play a big role, especially when coupled with increased life expectancy. Corps and unions mutually agreed to kick the can way far down the road in the 50s, 60s, and 70s. I also suspect that regulatory capture and wealth disparity play big roles, too.


While your points are true, how are they different from the situation 10, 20, 40 years ago? I'd argue that, similar to salaries, other teacher benefits are about what they have always been. My argument goes against my experience; my wife is in the public school system, and benefits are weaker and cost more than they did 10 or 20 years ago, but I won't chase that too hard here as it is only anec-data.


The cost of a defined benefit pension have skyrocketed. Replacing 90% of salary after 30 years for life with cost of living adjustments use to be worth about 20-35% of your salary. Now it's worth 120-200%.


As for cost, do you mean that the decline in prevailing interest rates requires setting more aside for a given annuity, e.g. pensions? It that where you get your estimations for worth (as distinct from cost)?


One simple reason is that in the last 50 years, DB pension plans have been required to fund an additional 7 years of lifespan for the average pensioner, and that's up from ~11 years, so it's a very substantial increase.

Management costs for DB pension plans have increased while management costs for market-based DC plans have plummeted (these price increases also track the rise of Vanguard and low-cost mutual funds).

Also, in that time period, a lot of major pension plans were financed based on calculations about market returns and interest rates that didn't bear out. But one of the defining attributes of a DB plan is that its payments are predictable to future pensioners, so all those financings had a ratchet effect.


Yes, my estimates are the present value of the liability the pension plan is incurring. It's what a pension plan would have to save to be fully funded.

Pension plans are currently not allowed under federal law to fully fund themselves because that would be so expensive it would disrupt federal taxation. Instead we are constantly building up future pension crises that will have to be paid in higher taxes and economic chaos later.


Is it reasonable for us to suggest that teachers working long hours (grading doesn't do itself) who are professionals get a crappy summer job? When you divide the salary into 190 days the tacit implication is that their pay should be cut and they'll be able to make up the difference. No one is going to pay someone a professional wage seasonally.

I'm not opposed to requiring that they put in the same number of hours over the course of a year that everyone else does but it's not like they're programmers who can go freelance for a few multiples of their standard salary hourly rate.


Along with pensions the other big non-cash compensation cost is healthcare. Teachers, and public sector workers in general, tend to have health insurance plans of a type that have all but disappeared in the private sector. Low or no employee contributions, low cost sharing at the point of service, broad networks and formularies, no gatekeeper, and even some out of network coverage.


OPRF is infuriating. We lost Greenstone to Francis Parker because his year in china allegedly reset his seniority -- the real reason ofc was they just didn't like him. The dude wrote a novel that nearly got turned into a movie. And his china stories were great. Probably made the other overpaid goons feel threatened.


In the US, education, military and other budgets are seen as sacred cows as proxy signals for the emotional investment in their missions, such that insisting on service value for budget outlay is viewed as "social treason."

The US needs to do more of what Robert Reich ("Inequality for All"), Michael Moore ("Where to Invade Next?"), Bernie Sanders and Plato suggest: copy what works from elsewhere in the world (which others often copied from elsewhere including the US in the past), strengthen unions and get people more engaged in all levels of politics. (The US isn't a special snowflake, policy prescriptions can be tried and customized for commonwealth utility. But first, get money out of politics.)

"The price good men pay for indifference to public affairs is to be ruled by evil men." -Plato


I don't quite understand how you jump from "sacred cow / cannot be cut" to "insisting on service value is viewed as treason".

I'm firmly in the camp that wouldn't cut education, but does consider the state of the system somewhat prolematic. Those two opinions aren't in conflict.

But, having experienced both the US and the German school systems, they were ultimately pretty similar: put 20-something children in a room with a teacher (where variability seems to be extremely high everywhere). Do calculus for 45min, repeat. Even though outcomes are quite similar as measured by PISA, there is a lot around the margins even these countries could learn from each other: extracurricular are virtually nonexistent in Germany and added so much, at least to my experience. OTOH I felt US high schools tended to be too large.


> I'm firmly in the camp that wouldn't cut education, but does consider the state of the system somewhat prolematic. Those two opinions aren't in conflict.

Aren't they?

Suppose it actually costs a specific, much lower than we are currently paying amount to fund a decent education. Spending more than that doesn't materially improve outcomes, but if you allocate more money than that, schools will dutifully find a way to spend it anyway.

What solution to this problem do you imagine exists, separate from reducing funding to that level from the eight-times-that-much or so level that we currently pay?


The DOD's budget is much more of a sacred cow than the Dept of Education's, Lockheed Martin is much better at lobbying than Pearsons. Plus, entrenched interests like CoreCivic are actively lobbying against effective education as it creates a cash cow down the line for them.


> The DOD's budget is much more of a sacred cow than the Dept of Education's

Well, the Department of Defense is an actual constitutional branch of the executive, whereas there is nothing whatsoever in the Constitution which grants the United States authority over the education policies of the several states.


"copy what works from elsewhere in the world"

Is it working elsewhere in the world though? The graphs in the article that are international show all the other countries experiencing similar problems, just possibly slower. Are there any countries where the nominally expected result of things actually getting cheaper and easier over time are obtained? Given the sorts of things we're discussing, something like a mandatory 35-hour-work day in France or something is still just fiddling around the edges of what "should" be happening.


Are there any countries where the nominally expected result of things actually getting cheaper and easier over time are obtained?

Yes.

Japan, Mexico, Chile, Poland, Hungary, Korea, Thailand.


Right, but you have to copy all of what works, or you just inherit the old problems.

For example, Europe has free or ultracheap or "you get paid for it" college. Great. But what's the catch?

Extremely spartan colleges, extremely strict standards to get in and stay, much less social pressure to go college, much more viable career alternatives.

Is the US ready to import the European college model with those tradeoffs? To have "universally free" college while also abandoning the "college for everyone" part? And to also give up the athletic programs and other nice-looking fluff?


> Is the US ready to import the European college model with those tradeoffs? To have "universally free" college while also abandoning the "college for everyone" part? And to also give up the athletic programs and other nice-looking fluff?

It seems like it would be worth offering that and see who takes it. Especially if it's possible to make the image of the free school with the high standards be as the prestigious one with the high quality graduates.


You don't get the effects unless the whole system shifts; you can't do it as an opt-in thing. There are schools that offer more spartan accommodations, but as long as the money and incentives are there, there's no reason to stop charging as much as the others.


"copy what works from elsewhere in the world"

Willing to adopt those places population trends and immigration laws?


Plainly the elites of America are not willing to accept the population trends and immigration laws of the successful nations negotiating the cost disease. You can see that in how they celebrated the power grab in Washington.

Copying the immigration policy of Hungary, Japan, Korea, and Poland is easy if you want all the people of your nation to prosper. If your elite is more interested in keeping the people down so they can stay up, you get a different policy.


Ok, maybe I'm getting this wrong, but to me, it's not entirely surprising that those costs have been rising, even when adjusted for inflation.

AFAIR, we spend a lot of money on food, transport, holidays, electronic devices, ... All of which have become cheaper over the last few decades. The consumer price index reflects this. So, if a lot of items have become cheaper, even adjusted for inflation, others must become more expensive, adjusted for inflation.

The article even mentions this effect:

  First, can we dismiss all of this as an illusion? Maybe adjusting for inflation is harder
  than I think. Inflation is an average, so some things have to have higher-than-average 
  inflation; maybe it’s education, health care, etc. Or maybe my sources have the wrong 
  statistics.
But: Maybe this does not explain the whole effect, and maybe I am missing something important. I am not an economist, after all.


You don't have to use CPI-- just compare percentages of income spent on expenses for people performing the same job over time.

If the price of basic goods became cheaper, you might expect people to invest more of their money or buy more luxury goods. You wouldn't expect basic necessities like health care or education to increase their total cost percentage vs income.

FTA: "The average 1960 worker spent ten days’ worth of their yearly paycheck on health insurance; the average modern worker spends sixty days’ worth of it, a sixth of their entire earnings."


Why wouldn't you expect that to happen? Stuff like food and electronics has dropped in price thanks to a combination of automation, exporting the work to cheaper countries, and technology improvements. The same things haven't happened to education and health care. Since people's income has barely grown in line with CPI which has been dragged down by those price drops, of course healthcare and insurance are going to increase in cost percentage compared to income. In some sense, their income has dropped in real terms and that's just disguised by efficiency improvements pushing down the inflation figures.


> Stuff like food and electronics has dropped in price thanks to a combination of automation, exporting the work to cheaper countries, and technology improvements. The same things haven't happened to education and health care.

This explains why health care, education, etc. have increased in cost relative to consumer goods. It does not explain why those things have increased by an order of magnitude relative to wages, rather than staying constant relative to wages. And obvious explanations for the increase are false: these are all labour-intensive services, yet their cost has increased tenfold without increasing wages to workers, and in the face of increasing productivity of workers. None of the other raw materials required by these services (real estate, energy, tools, consumables) show price increases that explain the magnitude of cost increase. What objective evidence exists indicates that the quality of service has not increased substantially. So where is that extra share of my income going?


It's going exactly where you'd expect it to go now that workers are in a much worse negotiating position due to jobs being automated away, efficiency improvements, etc: to the owners of the businesses. This is probably an across-the-board thing, but in areas where increasing automation has pushed down costs heavily that helps to disguise the impact a little on the consumer side. Even there I think workers are getting a much smaller slice of the pie and owners a lot more.


