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When I read Scott Alexander's post I couldn't shake the notion that he could have saved himself a lot of writing if he simply read up on how CPI is calculated and noticed that it's a very limited measure of real inflation.
Serious question: do any reputable economists besides Tyler Cowen believe in cost disease?
Serious question: do any reputable economists besides Tyler Cowen believe in cost disease?
A more plausible theory is that cost disease is largely due to (1) regulatory capture and weak institutions, (2) coordination costs between various institutions and (3) what ultimately boils down to corruption (public officials acting with private interests). If you really want to understand rising costs in health-care, military, and construction you should pay close attention to the rise in outsourcing and pseudo-government agencies (eg US defense contractors, supposedly "private" corporations where 70%+ of revenue comes from the government).
France, Japan, China -- these are in fact highly centralized economies which means that they are able to operate national, robust healthcare and military systems with surprising efficiency. UK, Brazil, India and of course the USA (par excellence) -- these are highly decentralized and federalized economies which means large scale initiatives are very prone to succumbing to the dangers referenced above.
The source of the cost disease is the growing control of government over sectors of the economy.
In education:
https://academic.oup.com/qje/article-abstract/111/3/671/1839...
In healthcare, the cost disease began when Medicare programs began being created around the world.
Even within sectors, we see the pattern. For example, the two fields of medicine which have seen the least cost growth are cosmetic [1] and laser eye surgery. Not only have costs risen the least, but the quality of some procedures in these fields has improved tremendously over the last two decades. Both are electives, so there are fewer mandates requiring that they be covered by insurance and fewer redistributive programs to subsidise them.
[1] http://healthblog.ncpa.org/wp-content/uploads/2013/06/HA1-06...
One simple way to see this, really, is to consider a simple example (curiously omitted from economic textbooks) of a supply chain: You have two markets and three entities - producers, distributors and consumers, where producers sell to distributors and distributors sell to consumers. Now consider, in the case of competition, what should be the margin of the distributor in the equilibrium? That is, why should all the cost decrease be propagated to the consumers?
In reality, "equilibrium" prices are probably oligopolistic determined by some "relative market power", which is really about how much you can "screw" your customers. And health care and education are matter of life and death for most people, so yeah, high prices, unless there is a big factor that will put an end to that (which happens outside the U.S. through regulation and government price negotiation).
I think the problem is that the neoclassical theory of perfect competition is just flatly wrong, and markets actually tend to monopoly (oligopoly) pricing over time. (So the "perfect competition" is more an exception than a rule in the real world.) There is plenty evidence for this, see e.g. Keen & Standish: http://www.albany.edu/~gs149266/Keen%20&%20Standish%20(2006)... One simple way to see this, really, is to cons…
Food is also a matter of life and death.
The difference between food and healthcare/education is that the former is not as heavily subsidised as the latter.
>And health care and education are matter of life and death for most people, so yeah, high prices, unless there is a big factor that will put an end to that (which happens outside the U.S. through regulation and government price negotiation).
This is incorrect. The cost disease is a global phenomenon affecting most advanced economies.
Here is an example: School district budget: 11.3m Salaries: 4.5m Benefits: 3m That's for ~220 students and ~30 full time teachers... http://www.edline.net/files/stream/5D3207F7E11684C4-0000015B...
$51K is being spent per student per year? And $150K salary and $100K benefits per teacher? Even if there is a school district with that budget, it is hardly representative of most school districts.
I think the problem is that the neoclassical theory of perfect competition is just flatly wrong, and markets actually tend to monopoly (oligopoly) pricing over time. (So the "perfect competition" is more an exception than a rule in the real world.) There is plenty evidence for this, see e.g. Keen & Standish: http://www.albany.edu/~gs149266/Keen%20&%20Standish%20(2006)... One simple way to see this, really, is to cons…
>And health care and education are matter of life and death for most people, so yeah, high prices Food is also a matter of life and death. The difference between food and healthcare/education is that the former is not as heavily subsidised as the latter. >And health care and education are matter of life and death for most people, so yeah, high prices, unless there is a big factor that will put an end to that (which h…
I think that's because you can grow your own food, and you can also buy it from abroad. Not so much with health care or education (because it's a service, not a physical product).
