A paradox: even though improving technology and globalization ought to be massively cutting costs, Americans over the past fifty years have witnessed sharply rising costs for certain fundamental goods and services. And in many cases, those sharply rising inputs have not been matched by proportional benefits in outcomes, the result being a hard-to-measure but indisputable productivity fall in those sectors.
One popular explanation is “the Baumol effect,” a shift toward higher salaries in certain fields that has fascinated economists since its discovery. But the Baumol effect predicts that workers should enjoy increasing incomes in affected areas, something that is not happening. Something else must be going on.
First we will present the data on primary, secondary, and college education, health care, housing, and infrastructure. These do not exhaust the possibilities; the costs of acquiring major weapons systems for the military is just one of several others we will leave aside for the time being.1
Then we will look at the Baumol effect and other possible supplementary explanations for the data. Some of these are widely discussed in the literature, others not much, if at all. Unfortunately, these do not sum to a reasonable explanation for cost disease. They are best thought of as fragments of a possible explanation that remain to be investigated and integrated. No one yet really understands this problem.
Finally, and briefly, we will address some of the political implications of cost disease.
The consensus concerning the costs and outcomes of primary education states that per-student spending has increased about 2.5 times in the past forty years, even after adjusting for inflation.2 At the same time, test scores have stayed relatively stagnant.3 For example, high school students’ reading scores went from 285 in 1971 to 287 today, a difference of 0.7 percent.
1. Inflation-Adjusted Total Cost of K-12 Public Education and Percent Change in Achievement for 17 Year Olds, Since 1970
Source: Cato Institute
The data show some heterogeneity across races: White students’ test scores increased 1.4 percent and minority students’ scores by about 20 percent. But school spending per capita does not explain much or most of the minority students’ improvement, which occurred almost entirely during the period from 1975 to 1985. School spending has been on the same trajectory before and since that decade in both white and minority areas, suggesting that there was something specific about that decade that improved minority scores so much. Most likely, it had to do with the general improvement in minorities’ conditions and, with them, changing expectations about education and possibilities for upward mobility. As far as cost disease is concerned, the key point is that most of the increase in school spending per capita took place after 1985, and demonstrably helped neither whites nor minorities.
My analysis shows that the cost of primary/secondary education really did more or less double in these forty years without any concomitant increase in measurable quality.4 It has little to do with adding costly special ed services, nothing to do with how we measure test scores, nor is it simply a “ceiling effect.”
In that light, imagine a choice set before a poor person—white, black, or any other demographic. Would you prefer to send your child to a 2016 school, or to send them to a 1975 school and get a check for $5,000 every year? That really is the stake here: 2016 schools have minimal test-score advantages over 1975 schools, but cost $5,000 more per year, inflation adjusted. That $5,000 comes out of the pocket of somebody—either taxpayers, or other people who could be helped by government programs.
The data for college/university education is even worse. The inflation-adjusted cost of a university education was something like $2,000 per year in 1980.5 Now it’s closer to $20,000 per year. No, it’s not because of decreased government funding, and the trajectories are similar for public and private schools.6
2. Percentage Increases in Consumer Prices Since the First Quarter of 1978
Source: Bloomberg (via Valuewalk)
There is no equivalent of “test scores” to measure how well colleges perform, despite some recent efforts to create reliable metrics. But who thinks that colleges today provide $18,000/year greater value than colleges did forty years ago? Who would rather graduate from a contemporary four-year college as opposed to graduating from one in about 1967 and getting a check for $72,000 (or, more realistically for many, having $72,000 less in student loans to pay off)?
As far as I can see, my parents’ college experience seems to have had all the relevant features: classes, professors, clubs, roommates, and standard-issue angst. I might have gotten something extra for my $72,000, but it’s hard to figure out what it was.
Cost disease has certainly not spared health care. Take a look at Figure 3. The cost of health care in the United States has about quintupled since 1970. Most likely it has actually been rising since earlier than that, but data to show it is scarce or of questionable reliability. Still, if we set the base year at 1960 instead of 1970, the increase comes to about 800 percent in fifty years.