There's an implicit assumption that the health care coverage a person recrived is roughly the same as it was in 1960, or at the very least that the expansion of health benefits is smaller than the possible price decrease due to improvements and commoditization. I'm not sure this assumption holds.


I think it does hold for education, however, specifically higher education.

If anything, costs should stay roughly the same for higher education- like broadcasting, higher education costs about the same to provide to 3 people as it does 300 (something "micro-degrees" take full advantage of). The only cost difference is the building and personnel to mark tests.

What has changed are two things.

First, more jobs now need university-educated people (or rather, people with the mental ability to make it to university- the proportion of the population that isn't university material likely hasn't changed). The average job for an individual in the 60s did not require the applicant to have even finished high school (national graduation rate: 72%). The decline in those jobs increased the graduation rate; it had nothing to do with the quality of education at the time as you can see from the average test scores.

Second (and as a consequence of the first point), a signalling war in education began. Employers started requiring high school graduation for positions that don't actually require it, and bachelor's degrees for positions that only really require high school graduation and possibly some specialized training (the signalling problem, also on SSC: http://slatestarcodex.com/2015/06/06/against-tulip-subsidies...). Education is still as much a golden ticket as it was in 1960, but the difference is that everyone has one now, so you must have one to be competitive, whether you need it or not.

The solution devalues it somehow; the assumption is that even without a degree graduates will be more competent than non-graduates. I'm not convinced that's true enough to avoid hurting a lot of people, but at least we can save those unfortunate enough to be currently stuck in the system and the people most invested don't vote.


Elite universities do have extremely low professor:student ratios. At Harvard it's 7. That does produce quite a difference – it's a level where 1:1 teaching happens fairly regularly.

Your analysis seems to rely on the price being a function of demand. I'm not sure if that holds, considering supply in this market is highly flexible.


The supply of elite universities with national reputations is pretty dang inflexible. You can't open another MIT, Harvard, Yale, Columbia, etc...

The supply of universities recognized at the state level is similarly fixed. In Texas all of the recognized state universities have been around for quite a while.

For profit tech schools are probably pretty flexible but they don't really compete on price as much as advertising and ability to get their students loans.


You can compare it against 1960s healthcare items, like doctors vists, basic blood tests, dental work, basic vet work, medications, broken bone surgery, etc. It will still be much cheaper than today.


That assumption is addressed in the article.


I thought the exact same thing, but then I scribbled out an imaginary two-good economy and realized that this is exactly accounted for in Baumol's cost disease (I think). If the price of (technology-neutral) school rises, the prices of (technology-neutral) teachers should rise equally. If the price of school is rising faster than wages, then it's a sign there's something more going on than measurement of dollars. I rather liked Scaevolus's alternative framing above to sidestep the issue of measuring dollars.


Good point, but I think that doesn't explain the "why" of the graphs, this observation only explains the fact.

The "why", then, in my (also non-expert) opinion, is (once again) globalization: We produce cheap electronics in China, so phones get cheaper, while we maintain the same, relatively high expenses for products and services that cannot be outsourced to countries with cheaper work-forces.

And because those local products and services are already "overpriced" (relatively speaking), there is also no way salaries will go up and will just stagnate from an inflation-adjusted point of view.


How does globalization increase the % of our GDP that goes to healthcare and education?


First, income in the US for most jobs has stagnated, inflation adjusted. Second, goods and services that can be produced cheaply due to technical advances get cheaper. This did not affect education, and medicine probably only got more expensive. At the same time, globalization accelerated this process greatly, pushing the "globalizable" products' prices even more, which means the "localized" products must get more expensive. This is known since at least 1996 as the "globalization trap."


Diseconomies of scale is a very real phenomenon, and it makes a pressing argument for decentralizing by giving power back to the states. Was that a foreseen side effect the founders wanted to avoid with the 10th amendment? Probably not, but freedom is inherently a decentralized proposition, and tends to be more efficient in many cases as a result.

https://en.wikipedia.org/wiki/Diseconomies_of_scale

> Cowen assumes his readers already understand that cost disease exists. I don’t know if this is true.

Unfortunately, "cost disease" has become politicized, so just like some won't accept global warming, others deny basic realities about economics.


> "cost disease" has become politicized

Citation needed. Where is this term common and where is it broadly discussed?


It's not; I've never heard of the term before the article. I'm referring to the phenomenon itself. For example, Elizabeth Warren was recently quoted as measuring success in dollars spent: http://reason.com/blog/2017/01/19/on-entitlements-elizabeth-...


"Entitlement programs" is politicized as a term, certainly. "Cost disease", though... possibly in search for a new keyword?

> I'm referring to the phenomenon itself.

From your example, Elizabeth Warren and Tom Price are looking at the same appearances (phenomena) and deriving different "noumena".


Lots of downvotes here – any explanation? The GP uses the phrase "the phenomenon itself" referring to the Kantian term "Ding an sich", which (as applied to phenomena) is just a logical error...


I have nothing against being the guy who spends time pointing out small, or even irrelevant errors, but there is no error to correct. I think this is just a misinterpretation on your part, either stemming from not reading the article to understand what the author described as 'cost disease,' or perhaps you did not understand my use of quotation marks around cost disease in my original post.


I don't understand the hate for "entitlement programs"; it's a precise, common, useful category with no better suggestion offered.


citation: https://web.archive.org/web/20110724151936/http://publishing...

it's been a heavily discussed subject amongst economists. it has not fully passed into mainstream conversation. I'm not an economist but I first encountered the term about 10 years ago while reading economists.


But is it really diseconomy of scale and not just increases in profits? While the difference is fuzzy, they are not really the same thing.

I would say most large companies have economies of scale that make them so much more efficient that they can have (a little bit of) diseconomy of scale and yet rake in enormous profits.

At the end, though, I think people (like doctors mentioned in the article) are unhappy because they don't want to be just cogs in a very efficient machine, despite this being a libertarians' dream.


> But is it really diseconomy of scale and not just increases in profits? While the difference is fuzzy, they are not really the same thing.

The concept of diseconomies of scale applies just as much to government bureaucracies as it does to private for-profit organizations. We see public education costs have skyrocketed for no return on investment; did they make profit? Well, perhaps, there are more uselessly employed school administrators and other bureaucrats "profiting." So yes, it is indeed diseconomies of scale at work.


It seems to me then your definition of "diseconomy" is pretty arbitrary - I mean, do you include private profits of the owners? Presumably not.. but why not? What's the difference between renter raking in profit, between CEO having bonuses and golden parachutes, and between a bureaucrat creating useless work for himself? Aren't all these diseconomies? And if you accept that, then eventually whole human existence becomes one big "diseconomy"..

To me, "diseconomy of scale" is a weird concept, and I think it's because it actually has to be normative. This is unlike "economy of scale", which is well-grounded; if I want to make one car, it's not efficient to build a production line first, but for million cars, it can be. So when something is subject to "economy of scale", it is because there are more possible economic solutions; however, I fail to see how something could be (in the physical, and non-normative, sense) subject to "diseconomy of scale" - surely you could in that case just duplicate the original small-scale process as needed (in other words, why would the corresponding "reduction of possible solutions" happen?).


I think you should read the Wikipedia article I linked. Simply put, diseconomies of scale refers to inefficiencies that occur in large organizations.


I actually did, but I don't think it disagrees with what I am saying - that it is a normative concept. In other words, some other form of human organization doesn't have to suffer from the same problems.

Let me put it yet differently. If you fail to utilize economies of scale, nobody will profit. However, if "diseconomies of scale" do exist, then it's because someone profits from these. From the perspective of that person, it's not "diseconomy". I mean, you cannot use the Pareto-efficiency to say that everybody would be better off without "diseconomy", and so it cannot be a positivistic claim.

And a little aside - public organizations are often inefficient because there are private companies profiting from them.


Two gut feelings about this.

1. Progress/inflation doesn't scale as homogeneously as we think. Producing a consumer good such as a car or computer is easier to optimize than providing healthcare, or an education. It also scales differently with globalization. A global economy competing to produce the best car at the lowest cost, is also a global population competing for the same limited slots in top universities.

2. Costs have a way of cascading through a system. Double the price of oil and it doesn't only mean more expensive plane tickets. It means more expensive everything. This article paints the picture of several costs increasing, but it could just be education. What happens to healthcare costs if medical school costs 20k rather than 200k?

Of course this doesn't explain all of it. The subway instance is probably the strongest counter argument.


1) Would explain stagnent prices, not prices going up as a percentage of total income. And I am about as convinced that there is a massive difference in how much things inflate as I am that the sun will rise tomorrow (one example: compare how much better an iphone you get in 17 vs 07 when they launch with how much gas you can buy for a set amount of hours worked).

2) I am not sure how that would work. If we take gas as an example, then if that is 10% of the cost to produce a good intuitively it should be at most 20% of the cost to produce a good even if it doubles (and might be a lot less, if the new higher cost of gas means it is cheaper to produce closer to the consumer).


This makes me think of charities. Suppose I'm trying to raise money for cancer research. Maybe I tell my friends and raise $100k. I then give that $100k to a research lab. The next year I raise $100k again, except that this time, I spend that money on advertisements telling people to donate to my charity. I raise $300k that way, netting me $200k which I give to the lab.

