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.
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?
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.
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.
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!
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.
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.
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.
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.
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."
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.
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.
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.
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.
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.)
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?
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.
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.
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:
It also suggests that increasing administrative costs are not a significant contributor, but that there is some effect from increased student services.
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.
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.
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.
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.
[+] [-] justcommenting|9 years ago|reply
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.
[+] [-] oli5679|9 years ago|reply
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.
[+] [-] ashark|9 years ago|reply
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?
[+] [-] SilasX|9 years ago|reply
>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.
[+] [-] jessriedel|9 years ago|reply
[+] [-] clay_to_n|9 years ago|reply
[+] [-] tptacek|9 years ago|reply
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.
[+] [-] kurthr|9 years ago|reply
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.
[+] [-] jonstewart|9 years ago|reply
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.
[+] [-] pjmorris|9 years ago|reply
[+] [-] brazzledazzle|9 years ago|reply
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.
[+] [-] bradleyjg|9 years ago|reply
[+] [-] sevenfive|9 years ago|reply
[+] [-] BrailleHunting|9 years ago|reply
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
[+] [-] matt4077|9 years ago|reply
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.
[+] [-] trome|9 years ago|reply
[+] [-] struppi|9 years ago|reply
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:
But: Maybe this does not explain the whole effect, and maybe I am missing something important. I am not an economist, after all.[+] [-] Scaevolus|9 years ago|reply
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."
[+] [-] tedsanders|9 years ago|reply
[+] [-] fnl|9 years ago|reply
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.
[+] [-] lend000|9 years ago|reply
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.
[+] [-] _bpo|9 years ago|reply
Citation needed. Where is this term common and where is it broadly discussed?
[+] [-] js8|9 years ago|reply
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.
[+] [-] johngalt|9 years ago|reply
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.
[+] [-] tomjen3|9 years ago|reply
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).
[+] [-] imh|9 years ago|reply
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?
[+] [-] misja111|9 years ago|reply
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.
[+] [-] lojack|9 years ago|reply
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.
[+] [-] adrianN|9 years ago|reply
[+] [-] SilasX|9 years ago|reply
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.
[+] [-] yummyfajitas|9 years ago|reply
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.
[+] [-] earljwagner|9 years ago|reply
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.
[+] [-] RobertKerans|9 years ago|reply
[+] [-] kbenson|9 years ago|reply
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. :/
[+] [-] marvy|9 years ago|reply
(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.)
[+] [-] rjeli|9 years ago|reply
[+] [-] imh|9 years ago|reply
[+] [-] yummyfajitas|9 years ago|reply
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.
[+] [-] nialo|9 years ago|reply
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.
[+] [-] SilasX|9 years ago|reply
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.
[+] [-] anonymoushn|9 years ago|reply
[+] [-] wmf|9 years ago|reply
What about savings and/or debt? Aren't people saving less?
[+] [-] martinpw|9 years ago|reply
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.
[+] [-] abakker|9 years ago|reply
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.
[+] [-] omgwtfbyobbq|9 years ago|reply
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.
[+] [-] woodandsteel|9 years ago|reply
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.
[+] [-] jchrisa|9 years ago|reply
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.
[+] [-] aidenn0|9 years ago|reply
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%
[+] [-] bradleyjg|9 years ago|reply
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.
[+] [-] unknown|9 years ago|reply
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