The discussion of "quality" in healthcare overlooks a point made by RCA and GMU's own Robin Hanson: there appears to be no health benefit from marginal expenditures on healthcare.
On loan forgiveness: it's not just recently that large numbers of loans have been expected to be forgiven. I know of a person who worked as a government lawyer for years specifically because there was a rule that once a certain number of years in there or other "public service", the law school loans would be forgiven.
I consider Murphy and Topel on the value of health care to be a swindle. American *health* improved a lot over the period that they studied. But it's a swindle to imply that this come from the medical services that we call health care. Instead, a lot of it comes from people taking better care of themselves, from better air quality, jobs that are less dangerous and physically demanding, etc.
There's a lot of good points made here, but I don't think it's just expensive surgeries where medical care is expensive. I broke my wrist in college, and that required an emergency room visit(I occupied a hospital bed for maybe an hour) and three or four doctor's visits. For that, my parents' insurance paid many thousands of dollars. I don't think setting a bone, putting a cast on someone's arm, and looking at x-rays are such amazing modern techniques that justify the high prices. There's more to it.
I propose the Eagle Scout could figure out how to do some medical service (setting a bone, for example), then there’s something broken if that service isn’t affordable.
All credit to Goff, his is a well reasoned argument, and it’s one I tend to hear the most for healthcare. However I just don’t think it comes close to telling the whole healthcare story. Quality and incomes do not explain the pricing and payment process for cash customers in the US. Quality adjusted heart treatment prices fell, ok, but what about the crazy list prices for things like ambulance rides? What quality improvements justify the astronomical list prices of non complex health services? This is a market unlike any other, one layered with regulation and cross subsidies, lacking any sort of price discovery. And I don’t know what political agenda he’s talking about, I don’t hear the echoes of John Cochrane anywhere on capitol hill unless my ears are busted! Maybe I should get a hearing aid, thank god I don’t need a prescription for that anymore (how long did that take!)
List prices matter to anyone without insurance. Or to anyone with insurance that is incomplete or otherwise screwed up. Most member cost shares are calculated based on list prices, which can make it very important (deductibles and coinsurance are usually based straight off the list price).
Moreover, high list price + low copay still means that all transactions have to flow through insurance. That always makes things more complicated then cash pay.
Does that fact argue for or against the conclusion? I.e., is that contributing to prices that don’t make sense, or to prices that reflect quality and demand?
As someone who has benefited from many medical advances in the last few decades that drastically improved my quality of life...I think the author is missing the point.
It is true that nerds and engineers invented lots of cool medicines and technologies and methods that have made our lives much better. It's not clear to me that "the healthcare system" was necessary for these things to happen. Between me and the prescription is a virtual army of service providers and administrators of quite dubious quality and value add. I know as I'm one of those people (I work in health insurance).
That disposable income goes into medical care is a tautology. If you need a prescription to save your life, of course you are going to put every dollar towards it that you have. And someone else's if you come to it.
Let me take a simple example. Insulin rose in cost From $30 to $300. If you need insulin and you don't get it, you die. So of course someone is going to put every dollar they have towards insulin.
Why did it do that? Well, we have a complicated health system that rewards something called "manufacturer rebates" so it made sense to jack up the list price and pay a rebate.
An army of highly trained professionals kept putting numbers into spreadsheets and trying to out spreadsheet jockey each other to take advantage of this system better then the professionals working for the other guy. Other professionals wrote white papers saying how the system should be changed to benefit one group of spreadsheet jockeys. Doctors had to spend time filling out Prior Authorizations so that insurers could credibly threaten to make getting a manufacturers drug difficult so that they would cough up more rebates (i.e. increase the nominal price faster).
None of that bullshit had anything to do with the innovation the nerds and engineers were coming up with. It's great that nowadays I have a device that sends live blood sugar readings to my phone. But nothing about the way the healthcare sector is designed was necessary for that to happen. It likely would have happened if we had a totally different healthcare system.
Singapore provides state of the art healthcare for 3% of GDP. And unlike Europe you can't complain its because they are poorer. Instead of wasting money in a Red Queen Race of dueling spreadsheet jockeys they get to deploy those resources in more useful ways.
This is my general critique of "things are better now." Yes, things are better because of nerds and engineers and some entrepreneurial businessmen. It's not clear that "the system" helped them do what they did, rather then they succeeded in spite of it.