My contribution to cancer research has doubled, yay! But this time, I raised a total of $400k, so for the donors (consumers), a dollar of cancer research now costs two dollars. I (the firm) became more sophisticated and in some ways more efficient, but in other ways less efficient. Costs to the consumer went up, but now I'm the dominant cancer charity. Other charities trying to raise money can't compete since nobody has heard of them, and their message isn't crafted by highly-paid marketers. To compete, they have to raise prices too! I remember this being a big controversy in charities a few years ago.

The analogous scenario with for-profit firms making widgets is straight-forward. I wonder what role this kind of mechanism could be playing in cost disease?


I'm probably biased because I'm from Europe but to me it seems that the decreasing cost effectiveness for health care and schooling in the USA is due to the capitalist philosophy that is so strong in USA politics.

For instance in health care, in the USA pharmaceutic companies have much more opportunity to sell or advertise their products directly to consumers. This is because as a consumer in the USA you have more influence in the choice of medicine or medical care you receive; as long as you are willing to pay for it, you can get almost anything. In many European countries it is not like that, it is many times the doctor who decides what is the most appropriate cure for you and even he can not always decide which medicine to use, many times this is regulated by the state or by health insurance companies.

In schooling there is a big competition in the USA between universities to have the best ratings; this competition drives up salaries of top professors to a level that does not reflect the extra benefits that they bring to their students. All of this can happen because universities are pretty much free to ask whatever fee they desire to students. Again in many European countries it is not like that, universities have only limited freedom to determine their tuition fees by themselves.


> pharmaceutic companies have much more opportunity to sell or advertise their products directly to consumers.

This is true, but I don't think its for the reasons you described. The cause is actually simply that they are legally allowed to advertise. I don't believe there's a single European country that allows pharmaceutical companies to advertise directly to consumers.

Consumers actually have a lot less choice than you'd imagine. You can request prescription medication from a doctor, but they won't necessarily prescribe it. Doctors can prescribe for off label usage, but the pharmaceutical companies are strictly forbidden from advertising that, and often even mentioning it. Doctors only really follow your request if its for an alternative treatment that they agree with. Similar to what you describe, insurance companies can also refuse to pay for drugs with generic alternatives, or request that the doctor follows other forms of treatment first.

Some of the advertising is to drive consumer choice, but it actually may be more for the doctor. Even if they don't prescribe a medication requested by the patient, they're forced to consider the drug, and they'll have the name in their head when reading journals and publications.


I don't think Professor's compensation makes up a big chunk of universities' spending. Administration seems to be the biggest and fastest growing cost.


I think that the pharma advertising, whatever the merits of the critique, is something of a distraction; remember, the cost absurdity is across the board. There's no direct-to-consumer saline-bag marketing, and yet it still has the $1-to-$700 blowup.

Also, I think the European model places excessive trust in doctors; I bet a lot of people there get stuck with some phone-it-in doctor who hasn't bothered to keep up with the cure that was found ten years ago, and the system still has to find some way to throttle all the demand to switch over to the good doctors that are diligent about this stuff.

With that said, I think the Europe-Asia vs US split is hint to the answer. Remember, Europe and Asian rail construction hasn't seen the cost blowup the the US has; theirs has kept in line with inflation a lot better.


Saline bags are $80/dozen. They used to be $25/dozen before the price increases. While manufacturers did increase prices in lockstep, they are limited by the ease of new entrants. You might end up paying $700 for a bag but that's the hospital setting the price.


Right, but the hospital's overcharging is exactly what I was citing as the problem.


India, which has actual capitalist medicine, has an extremely effective and cost efficient health care system. Scott Alexander even mentions this in the article.

I personally endorse the Indian medical system; everyone I know (including myself) who has a choice prefers to use it over any other system.

Primary schooling in the USA is not remotely capitalistic. There is no competition between schools. Similarly for transit construction; you get to ride whatever subway the MTA decides to build at whatever price they decide to pay for it. Similarly, capitalistic transportation system in the US (read: Uber + Lyft for people, Amazon + Walmart for materials) has been driving prices down.

Your "blame capitalism" theory doesn't really fit the facts.


We see similar phenomena in software: "software bloat", "feature creep", the "second system effect" (see Wikipedia for details). Linux provides the same basic functionality as Unix in 1980 but has orders of magnitude more lines of code. Why? It's more complicated because the world is more complicated, and we have higher (and more detailed) expectations for that functionality.

Basically, once you have a lean MVP that works, all social and economic pressures are to add new features with decreasing marginal gains, support standards of interest to fewer and fewer users, handle increasingly obscure edge cases, etc.


Yeah, I think this provides a useful analogy at the very least. The cost of new features increases over time (it is much easier to add/change/swap out features at an earlier point). Razing something to the ground and starting again can often produce better systems, but at that point the external world depends upong the systems already in place, so any efficiency you gain by reconstructing is bled away almost immediately. Coupled to that is this idea that automation always simplifies, make things more efficient. Whereas in practise it often does the opposite: it works well _if_ you can control the environment, simplify the interface to the external world. But reality isn't that clean; in education, health, infrastructure etc the external world becomes so complex that only aspects of it can be controlled, thus you only get very partial, focussed solutions that are sold as complete solutions (and fail). Maybe..


> I don’t know why more people don’t just come out and say “LOOK, REALLY OUR MAIN PROBLEM IS THAT ALL THE MOST IMPORTANT THINGS COST TEN TIMES AS MUCH AS THEY USED TO FOR NO REASON, PLUS THEY SEEM TO BE GOING DOWN IN QUALITY, AND NOBODY KNOWS WHY, AND WE’RE MOSTLY JUST DESPERATELY FLAILING AROUND LOOKING FOR SOLUTIONS HERE.” State that clearly, and a lot of political debates take on a different light.

Well, politicians don't get elected for saying "I don't know", especially when the competition says "It's simple, we stop doing X and start doing Y." I mean, they should get elected for saying they want to really understand the problem, so they can actually fix it, but that's not what the public likes to hear. :/


Not sure I agree with you. Suppose I want to fix this problem, and I decide I need political power to do it. Which of the following strategies would you recommend? Option A: get elected, spend first few years of my time in office trying to understand what's going on. By the time I achieve enlightenment, my term is over and I will not be reelected because I have nothing to show for my time in office. Option B: study the problem first. It may take longer this way, because politicians have access to resources that not everyone has. Eventually understand the problem well enough to propose a solution I think will help, and then run on a platform advocating that solution.

(There is also option C: make up a plausible sounding solution without even caring whether it works or not; but then you're just seeking power and don't care about the problem at all. Let's ignore that for now, despite the fact that I sometimes worry that this may account for a large fraction of politicians.)


> Option A: get elected, spend first few years of my time in office trying to understand what's going on. By the time I achieve enlightenment, my term is over and I will not be reelected because I have nothing to show for my time in office.

I don't think we are really disagreeing... The electorate is just stuck in a loop in this case where their own impatience (no doubt stirred by those looking to challenge the status quo) works against them.

> Option B: study the problem first. It may take longer this way, because politicians have access to resources that not everyone has. Eventually understand the problem well enough to propose a solution I think will help, and then run on a platform advocating that solution.

Likely the only solution that will work, but it's hard, and you have the problem of convincing people that your understanding and solution is correct. I suspect being correct might even be an impediment to being elected, because you'll likely have some hard truths to swallow for the electorate, which some other less robust solutions can likely sidestep - or safely target towards only a specific segment of the electorate - since they don't have the added burden of actually having to solve the problem.

> (There is also option C: make up a plausible sounding solution without even caring whether it works or not; but then you're just seeking power and don't care about the problem at all. Let's ignore that for now, despite the fact that I sometimes worry that this may account for a large fraction of politicians.)

Well, I think we can't ignore that, because that's almost exactly what I was referring to. :) The main difference being that the politicians may not be purposefully - or at least not consciously - trying to put forth solutions that are incorrect or at least very poorly researched and understood. It's expedient to their worldview to not look too closely at whether their "hunches" about the problem and solution stand up under scrutiny, and confirmation bias takes care of the rest.

Combine this with an electorate that is increasingly upset about the problem and wants a solution ASAP, and you get a revolving door of politicians that espouse their pet solutions to the problem, possibly alternating between opposing extremes that can both be incorrect.


yep, seems like we agree. now, what to do about it??



I vaguely remember someone saying the #1 doomsday scenario that keeps them up at night is complex systems collapse: that everything just starts to fail and no one knows why. Anyone have a link?


Sounds like a Strogatz kind of thing. I seem to remember him talking about it somewhere, but can't find it either.


I think this post is fundamentally wrong. I left a comment there explaining, but I'll also paste it here.

Note that my critique is an attempt at Feynmaning this theory.

Stylized fact 1: Income has remained flat after adjusting for chained CPI.

Stylized fact 2: costs have gone way up adjusting for chained CPI.

Conclusion: Consumption must have gone down, since consumption = Income/Cost.

The problem is that this simply hasn’t happened. People live in bigger homes. They visit the doctor more, and have all sorts of medical procedures that didn’t exist in the past. More people are attending college and receiving degrees than ever before. People just have more of everything.

If you want to argue with this point, I challenge you: find a major category of consumption that has gone down in material terms over a long period of time. The most I can think of is obsolete goods like land lines, or inferior goods like homed cooked meals (relative to restaurant meals).

That’s exactly the opposite of what this theory predicts! Therefore, although I can’t identify exactly where things go wrong, they must go wrong somewhere.