3. Increase in Total U.S. Health Expenditures in Billions, 1970-2015
Source: Kaiser Family Foundation
This has had the expected effects. Average workers in 1960 spent ten days’ worth of their yearly paychecks on health insurance; average modern workers spend sixty days’ worth—about a sixth of their entire earnings.7 As a result, both before and after the Affordable Care Act, a fair number of poorer Americans put off buying insurance or seeking medical (and dental) care.
4. Percentage of Americans Putting Off Medical Treatment Because of Cost
This is not necessarily for nothing. Life expectancy has gone way up since 1960, for example.
But life expectancy depends on many other factors aside from per capita health care spending. Better sanitation, nutrition, and a reduction in tobacco use, plus advances in technology that don’t involve spending more money have clearly mattered. For example, ACE inhibitors, invented in 1975, have probably increased life expectancy a great deal, but they cost only $20 for a year’s supply and replaced older drugs that cost about the same.
If we want to calculate how much lifespan gain more health care spending has produced, we find ourselves faced with a series of regression analysis challenges. But we have some options short of such an ordeal. One has to do with international comparisons.
5. Health Expenditures Per Capita vs. Life Expectancy
Sources: OECD, World Bank, via Our World in Data
6. Increases in Health Expenditures, 1970-2015
The data show that, for example, South Korea and Israel have about the same life expectancy as the United States but pay about 25 percent of what we pay. So we might conclude that it is very possible to get the same improving life expectancies as Americans have experienced without octupling health care spending.8
Again, spending per capita cannot possibly be the only criterion in cross-national comparisons. But it is notoriously difficult to calculate this. The Dutch have tried, and the example is instructive.
The Netherlands hiked its health budget by a lot starting around 2000, sparking several studies on whether, and how much, that increased life expectancy. A good meta-analysis lists six studies that tried to find the answer, and here is the range of their estimates: 0.3 percent, 1.8 percent, 8.0 percent, 17.2 percent, 22.1 percent, 27.5 percent. The meta-analysis also mentions two studies not included, one finding 0 percent effect and one finding 50 percent effect, presumably to narrow the statistical mean.
How to interpret this very wide range? The best conclusion anyone could arrive at was that, yes, it is likely that increased health care spending contributed to the recent increase in life expectancy in the Netherlands—but the methodological problems involved were so daunting that no one can reliably say by how much.
Even if the Dutch effort had produced more useful results, it would still be irresponsible to apply it to health spending in the United States over the past fifty years: The marginal social differences between the two nations are large, and anyway the 1950s are not the 2010s. If we irresponsibly take their median estimate and apply it to the current question anyway, we get that increasing health spending in the United States by 800 percent per capita over half a century has bought about one extra year of life expectancy.
Other (less irresponsible) studies come up with a slightly different number. One attempt to directly estimate a health spending (as percent of GDP) to life expectancy conversion, and says that an increase of 1 percent in GDP corresponds to an increase of 0.05 years in life expectancy. That works out to only 0.65 years of added life expectancy gained by health care spending since 1960.
If these numbers seem very low, remember all of those controlled experiments where giving people insurance doesn’t seem to make them much healthier in any meaningful way.9 That may be because having insurance has little bearing on lifestyle choices, and over time mortality rates for diseases tied to specific pathogens (bacterial, viral, fungal) has decreased less than mortality rates for lifestyle-driven diseases (diabetes, heart disease) have risen.
That said, we can ask the standard-form question we have used before: Would an average poor or middle-class person rather get modern health care, or get the same amount of health care as their parents’ generation did but with modern technology like ACE inhibitors—and also earn $8,000 extra a year?
Most of the important commentary on the graph below is in the public domain and is reasonably well understood, but, as usual, interpretations differ. Pessimistic takes often underestimate increases in quality as well as size. Optimistic takes, however, miss some of the downsides.10 Yes, homes are bigger, but part of the reason has to do with zoning laws that make it easier to get bigger houses for proportionally less money than smaller houses. Many would prefer a smaller house but cannot find one in the area they wish to live in for commuting or safety reasons. When I first moved to Michigan, for example, I lived alone in a three-bedroom house because there were no good one-bedroom houses available near my workplace, and all of the apartment buildings were loud and crime-ridden.
7. U.S. Median Rents (in 2014 dollars)
So, once again, would most poor and middle-class Americans rather rent a modern house/apartment, or rent the sort of house/apartment their parents had, but for half the cost?