"but these are treatments that an affluent society wants to make to keep “mom” and “dad” alive and well for 25 more years, “grandma” for 5 more years, and the “pre-me” baby alive 85 more years."
On education, it is clear that the growth in non-educational services is a big driver in the growth in cost. However, is it not true that the growth in non-educational services is driven, in part, by the necessity to obtain the diploma in the first place? If we are required to spend 4+ years to get a diploma in order to have "the good life", then why not make it fun?
On health care, as I am about to embark on a cataract surgery (in my 50s), I am reminded on how far that surgery has come since my grandfather had it in the 1970s, and even since my dad had it in the 1980s (in his 50s). In enabled my dad, and presumably will enable me, to have an extra couple of decades of productive capacity and improved quality of life. Unfortunately for my grandfather, he was born too early - it didn't work and he went blind.
However, pricing in health care is irrational, by design, in the US. It is a function of a pollical system that makes pricing non-transparent in order to hide the massive subsidies (and taxes). The lack of transparency and complexity is intuitively inefficient and wasteful. It is also highly inequitable and often arbitrary, which is mostly what infuriates so many people.
Not just that - 80% of healthcare expenditure is spent on the 20% sickest. There is NO WAY an extra year of life in the 20% sickest is worth $1M to the economy, or even the person, given that the majority of this population are retired or disabled.
And even in the 20% of healthcare going to the rest of the pop - even then, due to demographic pyramids and aging, most is going to retired people. Retired people are not driving $1M in economic value yearly, almost nobody is.
And to your point, 80%+ of anybody in the US aren't even ABLE to pay $1M for another year of life even if they valued it this high. That $1M per life year number is just flagrantly, blatantly, "not even wrong."
". . . income levels and growth accounts for almost all expenditure differences across countries and over the long run."
But this only begs the question as to why supply doesn't respond to expenditures over the long run. Prices can remain relatively higher over the long run in particular countries only if the supply can't migrate to the higher priced market. In the case of the medical racket in America, it is obvious that supply restrictions like professional licensing, Med School accreditation, FDA licensing, and patents are extremely valuable privileges that prevent cheap foreign doctors and cheap foreign drugs from flooding into America and limit the ability of unprivileged Americans and American firms to join the ranks of the privileged. Likewise, the academic racket has its accreditation restrictions and selective government subsidies protecting incumbent Universities against competition, notwithstanding the extreme surplus of domestic and foreign Ph.D.s who are capable of teaching.
Moreover, we shouldn't overlook the fact that many American individuals don't enjoy high income levels, and that there would be a demand for more affordable healthcare and educational services if the market were permitted to cater to their needs. Instead of getting rid of the restrictions on competition that drive up costs in America (or instead of confronting medical monopolists with a monopsonist single payer, as is the case in most industrialized countries), however, the D.C. regime's policy instead is to subsidize the poor so they can pay the restrictionist prices too and thus make the politicians look good even as we throttle our ability to accumulate capital goods (meaning that incomes and expenditures only grow in nominal terms, not in real terms) with accelerated creation of dollars out of thin air.
Healthcare and College Tuition: a Baumol Disease for American Only
Arguably, over the last 20 years, US GDP has been growing because more production was delivered per worker in all sectors except these 2 sectors. While Amazon warehouse employees became more and more productive at packing and shipping, university and hospital work was not reorganized in a way that improves their productivity as quickly.
The rise of forced expense has Americans them to work more and increase the American GDP to obtain the provision of education and healthcare whereas European and Japanese did not experience cost increase in these sectors. The European and Japanese GDP did not increase as much. My view is that American drive world economic growth because they are college and healthcare debt slaves.
While healthcare costs 15% (or is it 17%) of US GDP, Europe and Japan reach better health outcomes at half that cost. Singapore spends 4% of its GDP on public healthcare and the rest is financed through personal health savings account.
The rot in the US comes from a bad institutional foundation: the story goes that corporation threw money into inefficient private insurance as they were desperate to offer tax-exempt company perks in an era of 90% marginal incomes. Incentives did the rest.
The tuition cost is another mystery to me. I had to spend $50 a month to follow the Stanford Coursera Deep Learning Specialisation, which took me 6 month to complete, and seemed money well spent to me. I can imagine spending five times that amount per month if I want to study full time. I could pay for $2000 of textbooks if I don't go to the library, but there again, the same textbooks in China cost around $10 each. So now we are talking of $50 of textbooks...