I am pretty sure I'm living in an apartment that's smaller than my parent's house was when I was born in 1988, despite having three incomes instead of two to spend on it.

I also think that a pretty big fraction of all the extra people attending college and receiving degrees aren't doing any thing with them. My girlfriend would I think be strictly better off in a world were she didn't have student loans and didn't need a college degree in Psychology for her mostly unrelated office job manipulating artwork and processing orders. I don't think she's consuming less education exactly, but I also think it's tricky to say she's consuming more.

I'm not sure where this fits into your model, and I suspect some of it is "it would be great if we could legalize lower priced options". But it does feel like a place where things go wrong.


Did you see the part where he addressed that? If your only option is a bigger house you don't want but have to pay for anyway, that's an excess cost. If these operations don't actually extend life or quality but you have to buy insurance with them, that's an excess cost.

And likewise, if your compensation has "increased" but it's only to cover health care that's pointlessly more expensive, that's not really an increase in compensation.

Alexander very specifically addresses the tradeoff in "would you rather have 70s health care plus $8000/years cash" etc.


I agree that there is excess cost relative to a counterfactual where smaller/cheaper houses are legal. That's not what I'm disputing.

What I'm disputing is whether, overall, we are actually worse off. Fundamentally here's where I claim SA is wrong:

Imagine if tomorrow, the price of water dectupled. Suddenly people have to choose between drinking and washing dishes. Activists argue that taking a shower is a basic human right, and grumpy talk show hosts point out that in their day, parents taught their children not to waste water. A coalition promotes laws ensuring government-subsidized free water for poor families; a Fox News investigative report shows that some people receiving water on the government dime are taking long luxurious showers. Everyone gets really angry and there’s lots of talk about basic compassion and personal responsibility and whatever but all of this is secondary to why does water costs ten times what it used to?

But in reality, this is not an accurate analogy to the modern world. I'm claiming a better analogy would be this:

Imagine if tomorrow, the price of water dectupled. Furthermore, people's income and ability to purchase water remained flat. Yet somehow people started taking longer showers, drinking 10 glasses/day rather than 8, having greener lawns, and just generally staying very well hydrated.

In this latter scenario, I'd tell you that somewhere along the way you messed up. Water consumption = money spent on water / price per gallon - if water consumption went up, either the numerator increased or the denominator decreased.

If you think I'm wrong, tell me what we have less of.


Then I don't think original comment was productive: you think the cost increase can be explained by quality improvements; Alexander expressed skepticism on that point, by suggesting how the products offered cannot be explained through a reasonable model of consumer preferences. As much as people value bigger homes, do they value them so much as to pay 10x more for 2x the size even when technology should be improving that?

As much as people value better health care, are they actually making a conscious, understandable tradeoff between money and actually-better health care on the metrics they really want?

You then mocked that as "fundamentally wrong", "stylized facts" without quoting the specific part where he reduced it to a thought experiment (take 70s health care + $8000) or addressing the logic there.


I'm not saying it can be explained (completely) by quality improvements.

I'm saying consumption = (income - investment) / price. That's just an arithmetic identity. Investment has been between 5 and 10% since basically forever.

http://www.tradingeconomics.com/united-states/personal-savin...

So if consumption went up, income must have risen faster than price. That's my only point: you can't simultaneously have stagnating income, rising prices, and rising consumption.

Now, if you're saying separately that it would be great if we could legalize lower priced options, I agree with you. That would be great. But all that would do is make (preference-adjusted) consumption go up more, or perhaps make investment go up even more.

That doesn't change the fact that this price increase + stagnating income story is false.


>So if consumption went up, income must have risen faster than price.

You're assuming the consumption itself went up rather than paying more for the same stuff. And people are paying a bigger fraction of their incomes for these things. I don't know what this is adding to the discussion besides assuming away the problem, as if nothing ever becomes pointlessly expensive.

>Now, if you're saying separately that it would be great if we could legalize lower priced options, I agree with you. That would be great. But all that would do is make (preference-adjusted) consumption go up more, or perhaps make investment go up even more.

No, that's an assertion that assumes away one possible resolution: that pointless regulations mandate that only the expensive options be offered. It's unlikely, but your model seems to disallow the very existence of that dynamic.


Yes, I'm assuming people live in bigger houses than in 1975, drive more cars than in 1975, consume more medicine than in 1975, and get more education than in 1975.

Which of these things do you disagree with?

I don't know what this is adding to the discussion besides assuming away the problem, as if nothing ever becomes pointlessly expensive.

You are arguing against a straw man. I never claimed this. Search my HN posting history; you'll discover I do think education and transit are pointlessly expensive.


I greatly respect your insights on the issues, especially when unpopular; you're one of the few whose comment history I directly read, and I was especially appreciative of your contributions in this thread [1].

I'm replying because your comments here are unusually unhelpful -- in contrast with all of your others -- in that you're assuming away certain scenarios or ignoring Alexander's points about them. To wind back to the original question, he is claiming that:

1) We are paying much more for healthcare/housing/education (HHE)

2) We are paying a much bigger fraction of income to HHE.

3) HHE is better ... but not by an amount big enough to justify the additional cost.

4) HHE workers don't make any more than they used to.

Which combination of those do you think is physically impossible?

[1] https://news.ycombinator.com/item?id=10446377


So here's an explanation SA dismisses:

First, can we dismiss all of this as an illusion? Maybe adjusting for inflation is harder than I think. Inflation is an average, so some things have to have higher-than-average inflation; maybe it’s education, health care, etc.

I'm saying that in fact, this explanation must be true.

SA further says:

I’m more worried about the part where the cost of basic human needs goes up faster than wages do. Even if you’re making twice as much money, if your health care and education and so on cost ten times as much, you’re going to start falling behind.

The reason is that if this broader worry were true, then consumption should be going down. In fact, consumption has only gone up. Again: find me a good or service that the median or even the poor consume less of than in 1975.

If SA were making a very isolated claim that education and transit cost too much, I'd be agreeing with him. But he's actually making a much broader claim, and the broader claim is what I dispute.


Your assertion that consumption has increased is compatible with Alexander's article if the quality of the product being consumed has decreased, e.g. people go to the doctor 20x more, but their health is worse than before. Or they go to school for 5 years extra on average, but are worse prepared for a job. In this scenario people are consuming more of an inferior product, and overall getting less utility/dollar spent.

50 years ago you paid $100 to a doctor and $80 of those dollars went towards giving you medical care, whereas now only $10 of those dollars go to giving you medical care. Back then only $20 went to 'overhead', but nowadays $90 goes to 'overhead'. By overhead I mean anything that is not directly germane to giving you care: administrative, taxes, insurance, lawyers, paperwork, even the $15 you spent on driving/parking to get to the hospital. The extra money is thus being destroyed by inefficiencies in the system.

I made these numbers up to illustrate my point.


Then I guess we were reading different articles. The focus here seemed to be "HHE is more expensive and there's no good reason for it". The claim was not "total real consumption is down". If HHE is 10x more expensive for no reason, and technology has reduced the price of everything else, then you can be absolutely correct that consumption of all goods went up ... but that's not the problem under investigation here.

The problem is, why must HHE be so much more expensive despite not delivering comparable value and not being that much more expensive in other countries?

Even when Alexander brought up the resolution you endorse, he went on to say that it doesn't actually resolve the core dilemma because HHE is still overpriced relative to the value it delivers.

So, your comment didn't really justify its dismissive tone if you were essentially saying, "yeah HHE is overpriced for reasons we don't understand, exactly as Alexander is alleging, but it's not big deal because ipads are faster".


Isn't a possible answer that people's (net of tax) incomes are flat, but they can still afford to increase consumption because these services are government subsidized (directly or indirectly)?


Do people get ten times as much education per semester as in 1975?


More people consuming the same amount of college education doesn't predict a 10x cost increase in the same way that people buying (10x?) larger homes would.


consumption = Income/Cost

What about savings and/or debt? Aren't people saving less?


Yes, in retrospect I should have corrected for this. Savings has decreased, but only by 5%-7% of income since the 1970's. That hardly seems like it could explain the phenomenon alexander is discussing.

http://www.tradingeconomics.com/united-states/personal-savin...


For the specific case of public university tuition costs, this analysis from the UC system suggests the increase it is primarily due to reduced government funding, requiring students to make up the difference:

http://www.ppic.org/main/publication_quick.asp?i=1119

It also suggests that increasing administrative costs are not a significant contributor, but that there is some effect from increased student services.


I'm a prof at a private college, no state funding. When I ask our president he says, "80% of costs are personnel and the driver there is health care." Certainly I don't make what it says on the chart and have not had a raise since 2008; in fact, my overall compensation has fallen.

(I don't know about doctors but I can absolutely testify that the satisfaction in being a professor has plummeted, particularly since 2008. I have a son who graduated a couple of years ago and considered graduate school, which I did my best to warn him about.)


This article does a really nice job of laying out this issue, but avoids an explanation that is difficult to show in data, I think. Many of these issues he addresses - healthcare, housing, infrastructure, and education, are enabled by federally assumed debt.

The core problem, I believe, is that federal debt is like a blank check that nobody is personally accountable to repay. The result is that people in charge of spending simply do not bargain well. There is no immediate incentive to drive cost down by forcing suppliers to deliver at a lower cost, or find the the real market equilibrium where nobody will offer a service.