The first New York City subway opened around 1900. Various sources list track lengths from 10 to 20 miles and costs from $30 million to $60 million dollars. The variance here has to do with different sources capturing spending at different stages of construction. In any case, the data we have suggest costs of between $1 million to $4 million per kilometer.
Assuming that this estimate is good enough for government work, it looks to be the inflation-adjusted equivalent of roughly $100 million per kilometer today. In contrast, a new New York subway line being opened this year costs about $2.2 billion per kilometer, suggesting a cost increase of twenty times.11
Again, cross-national comparison may help. Paris, Berlin, and Copenhagen subways cost about $250 million per kilometer, almost 90 percent less. Yet even these European subways are overpriced compared to Korea, where a kilometer of subway in Seoul costs $40 million (although another Korean subway project cost $80 million per kilometer).12 This is a difference of 50 times—5,000 percent—between Seoul and New York for apparently comparable services. It suggests that the 1900s New York estimate above may have been roughly accurate if their efficiency was roughly in line with that of modern Europe and Korea.
So, to summarize: In the past fifty years, education costs have doubled, college costs have dectupled, health insurance costs have dectupled, housing costs have increased by about fifty percent, and subway costs have at least dectupled. U.S. health care costs about four times as much as equivalent health care in other “first world” countries; U.S. subways cost about eight times as much as equivalent subways in other “first world” countries.
People may know these numbers, but they seem to underestimate their significance. Some may just laugh it off, remembering how Grandpa used to talk about how back in his day movie tickets only cost a nickel. But all of the numbers cited above are inflation-adjusted. Many costs have really, genuinely dectupled, with no economic or statistical trickery involved.
This is especially strange because, as already noted, improving technology and globalization ought to be reducing costs. And in some respects they have. For example, in 1983, the first mobile phone cost $4,000, or about $10,000 in today’s dollars. (It was also terrible.) Today a much better phone costs only about $100. This is the right and proper way of the universe. It’s why we fund scientists, and pay businesspeople the big bucks.
But college and health care have still had their prices dectuple, and that is despite the obvious inputs of high technology that permeate these service fields. Patients can now schedule appointments online; doctors can send prescriptions by fax; pharmacies can keep track of medication histories on centralized computer systems that interface with the cloud; nurses get automatic reminders when giving two drugs with a potential interaction; insurance companies accept payment through credit cards—and all of this still costs ten times more than it did in the days of punch cards and secretaries who did calculations by hand.
Things are actually even worse than this, because we have many opportunities to save money that were unavailable in past generations. Underpaid foreign nurses immigrate to America and are willing to work for lower wages. Doctors’ notes are sent to India overnight to be transcribed by sweatshop-style labor for pennies an hour. Medical equipment gets manufactured in some labor-cheap third-world country. And it still costs ten times as much as when this was all made in the United States, back when minimum wages were proportionally higher than they are today.
And it’s actually even worse than this. Many of these services have decreased in quality, presumably to cut costs even further. Doctors used to make house calls. Women who gave birth in the hospital used to stay 8 to 14 days in the 1950s but that declined to less than 2 days in the mid-1990s. This isn’t because modern women are healthier; it’s because hospital administrators kick them out as soon as it’s safe, to free up beds for the next person. Historic records of hospital care generally describe leisurely convalescence periods designed to make sure patients felt well before they were let go; now the mantra is to evict people as soon as they’re “stable,” in other words not in acute crisis.
If we had to provide today the same quality of service as in 1960, and without the gains from modern technology and globalization, health care might cost fifty or even a hundred times more. Hardly anyone could afford that.
Why is this happening? The existing literature on cost disease focuses on the aforementioned Baumol effect, which dates from the 1960s. Suppose in some hypothetical economy that people can choose either to work in a factory or join an orchestra, and the salaries of factory workers and orchestra musicians reflect relative supply and demand and profit in those industries. Then the economy undergoes a technological revolution enabling factories to produce ten times as many goods with the same labor input. Some of the increased productivity trickles down to factory workers, and they earn more money. Would-be musicians might be expected to leave orchestra work behind to join much higher-paying factories, and so orchestras would have to raise wages to be assured of enough musicians. So tech improvements in the factory sector raise wages in the orchestra sector.