So you can be (at least in the U.S.) screwed less over food than over health care.
I agree that I don't have a complete picture, but at least, people should consider evidence for this theory.
> The cost disease is a global phenomenon affecting most advanced economies.
The problem is, the economies that have strong government actor working on behalf of consumers (either in the form of regulation, or a public corporation that competes in the market too) are actually affected less.
Serious question: do any reputable economists besides Tyler Cowen believe in cost disease?
Cost disease is definitely a real thing but you should be very wary of the diagnoses proposed by these amateur (libertarian) bloggers. Even a cursory analysis reveals that attempts to blame regulation, utilization, or government spending do not hold water -- all you have to do is compare the US to France, Germany and Japan. A more plausible theory is that cost disease is largely due to (1) regulatory capture and weak…
Agreed. These amateur ideologues latch onto anything that seems to support their beliefs with very little hard thinking.
> ultimately boils down to corruption ... highly decentralized and federalized economies
Maybe, but Western nations are arguably more centralized today compared to 50 years ago.
70 years ago the US won a world war and rebuilt Europe and Japan. 60 years ago the US built the interstate highway system. 50 years ago the US put people on the moon.
Can you imagine the US doing any of these things today? Today we can't win a war in one country (not to mention fighting in the Pacific and Atlantic simultaneously).
The space shuttle is gone with no replacement.
And we can't even maintain the roads and bridges that our grandparents built from nothing.
These were years with great decentralization and with no computers. Organized crime played a much larger role in the economy.
What's changed in the last 5 or 6 decades?
Earlier quoted context omitted.
>And health care and education are matter of life and death for most people, so yeah, high prices Food is also a matter of life and death. The difference between food and healthcare/education is that the former is not as heavily subsidised as the latter. >And health care and education are matter of life and death for most people, so yeah, high prices, unless there is a big factor that will put an end to that (which h…
> Food is also a matter of life and death. I think that's because you can grow your own food, and you can also buy it from abroad. Not so much with health care or education (because it's a service, not a physical product). So you can be (at least in the U.S.) screwed less over food than over health care. I agree that I don't have a complete picture, but at least, people should consider evidence for this theory. > The…
I don't see any evidence for that. A couple counter-examples: Singapore and developing countries like India and China have more market based healthcare systems than Western Europe and the US, and spend far less on healthcare as a percentage of GDP. India and China are making significant gains in life expectancy, but that may be explained away by the fact that they're starting from a lower level. Singapore however has a higher life expectancy than European countries.
The US is the outlier, with approximately half of healthcare spending being private, yet spending a very high percentage of GDP on healthcare. But I would argue that much of this 'private' is quasi public, as it's a manufactured outcome as a result of significant intervention by state and federal governments, like tax incentives for employers to provide healthcare through large insurance companies, and state mandates requiring health insurance to be comprehensive.
The fields of medicine in the US less subsidized via these kinds of interventions; cosmetic and laser eye surgery, have seen prices increase at below the rate of inflation.
The key is that people pay out of pocket for cosmetic and laser eye surgery:
http://healthblog.ncpa.org/why-cant-the-market-for-medical-c...
The government intervention in the private US healthcare system encourages exactly the opposite.
Also with respect to US healthcare spending, it's worth mentioning the US is a higher income country than other OECD countries, and there seems to be a trend toward healthcare spending as a percentage of GDP increasing with level of wealth, independent of all other factors. The US does have a more capitalised healthcare system, with more diagnostic equipment and advanced treatment centres for things like neonatal care. Often not mentioned is that the US has some of the best cancer survival rates in the world.
Mind you, the US is definitely suffering from the cost disease in healthcare, but the relatively higher wealth level of the US may explain the difference with Europe.