Loose spending from the government is a different problem than government spending in general. If the government were interested in getting the best deal, it has more bargaining power than most entities in the world. However, they frequently pay MORE for the same services. That alone should be a trigger. I think most people intuitively know this and rail against it when confronted by examples like student loans being spent on predatory for-profit colleges, but, in aggregate, I blame most of the problem here.

The government has a nearly infinite potential for more debt, and as a result they have no incentive to get a good price. Things have spiraled out of control.


I think your explanation is actually addressed, just not directly: the article touches on the "Government is inefficient" hypothesis (which might be fuelled either by taxes or debt; it's the incentive structure that matters, not the source of the money), but that hypothesis makes a number of predictions that are falsified:

- If the increased cost is due to government inefficiency, there is opportunity for for-profit businesses to provide the same service at lower cost, and either capture the difference as profit or compete on cost for more business. However, in practice, for-profit hospitals and schools operate at similar cost.

- If the increased cost is due to government inefficiency, then countries where the government enforces a monopoly over the service should have higher costs than countries where there is significant for-profit activity in the same sector. However, US costs are much higher and have increased much faster than in other developed countries, despite the US system being the most privatised by far.


> If the increased cost is due to government inefficiency, there is opportunity for for-profit businesses to provide the same service at lower cost, and either capture the difference as profit or compete on cost for more business. However, in practice, for-profit hospitals and schools operate at similar cost.

One possible cause here is government regulation causes increased costs, which all (legal) private companies can't avoid.

> However, US costs are much higher and have increased much faster than in other developed countries, despite the US system being the most privatised by far.

Which industry are you talking about here? The US does not have privatized medicine at all.


Sad to see this king of comments on top.

> Many of these issues he addresses - healthcare, housing, infrastructure, and education, are enabled by federally assumed debt. > The core problem, I believe, is that federal debt is like a blank check that nobody is personally accountable to repay.

This statement is more about ideology than facts: « free money, inflation, federal government doing shit» is like the constant refrain of conservatives for everything …

It's not even relevant in the context of this article :

- housing debts are individual debts, and they are indeed being repaid. Same goes for college tuition debts.

- this attempt to mimic a monetary economist reasoning is wobbly since those figures are expressed in constant dollar: those are cost increase in addition to inflation.


Who is personally accountable to repay government debt? Taxpayers. The politicians that assume debt are not accountable to repay it. that is all I meant by that comment.

The federal government has a hand in underwriting mortgage financing (they own Fannie and Freddie, and they keep the profits from those entities).

The Student Loans are personal loans, underwritten by the federal government.

I am not saying the federal government should never do these things, or that these programs are the root of all evil. However, the federal government has been generous with these programs. I think the incentives of providing easy money through debt to the economy are easy in the short term, and that this cost-disease is one of the long-term results.

If debt is akin to borrowing from the future, then maybe we borrow from the future at the future's level of inflation.


> federal debt is like a blank check that nobody is personally accountable to repay.

that statement is applicable to rising costs in, e.g. federally (or state or municipality) funded infrastructure programs such as the subway construction project that was one of the examples in the article.

the individually assumed debts (student loans, home mortgages) are being paid back and there is accountability there. however, the individual accountability of those debts is not a way out of the cost disease. the fact that individuals are now willing and able to take on larger and larger debts to pay for these perceived essentials is exactly the reason why those things keep going up in price: the buyer's have more money to pay for them (even if it debt and not really wealth).


Even assuming that all of this increased spending is enabled by easier access to capital (through federal debt, as you say), it doesn't really answer the problem. The incentive to lower the cost should still be there.

Suppose before introducing government loans, university education costed ~$X/year on average. The government puts additional $Y/year on the table, so (putting the issue of repayment aside) now people can afford to spend $(X+Y)/year. Why then the colleges that can provide the service for $X increase the price to $(X+Y), when they could have kept the price, so that customers choosing them would only pay $(X-Y) out of pocket? Market should clearly favor the service providers who did that, so why doesn't it?

Rebar now costs something like $600/ton. Suppose government gave direct subsidy for rebar used in building construction of $300/ton. Would it increase the rebar price to $900/ton? I don't think so -- the companies that continue to charge $600 would clearly undercut the companies that try to charge $900. Of course, there are some secondary effects, like the increase of demand for rebar as a result of the subsidy, which could probably increase the price a bit if the supply is limited, but there would still be incentive to drive the cost down (at least until the subsidy cover the whole price).


> The incentive to lower the cost should still be there.

the incentive is for the buyer. the seller has no incentive. seller's incentive is to raise the price as high as possible before it begins to curtail demand. if demand is held constant (or even stimulated to new growth) by supplying debt financing, then the seller will just keep raising costs.


Well, college is "different" (to put it mildly).

My theory is colleges are, in effect, selling a positional good[1], one whose value depends on its ranking relative to other goods. People go there to prove that they are in the nth percentile by some desirable quality.

Positional goods providers behave like monopolists when (the perception of) that ranking can't easily change, and buyers place extreme importance on being in the nth percentile.

To compare back to the rebar example, if a buyer had to get rebar from a top 3 provider (rather than simply "rebar above X psi strength etc"), and the top 3 never changed, you'd probably see the same effect, and they would simply raise prices with every subsidy.

[1] https://en.wikipedia.org/wiki/Positional_good


But the healthcare is not like this, and neither is housing: going to a better doctor is a very weak status signal, and while some people do spend a lot of money on housing to signal their status, for average person the function of their house or apartment is to provide roof over their head.


Don't you look for the best doctor when choosing healthcare? Often, the best doctors cost more money since they have limited time.

Spending more on housing is difficult because the location component of a house usually effects the price as much or more as the quality/size of the house itself.


Fair enough, but these don't all have to have the same cause (except maybe in a very abstract sense).


thank you. I was astonished while reading this that there was no mention whatever of debt financing as an underlying cause for cost disease(s).

every single one of those cost growth curves is a close match for the early part of the exponential growth curves of compound interest on debt. well, it's exponential growth, we know what shape the later part of the curve has.


> every single one of those cost growth curves is a close match for the early part of the exponential growth curves

The early part of a logistic growth curve (https://en.wikipedia.org/wiki/Logistic_function) also looks exponential.


My guess is that the increases in college costs are coming from for-profit universities and other "value" adds (student housing, etc...).

Inflation adjusted tuition costs in the UC system have apparently dropped by 40% or so since 1960 (~$2200 now compared to ~$3700 in 1960s dollars). Granted, the tuition costs for students have increased substantially, since the state used to cover most of it, but the total cost has still dropped a fair bit.

http://ucpay.globl.org/funding_vs_fees.php

I wouldn't be surprised to see the same in healthcare. An outpatient CTA at a local hospital is something like $3500+ through my insurance, but the cash price at a local radiology clinic is $550.

Don't even get me started with housing. The markups are ridiculous in some places, although not in all places.

If I had to guess, I'd say that at least some of these examples of cost-disease are really symptoms of excesses that weren't as common in the past and market/regulatory capture.


Interesting article. I think, however, if we are doing to do anything effective about the problem, it will happen only if we examine in detail those countries that don't have the same problems.

For instance, many Western European countries have very good health care for far less expense, and besides that the doctors enjoy their work. What we need to do is compare in detail how those health care systems work differently such that there are such good results, and then figure out how to make something similar in this country.

Ditto for the other areas. I can think of no sensible reason for not doing such studies. Of course, various groups wouldn't want this because it would run counter to their ideology or financial interests, but this is the right way to go about it.


So everything has been running in successively more nested layers of virtual machine, ever since the Magna Carta. What we need is for someone to start a "rust for civilization" project.

Further thought: could the thing that's happening be that money is getting less real? So it takes more of it to "push the string."

To me it seems that heavy redistribution, with high taxes and a basic income, could help make money more real.

One has to trust the opportunity landscape has shifted due to the Internet, and now capital accumulation is not a requirement for innovation. Otherwise it looks really scary to tamp down on the idea of capital accumulation. Especially to the bankers, who might be out of a job.


Elizabeth Warren gave a talk about this about a decade ago (before becoming a senator):

https://www.youtube.com/watch?v=akVL7QY0S8A

For a family of 4 compared 1975 to 2005, all inflation-adjusted:

Median housing went up by 76%, median number of rooms only went from 5.8 to 6.1 (5% increase), and the house is older.

74% increase in median health-care costs for a family of 4 with employer sponsored health-care.

52% increase in spending on cars, but cars are cheaper; many more families have 2+ cars.

Childcare went from the median family of 4 spending $0 to being a significant expense.

Tax liability went up by 21%


Actually no, you're deeply confused. Not surprising, because Warren phrased her numbers to be deliberately misleading.

Health care costs increased by 74% - this means that in 2005 were 174% of what they were in 1975.

Car costs increased by 52% - this means that in 2005 people spent 152% of what they spent in 1975.

Taxes increased by 21% - this means that if the family spent X% of income in 1975 on taxes, they spent X+21% of income in 2005.

However, if you want to make an apples to apples comparison, taxes increased by 140% from 1975 to 2005.

https://www.wsj.com/articles/SB118705537958296783

http://volokh.com/2011/07/28/christopher-caldwell-falls-for-...


That's a remarkable criticism for someone who:

She earned about $165,300 from September 2010 through August 2011 as a special adviser to President Obama, setting up the consumer protection agency she helped establish.

Before that, she collected a total of $192,722 for leading the congressional panel that oversaw the US bank bailout. That government salary covered a period that began before her latest disclosure report, spanning from November 2008 through September 2010.