But this story doesn’t explain the cost disease we observe today; the industries involved generally aren’t paying their workers more! For example, take teacher salaries over time (Figures 8 and 9).
8. Average Salary for Public School Teachers, in 2011 Dollars
9. Average Salary for Public School Teachers, as Ratio of Average Salary for All Full-Time Workers
Source: Fifty-Five Million
As the first graph shows, teacher salaries are relatively flat adjusting for inflation. But salaries for other jobs are increasing modestly relative to inflation. So teacher salaries relative to other occupations’ salaries are declining.
Figure 10 is a similar graph for professors. Professor salaries are rising a little, but they’re probably losing position relative to the average occupation. Also, note that although the average salary of each type of faculty is stable or increasing, the average salary of all faculty is declining. The reason is no mystery: Colleges are switching from tenured professors to adjuncts, who complain of being overworked and abused while making about the same amount as Starbucks baristas, also usually without benefits.
10. Faculty Salaries 1975-2012
Source: Higher Ed Data Stories
This resembles the case of the hospitals cutting care for new mothers. The price of the service dectuples, yet at the same time the service still must sacrifice quality in order to control costs.
Speaking of hospitals, take a look at Figure 11. Female nurses’ salaries went from about $55,000 in 1988 to $63,000 in 2013. This is probably around the average wage increase during that period. Some of this reflects changes in education: In the 1980s only 40 percent of nurses had a degree; by 2010, about 80 percent did.13
11. Nurses’ Annual Salary by Gender, in 2013 Dollars
Source: Journal of the American Medical Association
And now for doctors (Figure 12). The graph again displays apparent stability. But appearances can be deceiving. A lot of doctors’ salaries now go to paying off their ballooning medical school debt.
12. National Peak Physician Income, 1973-1997
Source: The Wharton School, University of Pennsylvania
Thus, the overall picture is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses. Indeed, these professions seem to have lost ground salary-wise relative to others.
Or maybe not. Might total compensation be increasing even though wages aren’t, notably through more generous vacation, maternity and paternity leave provisions, and pensions? It’s an interesting question, but the answer seems to be no. The pensions crisis in plain view, especially for government workers, has more to do with revenue shortfalls than with wildly more generous pensions as of late. In general, pensions aren’t increasing much faster than wages, but this might not be true in all sectors. Still, any effect here is likely marginal.14
And that is not all the bad news for teachers and doctors. Money aside, job satisfaction has plummeted for a variety of other reasons—not all of which are unrelated, possibly, to cost disease. Veteran teachers and doctors alike regularly complain that their jobs used to be enjoyable and fulfilling, but now they feel overworked, unappreciated, and perhaps above all, trapped in mountains of paperwork—in increased transactional costs.
It might make sense for these fields to become more expensive if their employees’ salaries were increasing. And it might make sense for salaries to stay the same if employees instead benefitted from lower workloads and better working conditions. But neither of these things is happening.
Clearly, the Baumol effect by itself has its limits as an explanation for cost disease. So what else might be going on?
Let us first consider the possibility that all of this is an illusion. Maybe adjusting for inflation is harder than we think. Inflation is an average, after all, so some sectors must manifest higher-than-average inflation—maybe education, health care, housing, and infrastructure. Or maybe the raw data is badly defective.
But it’s not likely. An acquaintance runs a private school that does just as well as public schools, for an average cost of only $3,000 per student per year, a fourth of the public school rate. Economist Alex Tabarrok notes that India has a private health system that delivers the same quality of care as its public system for a quarter of the cost.15 Whenever the same drug is provided by the official U.S. health system and some kind of grey market, the grey market supplement costs between a fifth and a tenth as much; for example, Google’s first hit for Deplin®, the official prescription for L-methylfolate, shows a cost of $175 for a month’s supply; unregulated L-methylfolate supplement delivers the same dose for about $30. And this doesn’t even take into account things like a $1 bag of saline that costs $700 at hospitals.16 Since it is not remotely difficult to cite examples of doing things for a fraction of what we usually pay, we should not be reluctant to believe that the cost of nearly everything really has risen and is still rising.
