24 Jul 2017

Cost Disease: The Economic Superbug

Scott Alexander, who writes the Slate Star Codex blog, has a fantastic food-for-thought post about “cost disease” and how it relates to flat or declining standards of living in the US.

There’s a lot to mull over in the article, and that’s without even getting into the Tyler Cowen piece that it is in response to. But if I can direct your attention to only one part of it, it’s this:

[I]n the past fifty years, education costs have doubled, college costs have dectupled, health insurance costs have dectupled, subway costs have at least dectupled, and housing costs have increased by about fifty percent. US health care costs about four times as much as equivalent health care in other First World countries; US subways cost about eight times as much as equivalent subways in other First World countries. […] These things have dectupled in cost even after you adjust for movies costing a nickel in Grandpa’s day. They have really, genuinely dectupled in cost, no economic trickery involved. […]

Libertarian-minded people keep talking about how there’s too much red tape and the economy is being throttled. And less libertarian-minded people keep interpreting it as not caring about the poor, or not understanding that government has an important role in a civilized society, or as a “dog whistle” for racism, or whatever. 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.

He analyzes a number of industries that have been subject to incredible price increases over time, including education (both primary and higher), healthcare, and heavy infrastructure (subways in particular). In each case, costs borne by the public – that’s after adjusting for inflation, mind you – have gone up astronomically in the last half-century or so, but outcomes haven’t really improved.

And, somewhat absurdly for what appears to be the defining question of modern economics, nobody seems to know exactly what is causing it.

I’m having a hard time even finding hard data on where the majority of the cost increases are going, in terms of spending on the backend of the affected industries. Everyone knows that higher ed, for instance, has many more administrative workers than it used to, and healthcare does as well, but it’s difficult to determine (and I am personally skeptical) that those headcount increases are enough to absorb the staggering cost increases. Lots of people use the cost increases to push for one particular policy prescription or another, but there doesn’t seem to be a consensus opinion on what’s really going on.

But if I had six months and a research grant that was enough to keep me in beer and the dogs and cats in food, plus hire a couple of interns to chase down the data, I know what I’d be looking into.