France "free education" actually costs 12000 euros per year per college student, but the elite institution cost twice that to the State. So again, we are talking of $26,000 for something like the MIT and $10000 for some non-selective university.
For tuition fee, it also seems to me that these are bad incentives and wrong feedback loops at play.
That is the fundamental misunderstanding – your Coursera point. You’re paying $50 for the course, and $49,950 per year for access to and training on how to get wired into the Stanford network. A networked economy turns ordinary humans into insane mode productivity beasts once they are hardwired into the right networks. That is what Stanford is selling you. That’s why those graduates go onto to earn $500k a year within a few years
It seems to me more signaling value than networking here, but you have a point for these trophy diplomas. They have a great roi. Now the increasing tuition price does not per se make a university more prestigious, so there seem to be some Ricardian rent extraction here.
There’s definitely some signaling, but in my experience, at least, in business related disciplines, the bulk of the value isn’t getting hardwired into the relevant networks
I'm worried that consumers are somewhat irrational and lacking willpower, and that this causes a lot of cost disease inflation.
For your example, the fancier haircut. OK, sure, it feels nicer if they take their time and pamper you with a shampoo. It costs maybe $10 more, and most people can afford that. But it's not *much* nicer. People pay for it carelessly, without really thinking about whether it's "worth it." They just think "I can afford $10," not thinking about how they've basically chosen to double the cost of haircuts for the rest of their life. And pretty soon the barber stops *offering* the cheap cuts, because they can make more money from fancy cuts, so now the rest of us have no choice but to pay extra.
So many things are like that. The cheap, basic options that I used to rely on have mostly disappeared. Now the "fancy" option is the only option, at least without a long search for the one last guy still doing cheap haircuts/meals/whatever (usually in the immigrant neighborhoods).
Does that mean that consumers are not somewhat irrational and lacking willpower in other markets that have not experienced a lot of cost disease inflation? That just takes us back to square one, what the heck is going on?
I feel like consumers are *semi* rational, and some markets just make it much easier to be rational than others.
EG, it's easy to look at the price of gas, and it's all the same stuff (commodity). That makes it really hard to upsell consumers on "fancy" gas, so gas stations are still the same slightly scuzzy, cheap places they've always been.
People will also put more effort into scrutinizing a really big purchase, like a house or a car. There's still some cost creep that happens, but you can't just throw in a stupid service, double the price, and expect people to people to pay it. All the old, basic houses/cars are still on the market, too.
But for fast food and quick, cheap services? People just don't have the time or attention to be properly rational there.
Sorry, all due respect, your arguments don’t stand up here.
Note you have shifted from education and healthcare (for the latter of which it is quite obvious we have nothing like a typical free market, and for the former I wouldn’t argue we do either) to pedestrian, free market, buyer-foots-the-bill services.
Even if you are correct that consumers don’t have the time to be “properly rational” there, entrepreneurs do. If there were a sufficiently large market for a cheaper service at a lower price, someone would likely fill it - and exploit the market opportunity that existed to provide a lesser bundle at a lower price.
I also submit that in your personal definition of “properly rational” you are ignoring the value of people’s time. And I do not mean by this the time spent searching out the less expensive product/service bundle. The fact that these lower quality, lower cost services don’t exist (except “in immigrant neighborhoods”, as you note) is a pretty good indicator that the market of people who think the way you claim they should is for the most part insufficiently large. It’s one thing to claim that “many” people are irrational. Claiming that *almost all* are is a pretty strong statement.
While I’m not claiming that all consumers are perfectly rational, I do think that claim for the types of services you’re referring to is closer to reality than your “not properly rational” one.
Those are some good critiques. I don't really have an answer for them, I will just say that I'm not a professional economist, just a guy who reads econ blogs for fun. I have a vague *feel* that something's not right with the economy, and I try to explain that feeling as best I can, but I wish that a professional economist could do it better than I can.
Very good piece by Goff. I had to laugh at that this line "....get their kids not just into Harvard or Stanford but places such as USC." I am sure it is not his intention but it makes USC sound like some storefront college. I will have you know that USC students can wear sweaters around their necks with the best of them.
"I mean it's one thing for movie stars to commit felonies and pay hundreds of thousands to get their kids into a Harvard, Yale, MIT, or Stanford . . . but USC ??? Is that even above a community college?"