If so, this might suggest that markets are not working because of massive rentier behavior that enables the fortuitously positioned to increase costs without suffering any decreased demand. Certainly markets for medicine and education are deeply distorted by the paucity of information in some cases and by the distortions of regularized third-party payments in others. But we need to think of the rentier phenomenon not in the old way, as the work of individuals at market choke points, but rather as institutions performing the same kind of distortion.
Still, even market-immune institutional price-gouging cannot explain cost disease entirely. For one thing, corporate profits haven’t increased nearly enough to account for where all the money is going. For another, non-profits live a more complex life. Take increasing college tuition costs. Some of it is the administrative bloat we would expect. But some of it is fun “student life” types of activities like clubs, festivals, and paying Milo Yiannopoulos to speak and then cleaning up after the ensuing riots. These sorts of things arguably improve the student experience, but the typical student might not prefer an expensive college with clubs/festivals/Milo than a cheap college without them. More important, however, the typical student is rarely offered this choice without it being attached to a prestige damper.
So suppose it were proved that Khan Academy could teach you just as much as a normal college education, but for free. People would still ask whether employers would accept a Khan Academy degree, whether it would look good on a resume, whether people make fun of Khan Academy grads. The same is true of community colleges, second-tier colleges, and for-profit colleges. If prestige and its prospective uses are more important to many people than education per se, why can’t colleges just charge whatever they want irrespective of most normal market considerations?
This suggests that institutional rentier price-gouging may at times be indirect or socially mediated—and that it may come down to how service “products” are packaged. For example, many hospitals have switched from many-people-in-a-big-ward to private rooms. Once again, as with bells-and-whistles university campuses, the choice between expensive hospitals with private rooms versus cheap hospitals with roommates is not on offer. Perhaps more labor-intensive service industries have their own reasons for switching to more-bells-and-whistles services that people don’t necessarily want, and consumers just go along because for some reason (lack of information transparency, possibly) they’re not exercising choice as they would in other markets.
Some examples brought above may suggest that, as libertarians like to claim, government is inherently inefficient relative to private industry. Government handles most primary education and subways, and has its hand deep into health care. But for-profit hospitals aren’t much cheaper than government hospitals, and private schools usually aren’t much cheaper (and are sometimes more expensive) than government schools. And private colleges cost more than government-funded ones. So even if this general argument about government is right, it isn’t right in the cases where the worst problems with cost disease exist.
But maybe we can indict government in some other way: for example, regulation, which public institutions and private companies alike must deal with? This seems to be at least part of the story in health care, given how much money you can save by grey-market practices that avoid the FDA. It’s harder to apply it to colleges, though regulations like Title IX do affect costs in the educational sector.
This claim raises the general question of whether deregulation dampens cost-curve increases. Libertarians and most garden-variety conservatives say it does. It is hard to know: despite the supposed war on overregulation Republicans (and Democrats in some sectors) waged in the 1980s and 1990s, the number of pages in the Federal regulatory code continued to increase.
13. Total Number of Pages in the Code of Federal Regulations, 1975-2011
Source: Mercatus Center, George Mason University
Maybe the Trump Administration’s determination to deconstruct the administrative state will produce a different outcome. But it still may not affect cost disease very much. Consider pet health care, which is a much bigger business in the United States than most people realize. Veterinary care is much less regulated than human health care, yet its cost is rising as fast (or faster) than that of the human medical system.17 It’s hard to know what to make of this, except to say that sometimes demand is whimsical, and whimsy can end up being expensive.
There is yet another way to think about increased regulatory complexity: it happens not only through literal regulations, but also through fear of lawsuits. Institutions sometimes add extra layers of administration and expense not because they’re forced to, but because they fear being sued if they don’t and something goes wrong.
This happens 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 upset about all this. Any normal person would say, “You had a heart attack, so of course you’re upset; get over it or you might cause yourself another attack.” But if his doctor says this, and then a year later the patient commits suicide for some unrelated reason, his family can sue the doctor for “not picking up the warning signs” and win millions of dollars. So the doctor holds his tongue and instead brings a psychiatrist into play, who does an hour-long evaluation, charges the insurance company $500, and determines using his or her immense clinical expertise that the patient is upset because he just had a heart attack.
