6 ms·

Identifying Sources of Cost Disease

66 points by kespindler 9y ago

nullc 9y ago
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.
- xyzzyz 9y ago
  What writing exactly could he save himself? I'm confused.
- rbcgerard 9y ago
  What real inflation measure should he have used?
- taneq 9y ago
  I don't think saving himself writing is high on the list of that dude's motivations. :P
twobyfour 9y ago
Here's a major one the article missed: short-sightedness. In industry and commerce, that may be optimizing for short-term cost-cutting over long-term efficiency. In education, that might be standards and incentives that lead schools to "teach the test" so the teacher/school gets a positive evaluation this semester - rather than investing in teaching how to learn or instilling a love of learning. In healthcare, that might be high costs and bureaucratic obstacles that deter people from seeking evaluative and preventative care - at the cost of much more expensive later-stage treatments down the line. In real estate, it could be crappy building materials and lower standards of craftsmanship that help build faster and cheaper but result in more problems and higher utility and eventually maintenance costs down the line. In infrastructure, it can be deferring maintenance so you can cut taxes - resulting in more expensive repairs when things fall apart completely for want of a bit of paint or grease. And so on ad nauseum.
- tmbsundar 9y ago
  In quality circles this is known as cost of poor quality. We might need Deming type thinking again to counter the short term thinking. * Deming's chain reaction: * http://www.transformationforum.org/Chain_Reaction.html http://www.transformationforum.org/Chain_Reaction.html
calafrax 9y ago
Very interesting observations and a very complex subject with many factors. One theory of economics is that it only actually works if very few of the market participants act like rational economic actors. In the example of higher education, for instance, universities used to be a great value for students. Now they are approaching break-even on average in terms of cost-benefit for students, with some students losing and some winning. That is a market based outcome and is exactly what a market should do but people don't like it. In the past maybe professors and administers thought in non-market ways, such as that they should impart knowledge for the good of society, etc, etc, as opposed to rationally optimizing their income.
- taneq 9y ago
  > That is a market based outcome and is exactly what a market should do but people don't like it. Maybe... whispers maybe not everything is best determined by the free market?
- Aron 9y ago
  A break-even cost-benefit is not a market based outcome.
kevinr 9y ago
Serious question: do any reputable economists besides Tyler Cowen believe in cost disease?
- kvb 9y ago
  I think most do... Can you point to some that don't?
  - kevinr 9y ago
    It is, unfortunately, impossible to prove a negative, not that that's ever stopped anyone from trying. For example, though, a cursory Google turns up no instances of Paul Krugman or Larry Summers mentioning it, which I would expect for something which "most economists" understood to exist.
- deleted 9y ago
  [deleted]
- redy 9y ago
  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 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.
rbcgerard 9y ago
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/5D3207F7E11684C4-0000015BE8DF4EC2/050817+Budget+Presentation-Budget+Hearing.pdf http://www.edline.net/files/stream/5D3207F7E11684C4-0000015B...
- tasty_freeze 9y ago
  Request URL is not accessible. Try logging in to access the resource. $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.
  - rbcgerard 9y ago
    http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Education/Board_Meeting_Presentations/2016-2017 http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Edu... they have some part time teachers - but that is about the gist of it...and the outcomes not super impressive for the money...
Jabanga 9y ago
The cost disease can't be cured gracefully, for too many people have a vested interest in maintaining the delusion that government is not inefficient. 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/111/3/671/1839935/How-Teachers-Unions-Affect-Education-Production 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/HA1-06-17-2013.jpg http://healthblog.ncpa.org/wp-content/uploads/2013/06/HA1-06...
js8 9y ago
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).pdf http://www.albany.edu/~gs149266/Keen%20&%20Standish%20(2006)... 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).
- Jabanga 9y ago
  >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 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.
  - js8 9y ago
    > 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 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.
nwah1 9y ago
The main concept this is completely neglecting is economic rent.

66 points by kespindler 9y ago

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.

xyzzyz 9y ago
What writing exactly could he save himself? I'm confused.
rbcgerard 9y ago
What real inflation measure should he have used?
taneq 9y ago
I don't think saving himself writing is high on the list of that dude's motivations. :P

twobyfour 9y ago

Here's a major one the article missed: short-sightedness. In industry and commerce, that may be optimizing for short-term cost-cutting over long-term efficiency. In education, that might be standards and incentives that lead schools to "teach the test" so the teacher/school gets a positive evaluation this semester - rather than investing in teaching how to learn or instilling a love of learning. In healthcare, that might be high costs and bureaucratic obstacles that deter people from seeking evaluative and preventative care - at the cost of much more expensive later-stage treatments down the line. In real estate, it could be crappy building materials and lower standards of craftsmanship that help build faster and cheaper but result in more problems and higher utility and eventually maintenance costs down the line. In infrastructure, it can be deferring maintenance so you can cut taxes - resulting in more expensive repairs when things fall apart completely for want of a bit of paint or grease. And so on ad nauseum.

tmbsundar 9y ago
In quality circles this is known as cost of poor quality. We might need Deming type thinking again to counter the short term thinking. * Deming's chain reaction: * http://www.transformationforum.org/Chain_Reaction.html http://www.transformationforum.org/Chain_Reaction.html

calafrax 9y ago

Very interesting observations and a very complex subject with many factors. One theory of economics is that it only actually works if very few of the market participants act like rational economic actors. In the example of higher education, for instance, universities used to be a great value for students. Now they are approaching break-even on average in terms of cost-benefit for students, with some students losing and some winning. That is a market based outcome and is exactly what a market should do but people don't like it. In the past maybe professors and administers thought in non-market ways, such as that they should impart knowledge for the good of society, etc, etc, as opposed to rationally optimizing their income.

taneq 9y ago
> That is a market based outcome and is exactly what a market should do but people don't like it. Maybe... whispers maybe not everything is best determined by the free market?
Aron 9y ago
A break-even cost-benefit is not a market based outcome.

kevinr 9y ago

Serious question: do any reputable economists besides Tyler Cowen believe in cost disease?

kvb 9y ago
I think most do... Can you point to some that don't?
- kevinr 9y ago
  It is, unfortunately, impossible to prove a negative, not that that's ever stopped anyone from trying. For example, though, a cursory Google turns up no instances of Paul Krugman or Larry Summers mentioning it, which I would expect for something which "most economists" understood to exist.
deleted 9y ago
[deleted]
redy 9y ago
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 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.

rbcgerard 9y ago

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/5D3207F7E11684C4-0000015BE8DF4EC2/050817+Budget+Presentation-Budget+Hearing.pdf http://www.edline.net/files/stream/5D3207F7E11684C4-0000015B...

tasty_freeze 9y ago
Request URL is not accessible. Try logging in to access the resource. $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.
- rbcgerard 9y ago
  http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Education/Board_Meeting_Presentations/2016-2017 http://www.edline.net/pages/Shelter_Island_UFSD/Board_of_Edu... they have some part time teachers - but that is about the gist of it...and the outcomes not super impressive for the money...

Jabanga 9y ago

The cost disease can't be cured gracefully, for too many people have a vested interest in maintaining the delusion that government is not inefficient. 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/111/3/671/1839935/How-Teachers-Unions-Affect-Education-Production 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/HA1-06-17-2013.jpg http://healthblog.ncpa.org/wp-content/uploads/2013/06/HA1-06...

js8 9y ago

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).pdf http://www.albany.edu/~gs149266/Keen%20&%20Standish%20(2006)... 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).

Jabanga 9y ago
>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 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.
- js8 9y ago
  > 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 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.

nwah1 9y ago

The main concept this is completely neglecting is economic rent.