Elizabeth Warren, the Harvard Law School professor and consumer advocate challenging Republican Senator Scott Brown, took home more than $700,000 in compensation from teaching and consulting fees over a two-year period from 2010 to 2011, according to her most recent financial disclosure form.

I don't understand how you can in good conscience make criticisms like that while collecting millions of dollars serving the American people and working in academia.

https://www.bostonglobe.com/metro/2012/01/13/elizabeth-warre...


“When I was poor and complained about inequality they said I was bitter; now that I'm rich and I complain about inequality they say I'm a hypocrite. I'm beginning to think they just don't want to talk about inequality.”


That would be a great retort except for the fact that there are people who care about inequality but aren't willing to take money from a system which is the very driver of inequality they preach against. Human beings are great at justification, no matter who they are.

Do as I say but not as I do? That seems to be a problem with politics as a whole. It'd be better if we didn't defend it.


>That would be a great retort except for the fact that there are people who care about inequality but aren't willing to take money from a system which is the very driver of inequality they preach against.

You know, I don't think anyone has ever deliberately kept themselves at minimum wage to make a point about capitalism.


> You know, I don't think anyone has ever deliberately kept themselves at minimum wage to make a point about capitalism.

We have a crazy socialist local city council member who comes close: http://blog.seattlepi.com/seattlepolitics/2014/01/27/sawant-...


I was under the impression she made a chunk of money at Microsoft, and so doesn't have to support herself off City Council work.


I guess it's possible. Wikipedia doesn't have any information on on her work between getting her Comp Sci B.Sc in 1994 and her economics PhD sometime around ~2003.

She didn't move to Seattle until 2006, unless that's missing from her 1994-2003 bio; after she had left the CS field. Maybe not Microsoft then, but still tech money.


You're expressing an ad hominem sentiment that has become increasingly common in my experience, that policy advocates should "practice what they preach" -- this is, when you think about it, ridiculous. If a politician is in favour of a particular tax, should he pay said tax voluntarily until it becomes law? I feel we need more "don't hate the player, hate the game" thinking in society in general.


Why should politicians not practice what they preach?

If their job is to be a public servant, if their job is to convince people to do something, why would they not do that themselves?

I don't think it's hypocrisy because that's unfair and it's not intentional, but how do you justify taking 190k and 160k respectively "consulting" government before you are even holding office if you care so much about the poor? It wasn't a full time job because her full time job was at Harvard where she was making 400k.

Sure, those small amounts don't hurt anyone's bottom line but when everyone is doing it you end up in the financial situation we are discussing.

Maybe if politicians practiced what they preached people would believe what they are saying. You can keep "playing the game" like everyone else, but then the game is gonna remain and nothing changes.


Taking this argument to the extreme men who push for equality for women should become women?

I think legislators should be judged on what bills they author / sponsor, how much they are able to convince / cajole their legislative peers, what legislation they support / amend / reject in committees, and what legislation they vote for and against. That's their job.


Her argument isn't that no one should be well paid, but that poor people shouldn't get screwed over. You don't have to be poor to recognise that poor people have a bad time and pay a disproportionate amount of the cost of running society.


Who cares? If she's right, then she's right regardless of being a hypocrite. If she's wrong, then she's wrong regardless. Do you have an argument that involves the ideas, or just the person?


> Elizabeth Warren gave a talk about this about a decade ago (before becoming a senator)


irrelevant, distorted, ad hominem attack.


For schools and healthcare I'd like to see total FTE across every employment category in the sector per student and per capita respectively.

I'd guess that even if the teacher and doctor ratios are staying the same or going down the overall ratios are shooting up.

If so, the missing money isn't mostly being siphoned off to a few people but is going to enormous new workforce that didn't exist in the medical and education systems of the 1970s.


Most of this "cost disease" is simple inflation. But we've been fooled into thinking that "inflation" is a single number defined by a government committee, when really it's a general concept applicable to any sector where currency is infused. For instance housing valuations haven't outpaced inflation, they are inflation!


Can you please explain and provide evidence for the final declaration in your comment?

Are you saying that changes in housing valuations are definitionally equal to inflation? As in, they don't change price for any other reason, ever? That doesn't sound very realistic.


> Are you saying that changes in housing valuations are definitionally equal to inflation?

Yes, essentially. For most housing transactions, the money supply that is made available to buy the house is equal to the appraisal of the house. It is a circular relationship.


this is explicitly wrong. monetary inflation is about the size of the money supply over time. "correcting for inflation" means multiplying the prices of things out by an adjustment factor that accounts for changes in the size of the money supply relative to an index (a specific starting point).

when the price of something in particular (home prices, college tuition, etc.) changes at a rate vastly different than the rate of monetary inflation you're looking at a price phenomenon in that specific thing.


You're qualifying inflation with "monetary". Note that the government committee disagrees with your measure of inflation, as well. When people casually toss out "adjusted for inflation", they aren't talking about M2/M3, but committee-accepted price inflation.

But even analyzing in terms of monetary inflation, the size of the money supply used to buy houses is basically the money that can be borrowed from banks to buy houses, which roughly matches their valuation (as the house is used as collateral).


I'm discussing monetary inflation because that is the "inflation adjusted dollars" unit that is used in the article.

the relationship you're trying to examine between home prices and monetary inflation is an indirect one at best. the banks that lend home mortgages are retail banks. the banks that lend to other banks (and borrow from the Federal Reserve) are investment banks. they are related but not identical.


Sure, the investment banks form a layer of insulation between a homebuyer and the federal reserve, just like the retail banks do. But ultimately, every dollar of a home loan exists solely due to the collateral of the asset itself. (since they will ultimately pass off the loan to a bank with access to easier money). Thus an upper constraint on home prices does not come from the amounts banks are willing to lend (since the valuation relationship is circular), but only from what borrowers are willing to pay in monthly payments, divided by the interest rate.

I cannot easily determine the exact adjustment the article is applying for "inflation adjusted dollars", but most every time I see such an adjustment it is based on estimates of purchasing power, not monetary supply.


good article but it should look at who profits from increased revenues and why instead of focusing only on costs increasing.


Underpaid/free labour (by women and black) that was very common back then. Much less now. This sosiety shift alone could double every price in economy, while keeping wages stagnant.

I.e. household income rose even if wages did not.


If people were underpaid back then, wouldn't the average salary have raised significantly over the past decades? However his article shows that it's pretty much stagnant.


wouldn't the average salary have raised significantly over the past decades?

Not if those people were previously excluded from salary calculations. If they were unpaid, it's definitely true that they weren't included in the average salary figures.


My take on it is, even if health costs were 30% of my cushy software salary, I'd pay them, because well, everyone wants to live. And so, prices continue rising to the point where people are willing to pay for them. I'm willing to pay 30% of my salary for healthcare. I'm willing to pay 20% of my salary to get a good education for my kids. I'm willing to pay 20% of my salary to live in a city with good culture. I'm willing to... oh wait, what's that? I ran out of money because 40% of my salary went to federal and state taxes? Oops!


Imagine a distant future where advances in technology makes everyone fantastically wealthy in modern terms. Material goods are as cheap as digital storage feels now. What would spend money on in this utopia? My guess would be extending our time and quality of life (health care) and improving our minds (education).


Any book recommendations that go more in-depth on this that you're aware?


Isn't it obvious? All of the fields experiencing the cost disease are dominated by government. Either through massive funding, or vast numbers of regulations.

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.

The source of the complex system dysfunction is the political and social system, which enables special interests to mislead the public in order to implement policies that benefit themselves but have a negative-sum impact on the economy as a whole. One of the 'big lies' that these special interests have succeeded in convincing the public of is that the free market is a misguided ideology that is promulgated by the rich in order to exploit the poor, when in reality it is a basic rule-set necessary for economic development in complex systems (due to properties like the rule-set enabling effective large-scale coordination of economic resources through price signalling, aligning private incentives with the public interest through laws granting and protecting the right to property produced through one's own efforts, or acquired through trade (and inversely, prohibiting acquisition of property through theft, armed robbery and other non-voluntary and predatory means), etc).

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


The U.S. government seems to be worse than the others.

For instance when Europeans hear how much it costs to build a subway in the U.S. often they are shocked. Heck, the Green Party in my town got shocked when it heard how much it costs to build a bus shelter.

Also government is involved in healthcare in other countries too. The difference is that our government spends more than the others and then the private sector spends more money on top of that.

Thus government itself is not a problem so much as the U.S. government is particularly broken.


Where do you get the idea that government is not involved in subway building in a big way in the US? Perhaps there are more legal/regulatory barriers in place to build a subway in the US than in Europe.

>Thus government itself is not a problem so much as the U.S. government is particularly broken.

The cost disease is affecting all developed economies, not just the US, and it affects almost exclusively government dominated industries. If all governments are broken, then that suggests something inherently wrong with government.


Can you use this model to explain why government-involved health care, education, and subway construction is much cheaper in all other developed countries than in the United States?


I don't know but if I had to speculate, I'd say the US has less efficient government, because of factors like greater wealth (more complacency toward waste and corruption) and a larger and less homogenous population (a less coherent public debate).

With respect to the second point, I hypothesize that generally central economic planning becomes less efficient as the economy it plans grows larger. I suspect this is related to Dunbar's number.


More to the point, it is usually the government that funds, builds and operates the subway.