Those outside the field of medicine have no idea how often this sort of thing happens. People often say that the importance of lawsuits to medical cost increases is overrated because malpractice insurance doesn’t really cost that much, but the situation described above would never look lawsuit-related. There is so much anticipatory protection going on that it has gotten baked into professional realities. This has nothing to do with government regulations (except insofar as regulations make lawsuits easier or harder to bring), but it does drive cost increases, and a similar dynamic might apply to fields outside medicine as well.
Broader social trends may have something to do with all this, as well. Perhaps our tolerance for risk has changed. In other words, maybe what people are prepared to spend to mitigate risk is due less to a fear of being sued than to really caring more about whether or not people are protected. Playgrounds are changing because modern parents won’t let kids run around unsupervised on anything with sharp edges. Suppose that one in 10,000 kids suffers a serious playground-related injury. Is it worth making playgrounds cost twice as much and be half as fun in order to decrease that number to one in 100,000? This isn’t a rhetorical question; different people can have legitimately different opinions here.
Moreover, there is probably a difference between personal versus institutional risk tolerance. Every so often, an elderly person walking to the bathroom will fall and break a hip. This is a fact of life that the elderly deal with daily. Yet few elderly people spend thousands of dollars fall-proofing the route from their bed to their bathroom, or hiring people to watch them to make sure they don’t fall, or buy a bedside commode to make bathroom-related falls impossible. This suggests a revealed preference that the elderly are willing to tolerate a certain fall probability in order to save money and convenience.
But hospitals, which face huge lawsuits if any elderly person falls on the premises, are not willing to tolerate that probability. They put rails on elderly people’s beds, place alarms on them that will go off if the elderly person tries to leave the bed without permission, and hire patient care assistants who, among other things, go around carefully holding elderly people upright as they walk to the bathroom (I assume this job will soon require at least a master’s degree). As more things become institutionalized and the level of acceptable institutional risk tolerance sinks, the cost-risk tradeoff could shift upwards even if there isn’t a population-level trend toward more risk-aversion.
Then there is the cost of delinquency. Might things cost more for the people who pay because so many people don’t pay? This is somewhat true of colleges, where an increasing number of people are getting in on scholarships funded by the tuition of non-scholarship students. And everyone knows that student-loan interest rates are higher because of a pretty high default rate.
Delinquency also applies in health care. Hospitals complain of “frequent flier” patients who overdose on drugs on a near-weekly basis. They come in, get treated (hospitals can’t legally turn away emergency cases), get advised to get help for their addiction (without the slightest expectation that they will take the advice), and then get discharged. Most of them are poor and have no insurance, but each admission costs several thousand dollars, which is eventually paid by a combination of taxpayers and other hospital patients with good insurance who get big markups on their own bills.
The Politics of Cost Disease
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 that line 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. This discourse might improve if most people realized that some of the most important industries cost ten times as much as they used to for no obvious reason, plus they seem to be declining in quality, and nobody knows why. State that clearly, and many of our political debates are bound to appear in a different light.
For example: Some promote free universal college education, remembering a time when it was easy for middle-class people to afford college if they wanted it. Others oppose the policy, remembering a time when people didn’t depend on government handouts. Both statements are true. Lots of people paid for tuition at good colleges just by working summer jobs, which was not hard to pull off when college cost a tenth of what it does now. The modern conflict between opponents and proponents of free college education is over how to distribute our losses relative to the time before the ravages of cost disease. In the old days, we could combine low taxes with widely available education. Now we can’t because core things have become too expensive, and so we argue about which value to sacrifice. If we could figure out the causes of cost disease and reverse it, we wouldn’t need to have that argument.
Another example: Some get upset about teachers’ unions, saying they must be sucking the “dynamism” out of education because of increasing costs. Others defend them, saying teachers are underpaid and overworked and that without unions things would be even worse. Once again, in the context of cost disease, both are obviously true. Taxpayers are trying to protect their right to get their children an education as cheaply as their own. The teachers are trying to protect their right to make as much money as they used to. Again, the conflict is about how to distribute relative losses; somebody will be worse off than they were a generation ago, so who’s it going to be?
The same is true to greater or lesser degrees in the various debates over health care, public housing, public transportation costs, and so on. Imagine that the price of clean, fresh water were to dectuple. Some people would have to choose between drinking and washing dishes. Activists would argue that taking a shower is a basic human right, and grumpy talk show hosts would point out that in their day, parents taught their children not to waste water. A coalition would promote laws ensuring government-subsidized free water for poor families; a Fox News investigative report would show that some people receiving water on the government dime are taking long, luxurious showers. Everyone would get angry, but this would all be secondary to the fact that water costs ten times what it used to, for no obvious reason.
Think about what a reversal of cost disease might do in (for example) health care. How many people currently opposed to paying for universal health care would be happy to pay for it if cost a lot less, was less wasteful and more efficient, and its prices were expected to go down rather than up with every passing year?
Similarly, if government found a way to give people “free” college tuition for about $1,000 a year, and decent housing for only about half of what it costs now, that would be the greatest anti-poverty advance in U.S. history. That program is called “having things be as efficient as they were a few decades ago,” when poverty by any objective standard did plummet.
More generally, GDP per capita in the United States is now four to five times larger in constant dollars than it was in about 1950, yet most Americans still work forty-hour weeks, and some large-but-inconsistently-reported percent of Americans still live paycheck to paycheck. Some of this is because expected minimal standards of living have risen sharply, and some of it, more recently, is because most of the gains in the economy have gone to the rich who benefit from greater returns to invested capital. But some of it, maybe much of it, has to do with cost disease—with some concatenation of elusive structural changes within society that ramify throughout the economy and that are much worse in the United States than in other advanced countries.
Not everybody understands all of this, but intuitions often hit home. People sense that when the cost of basic human needs goes up faster than wages—when, even if your household is bringing in twice as much money as before, your health care and education cost ten times as much—you’re falling behind. If we don’t figure out what is really causing cost disease, and find a way to stanch and reverse it, the future of American politics may not get much better from here.
1Edward N. Luttwak, “Breaking the Bank,” The American Interest (September/October 2007).
2Warren Fiske, “Brat: U.S. school spending up 375 percent over 30 years but test score remain flat,” Politifact, March 2, 2015.
3“Summary of Major Findings in Long-Term Trend Assessments, 2012,” The Nation’s Report Card.
4See Scott Alexander, “Contra Robinson on Schooling,” Slate Star Codex, December 2, 2016; “Highlights from the Comments Thread on School Choice,” Slate Star Codex, December 4, 2016.
5“Table 320: Average undergraduate tuition and fees and room and board rates charged for full-time students in degree-granting institutions, by type and control of institution: 1964-65 through 2006-07,” Digest of Education Statistics, National Center for Education Statistics.
6Paul F. Campos, “The Real Reason College Tuition Costs So Much,” New York Times, April 4, 2015.
7Chris Conover, “The Cost of Health Care: 1958 vs. 2012,” Forbes, December 22, 2012.
8Some use this data to argue for the superiority of centralized government health systems, although the blog Random Critical Analysis has an alternative perspective. See “US life expectancy is below naive expectations mostly because it economically outperforms,” Random Critical Analysis, November 6, 2016.
9See Robert H. Brook et al., “The Health Insurance Experiment: A Classic RAND Study Speaks to the Current Health Care Reform Debate,” RAND Corporation, 2006; Katherine Baicker et al., “The Oregon Experiment—Effects of Medicaid on Clinical Outcomes,” New England Journal of Medicine, May 2, 2013.
10For example: Mark J. Perry, “Today’s new homes are 1,000 square feet larger than in 1973, and the living space per person has doubled over last 40 years,” AEI, February 26, 2014.
11Matt Yglesias, “NYC’s brand new subway is the most expensive in the world—that’s a problem,” Vox, January 1, 2017.
12Alon Levy, “Comparative Subway Construction Costs, Revised,” Pedestrian Observations, June 3, 2013.
13“Nursing Fact Sheet,” American Association of Colleges of Nursing.
14Lawrence Mishel, “Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True,” Economic Policy Institute, July 4, 2015.
15Tabarrok, “Private versus Public Health Care in India,” Marginal Revolution, December 6, 2016.
16“The secret of saline’s cost: Why a $1 bag can cost $700,” Advisory Board, August 27, 2013.
17Liran Einav, Amy Finkelstein, and Atul Gupta, “Is American Pet Health Care (Also) Uniquely Inefficient?” National Bureau of Economics Research, September 2016.
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