> Both are electives

This is critical, because it makes them actually price-sensitive. You can't choose not to have heart disease, though.

Free markets have a bunch of conditions on their efficiency that are often ignored by advocates and don't always apply: must be plurality of non-coordinated buyers and sellers, must be feasible for participants to determine quality of goods (Akerloff's "lemons"), must be low barriers to entry, must be feasible for participants to choose not to do a transaction, and so on.


You can't choose not to eat, yet food prices don't rise like healthcare prices.

I think TFA did a pretty good job showing the difficulty of pinning the problem on market failure, government failure etc. At least any confident explanation must come with numbers and not just passionate words showing where the money went.


You have to eat, but you can choose what to eat. The beef farmer has to compete against the pig farmer and the bean farmers.

I don't have an explanation, but your counter doesn't fit either.


> yet food prices don't rise like healthcare prices.

agricultural subsidies and price support (government agrees to purchase unsold surplus of many crops) are a huge contributor here.

also consider the externalities. the price of cheap beef is that 60 years from now a global climate crisis will cost the entire world thousands of trillions of dollars, and probably lots of lost lives as well.


The price trends of food and healthcare couldn't be more different. There's clearly something more than agricultural subsidies at work explaining the difference, given healthcare receives many fold more subsidies. In fact, it's possible that receiving compatively little in sibsidies is one reason that food prices have declined. An even more likely explanation for the price decline of food is that consumers are incentivizes to bargain hunt when buying food, since doing so reduces what they pay, and thus a real consumer-driven market, that rewards efficiency, exists in food. In healthcare, with private/government insurance, there is no incentive for consumers to bargain hunt.

Another factor that likely contributes to the divergence in prices is that healthcare is heavily regulated while food production is not anywhere near as constrained by government mandates.


food production and distribution is also heavily regulated. the USDA inspects farms for safety and sanitation. the FDA inspects food processors for safety and sanitation and inspects food products for safety and purity (whether or not the item in the package is what it claims to be).

I don't know precisely how this compares with the degree of regulation and government intervention in the healthcare sector, but I wish you would try to make a more concrete argument with some examples or citations. as is it really seems as if you're arguing purely from ideology.


>food production and distribution is also heavily regulated.

Nowhere near as much as healthcare. Sorry I can't provide any concrete evidence of that


The most obvious problem with healthcare prices is that consumers are removed two steps* from paying for it, so there's little price pressure. But it's hard to have an insurance-based system while also providing an incentive to choose a lower cost provider.

* first by insurance, and second by the employer/government paying for the bulk of that insurance


That's why we shouldn't have an insurance based system. Like Ron Paul (who has been a medical doctor since the early 1960s) says, health insurance should be for catastrophic medical events, not for routine checkups and minor ailments and illnesses.


That's how Singapore does it, which is probably fine. A shame nobody their system hasn't come up as a viable option over here.


>This is critical, because it makes them actually price-sensitive. You can't choose not to have heart disease, though.

But the sectors experiencing the cost disease do not universally share the property of having inelastic demand. In fact, inelastic demand alone will not make a field price-insensitive. One can still be price conscious when purchasing a non-elective service. Only in the case of an emergency service, where the consumer is not capable of shopping the market is price sensitivity lost.

The biggest source of price insensitivity is government coverage, which eliminates all incentive for a consumer to shop around to find the lowest cost product/service.

>must be plurality of non-coordinated buyers and sellers, must be feasible for participants to determine quality of goods (Akerloff's "lemons"), must be low barriers to entry, must be feasible for participants to choose not to do a transaction, and so on.

Collusion-prone industries are the edge case, not the norm. We have levels of government intervention far in excess of what's needed to prevent abuse in these sectors. Moreover, many of these sectors are collusion-prone due to artificial regulatory costs imposed by government, as well as the intellectual property system created by government, which create barriers to entry that benefit larger economic entities, and lead to many sectors being dominated by a handful of large companies that are in a position of being able to collude with one another.

>must be feasible for participants to determine quality of goods (Akerloff's "lemons"),

Akerloff's lemons have many market solutions.


> Isn't it obvious? All of the fields experiencing the cost disease are dominated by government

Those are all fields which actually need state involvement. In the graphs you can see that countries with more state involvements are actually doing better. So the bad performance in the USA could be pinned to an avoidance of letting the state do things.


There was no runaway growth in cost when government first started getting involved in those industries in a big way. The cost disease began in all developing economies after large scale government intervention began.

>In the graphs you can see that countries with more state involvements are actually doing better. So the bad performance in the USA could be pinned to an avoidance of letting the state do things.

That's overly simplistic. Government in the US spends more than most developed countries on healthcare per capita so it is not at all clear that it is less quantatively less involved, the until recent lack of universal coverage notwithstanding.

Also, the fact that patients consume far more technologically advanced services, like medical imaging, and experimental and cutting age treatments in the US than in Europe and has to be factored into any analysis on cost-benefit.


Tangential, but why do people write things like "even after adjusting for inflation" when discussing long timespans (40 years in this case)?

Is there any reason to not adjust for inflation? The "even..." in the sentence suggests that the author is being liberal with potential critics when it would seem only rudimentary to acknowledge inflation when discussing a 40-year timespan. A typical (new) car cost ~$4.5k in 1977 in the US....


Because news articles often don't adjust for it when making their arguments, and savvy readers are used to thinking "yeah, this argument only sounds right because they don't adjust for inflation".


[flagged]


If adding the word "even" clarifies things for even just a tiny percentage of readers (clearly Tenoke found it helpful, and so did I), then it is worth doing. Sure, the article is quite long (Scott Alexander's writing often is), but the incremental cost of this one word (albeit repeated a few times in the article) does not increase that much.


I really hope that this is a bot making that comment, and not someone asking me for a citation on why I think the author has used a certain wording.


Not a bot, just a regular reader of quality newspapers who cannot remember a single case of an article making that mistake. It's slightly disheartening to see how the collective mind has turned on journalists to a point where any and all accusations can be levelled against them and will be assumed to be true.


Tenote mentioned > news articles

and you mentioned > quality newspapers

now, these things are not necessarily congruent. You might think that you read a quality newspaper, but how many people get their news from such? It certainly seems that more people get it from trashy tabloids in the UK (see https://en.wikipedia.org/wiki/List_of_newspapers_in_the_Unit... for reference) and there will be vastly more 'news articles' than exist in quality newspapers.

and anyway, is 'slatestarcodex.com' one of your quality newspapers? Certainly I've never heard of it, so I was happy to see that phrase included though I was not going to check their references anyway.


This isn't really the point here, but for what is worth slatestarcodex is actually really rigorous, and of really high quality. The author always makes sure to triple check everything, consider all sides, be explicit about things that he might be missing, etc. And the comment section there is pretty comparable to the comment section on HN in terms of quality.


It's a common idiom used when writing for general audience. Distinction between real and nominal is not at all clear to the public.


I agree but I think it is just a way to explicitly state that this adjustment was performed and not forgotten.

Better would be:

"Per student spending has increased about 2.5x in the past forty years (after adjusting for inflation)."


> Is there any reason to not adjust for inflation?

Lies, damned lies and statistics. It is easier to mislead if you don't adjust.


Anyone who identifies the problem and the solution is labeled a free market ideologue and ignored.

This is the solution:

http://www.ncpa.org/pdfs/st349.pdf

It's not a mystery why all of the industries suffering the cost disease are dominated by government.


For those not following the link, that paper is entitled "The Market for Medical Care Should Work Like Cosmetic Surgery". Having briefly skimmed it, it points out that the costs for cosmetic surgery have not grown nearly as fast as the costs for medical care in general.

The article certainly has its own opinion about why that's the case, but regardless, anyone trying to explain the increase in medical costs should have to address the facts. Cosmetic surgeons still need liability insurance, nurses, office space, medical training, operating room time, etc, etc. So the likelihood that any of those are contributing to rising medical costs is reduced.


>Cosmetic surgery provides price competition because patients pay the bills.

Is this supposed to be satire? Do I even need to explain how ridiculous this stance is? I'll save my energy until I get a resounding "yes."


Yes, it seems clear from the downvotes that you need to explain your dismissal.


It's at -1. I really should not need to explain why a luxury service is not at all analogous to a service that deals with life-threatening, chronic conditions with a population that may not always have the means to pay especially when that payment amount is built off of a shadow market place and several entities which are notorious for not giving a flying shit about people.

Don't be silly.


Having the means to pay and needing the service for life or death reasons have nothing do with the forces that drive costs down, namely consumers bargain hunting for the lowest price service that offers adequate an level of quality. Neither being poor nor needing a service for a life-or-death reasons. will prevent consumer from bargain hunting. The factors are orthogonal to those that affect cost trends.

You're failing to see that mechanics behind the evolution of consumer markets that lead to prices being driven down. Combined with your rude and arrogant dismissal of the link, your attitude embodies everything that is wrong with our political system and that prevents solutions from being found and implemented.


>You're failing to see that mechanics behind the evolution of consumer markets that lead to prices being driven down.

How so? If anything, I succinctly recognized these so-called mechanics are really just symptoms of other underlying actions and motivations. The PDF wants to pretend like it's looking at market forces, while completely ignoring some fundamental economic theories.

>Combined with your rude and arrogant dismissal of the link, your attitude embodies everything that is wrong with our political system and that prevents solutions from being found and implemented.

Your personal appeals to however insulted you feel or however blunt my response was isn't going to make anything that was stated in your comment or in the link any more substantive than it already is not.

Upon further investigation, the NCPA is a completely biased think-tank whose explicit goals are apparently "to develop and promote private alternatives to government regulation and control." I've never even heard of the NCPA, but the whole contrived tone of the PDF immediately spiked my bullshit meter.

I'm sorry you think you can get away with espousing complete drivel that needs to cherry-pick information to push forward a narrative, contrary to the experiences of the rest of the world. I have a feeling the more and more I'm going to look into this perspective, the less friendly this conversation is going to become. At this point, I have zero tolerance for intellectual dishonesty.


"I succinctly recognized these so-called mechanics are really just symptoms of other underlying actions and motivations. "

I have no idea what that means or what you're referring to. You still haven't addressed any of the arguments I made.

Once more, my response to your argument:

>Having the means to pay and needing the service for life or death reasons have nothing do with the forces that drive costs down, namely consumers bargain hunting for the lowest price service that offers adequate an level of quality. Neither being poor nor needing a service for a life-or-death reasons, will prevent consumers from bargain hunting. The factors are orthogonal to those that affect cost trends.

All you've done is try to justify the unscientific response you provided to my comment, which contains only ad hominem ideological name-calling about the source, rather than addressing the facts it listed and logic it offered.

To recap: you've had a viscerally emotional response, where you engaged in totally rude and intellectually dishonest behaviour against me, all because the argument I made is for the free market, and the party I cited believes in the free market. This embodies everything wrong with our political system.


I did address it, and you are ignoring it. I honestly do not care how insulted you are, or how rude you think I am. You removed any right to be cordially addressed when you pushed non-sense into this board, and then had the audacity to actually treat it as if you were being scientific.

Part of being scientific is asking your own position, "What does this look like if the theory is wrong?" It's called falsifiability. If the PDF you linked had the intellectual capacity and honesty to ask themselves that, then the PDF would have never been published.

Yet you nor the paper have yet to realize, again, some pretty fundamental economic concepts that explain the paper as a whole and why it's completely irrelevant to the conversation at large.

>because the argument I made is for the free market, and the party I cited believes in the free market.

No because they put their blinders on and didn't bother to actually look at any other direction except for the one they wanted to see.

Allow me to be completely straight-forward with my final words: fuck off with your unscientific, dishonest drivel.


> fuck off with your unscientific, dishonest drivel.

We've banned this account for repeatedly breaking HN's civility rule. That's not allowed here.

If you don't want it to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow HN's rules in the future.

https://news.ycombinator.com/newsguidelines.html

https://news.ycombinator.com/newswelcome.html


>I did address it, and you are ignoring it. I honestly do not care how insulted you are, or how rude you think I am.

That's simply untrue. Where did you address it. Let me reiterate, you have not responded to this:

>Having the means to pay and needing the service for life or death reasons have nothing do with the forces that drive costs down, namely consumers bargain hunting for the lowest price service that offers adequate an level of quality. Neither being poor nor needing a service for a life-or-death reasons, will prevent consumers from bargain hunting. The factors are orthogonal to those that affect cost trends.

This was my rebuttal to your argument, and to date, has not been addressed. You falsely claim you addressed it and then quickly went back to your rude, anti-intellectual ranting.

>You removed any right to be cordially addressed when you pushed non-sense into this board, and then had the audacity to actually treat it as if you were being scientific.

You're displaying an unscientific and demagogic attitude, where you justify belligence with your own subjective determination that a party's argument is "nonsense".

>Part of being scientific is asking your own position, "What does this look like if the theory is wrong?" It's called falsifiability.

That's obvious and doesn't need to be stated. If cosmetic surgery prices had increased as much as procedures in other fields of medicine, that would count as evidence against the theory that a consumer market drives prices down. The article didn't need to pose that question because the evidence doesn't falsify its theory.

>No because they put their blinders on and didn't bother to actually look at any other direction except for the one they wanted to see.

You're making assumptions, not evidence-based arguments.

Like I said, you have not addressed the arguments I've made, and you have behaved like a putelent child, in being rude and trying to justify your rudeness.

Look I get it. I understand how you feel. You see some POS free market ideologue arguing that the free market is what we need in healthcare, when we've all seen that Europe's government run healthcare vastly outperforms the capitalist US healthcare system at a fraction of the cost. You wonder how someone could be so blind to facts, and so indoctrinated by simplistic ideology that is promoted by the American right and its bevy of propaganda-spewing think thanks. You see POSs like this polluting the minds of the public with their pseudo-religous free market dogma, and preventing far better public options - that would save lives and cost less, while guaranteeing universal coverage - from gaining the critical public support needed to be implemented.

I know where you're coming from, and if only you had an open mind, I could explain why your assumptions are wrong.


I think I can explain the subway costs - the construction itself is relatively cheap - tunneling and excavating is something mine companies do regularly on a bigger scale.

It is the NIMBY, regulations and not breaking anything. Unlike China you cannot rule by decree - there be subway here - dig.


It's also likely that the early construction projects were the low hanging fruit - things that had the greatest impact for the lowest cost. As you run out of those things and start to implement the more complex ideas costs are bound to increase. I'm not sure that would be enough to account for a 20* increase though.


One way to test this theory would be to estimate the cost of completing low-hanging-fruit projects from the early twentieth century that were cancelled (e.g. subways in Cincinnati and St. Louis). I doubt you'd find that it's just as cheap to build them now.


But how about spain, france & the UK?


They handle environmental impact by regulatory agency, not by giving everybody and their brother the right to sue to stop the project on environmental grounds. The way the US does it keeps regulatory bodies relatively small and cheap in budget terms by passing on the enforcement costs to private parties. But the overall costs and delays go way, way up.


The UK also has problems with particularly expensive infrastructure projects.

They tend to cost magnitudes more in common law countries (USA, Canada, UK, Australia, NZ. This is generally down to the land and legal costs, with the dispute framework becoming much more expensive. Land and property rights are much more extensively protected in common law countries.


Germany has also had massive cost problems with some projects, such as the Hamburg concert hall. There's also the Berlin airport which is years late and has costs over twice of what was expected.


Different culture. People like, use, and depend on subways so they like the extensions and expect their governments to get shit done. And in Europe the power of a single individual to block major project is limited.


Well in France any hamster is basically empowered to stop a project...

While we're guessing, this may just be due to the very special environment that is Manhattan. It's been a few years since I read about it, but I seem to remember that they had to fight some quite unusual challenges, including skyscrapers, the constant influx of water, and both granite and basically liquid sediments. Manhattan probably also has an insane amount od existing, badly documented underground infrastructure.


This is a 3% compounded increase in cost YoY. Not bad seeing at the population about doubled in the same time (2.5% YoY):

http://www.censusscope.org/us/chart_popl.html


I suspect the hidden factor is population growth. You can find numerous examples of things that become less efficient (more difficult/costly yet also crappier) when more people are out there demanding that service. Or not even using the same service, but simply interfering with each other in ways unrelated - getting in each other's way, affecting each other. Cost is not in a linear relationship with population size, or maybe it's population density. There's a kind of friction that increases. Diminishing returns of scale & complexity, you could call it.


Reasons I can't stand the rationalists: They pick an arbitrary objective metric for a topic about which they have no expertise, assume the metric is basically complete, and then draw ridiculous conclusions.

You can have the best methods in the world, but if your prior is crap and your data collection is crap, your posterior estimate will be crap.

-----

(sardonic paraphrase): "test scores aren't increasing, so objectively schools aren't better". and "I talked with my parents and their school experience seemed similar to mine".

Hypothesis that they didn't seriously evaluate: "the spending went to things not related to test scores which still has value"


If you think that's what happened, why don't you make that argument? What is that thing unrelated to test scores which still has value?

(Similarly, what is the hidden thing in transit costs, in health care, etc?)

"Maybe there's a hidden thing this guy missed, and I can't stand people like him" isn't really a counterargument.


SSC does this regularly: he'll take a problem, choose an arbitrary metric, and then run the whole way. It's a cultural rejection of expertise (especially expertise from the social sciences) which is endemic to tech and mathematics. It leads to terrible policy recommendations (c.f., the effect on education by the Gates Foundation and Zuckerberg's 100M to NJ).

("The Best and the Brightest" is a good book that talks about this phenomena in another context.)

As a starting point, we can talk about issues related to: -- increasing prevalence of mental health issues -- the expanding nature of school populations (a lot more students, coming often from much more disadvantaged backgrounds) -- shifts from off-campus housing to on-campus housing which have necessitated a massive expansion of facilities staff, security, dining halls, etc. -- changes in the legal burden that schools need to reach (e.g., title 9)


You are still not arguing that he's wrong. You're merely arguing that if he were wrong, he might be wrong at other times for similar reasons.


author of SSC is an M.D. (psychiatry resident), not specifically a math or tech guy.

I agree with you, however, that too much faith in dubious metrics is a serious problem. I don't particularly think the main thesis of today's post is based on dubious metrics though, but perhaps some specific claims in it (about education outcomes, for example) are not well supported.

that's beside the point though. he wasn't examining whether or not we got our money's worth on all this increased education spending. he was pointing out that the cost of education, on a per student basis, has risen massively over the last several decades, and there is not particularly a good reason why this should have occurred.


The great thing about the rationalist is that if you explain why their conclusion is wrong and come up with a better explanation then they change their viewpoint. They don't get caught up in trying to prove they're the smartest.




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