Excellent post. Along the same lines Brian Goff argues in his post above, I used Joe Newhouse's article to make the point about quality of medical care. It was published in 1992. Newhouse makes a crucial error by omission but, nevertheless, his basic case stands. The article is here: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.6.3.3
Thanks for the detailed analysis. Tyler has previously written that one of the reasons that health care expenditure in the US is so high, is that health care is a consumable good, and that citizens of the US are among the biggest consumers in the world (US = 5% of the world’s population, but 25% of legal opioid consumption, ~50% of the world’s defence expenditure).
However, what is not clear is why the cost of health care is double the OECD average, even when adjusted for quality.
In fact, access is an important measure of quality, and providing 5 star care to the wealthy, but no/minimal care to the poor does not solve the health care problem.
Life expectancy (a measure of population level health care/culture/health behaviours/cost of health) shows the US well behind other developed countries.
In fact, life expectancy is going down in the US with time (even before the COVID epidemic).
Obesity/diabetes/deaths of despair are all health issues.
Whilst at the level of a wealthy individual (or well insured individual), health care in the US is at or better than world best; but at a population level, care is too expensive or non existent for most of the rest of the population.
Govt provided population level health care works well in Germany and France, works not so well in the UK (the problems of the NHS are well described).
Blended Govt/Private models like Canada and Australia work very well at both the individual and at the population level, and are affordable for the taxpayer.
A comparative analysis of health systems which work well versus the US system would be great.
Relying on the wealthy, who can afford to consume high levels of health expenditure, only proves part of the issue.
Goff writes: "Do we really think that all of these students and families are being duped?"
Not "all" for sure.
But I work with lots of first gen college grads. They are, indeed, often duped. They don't even like the preppy parties, hot yoga, cafeteria wild mushroom risotto, and the rest of the "experience" that much. They do naively expect wage returns for, shall we say, non-STEM majors.
They have no college grad parent to explain "Um, Art History?" con here.
Read: "Peeling The College Career Services Office Onion: Why They Are Terrible."
Even as seniors, many get false reassurance the job stuff will work out. Until they're across the stage and out the door.
I think the piece is well reasoned and makes valid points that are indeed likely explanatory in *part*, and in particular on the higher education side the point re: more than one product.
However, his argument does nothing to explain the almost equal rise in the cost of “lower education” / secondary education (534 vs 586 for higher education per Helland and Tabarrok).
I’d be curious to hear Goff’s explanation of the rise in secondary education costs and spending.
The discussion of "quality" in healthcare overlooks a point made by RCA and GMU's own Robin Hanson: there appears to be no health benefit from marginal expenditures on healthcare.
On loan forgiveness: it's not just recently that large numbers of loans have been expected to be forgiven. I know of a person who worked as a government lawyer for years specifically because there was a rule that once a certain number of years in there or other "public service", the law school loans would be forgiven.
I consider Murphy and Topel on the value of health care to be a swindle. American *health* improved a lot over the period that they studied. But it's a swindle to imply that this come from the medical services that we call health care. Instead, a lot of it comes from people taking better care of themselves, from better air quality, jobs that are less dangerous and physically demanding, etc.
There's a lot of good points made here, but I don't think it's just expensive surgeries where medical care is expensive. I broke my wrist in college, and that required an emergency room visit(I occupied a hospital bed for maybe an hour) and three or four doctor's visits. For that, my parents' insurance paid many thousands of dollars. I don't think setting a bone, putting a cast on someone's arm, and looking at x-rays are such amazing modern techniques that justify the high prices. There's more to it.
I propose the Eagle Scout could figure out how to do some medical service (setting a bone, for example), then there’s something broken if that service isn’t affordable.
That was supposed to say “Eagle Scout standard”.
All credit to Goff, his is a well reasoned argument, and it’s one I tend to hear the most for healthcare. However I just don’t think it comes close to telling the whole healthcare story. Quality and incomes do not explain the pricing and payment process for cash customers in the US. Quality adjusted heart treatment prices fell, ok, but what about the crazy list prices for things like ambulance rides? What quality improvements justify the astronomical list prices of non complex health services? This is a market unlike any other, one layered with regulation and cross subsidies, lacking any sort of price discovery. And I don’t know what political agenda he’s talking about, I don’t hear the echoes of John Cochrane anywhere on capitol hill unless my ears are busted! Maybe I should get a hearing aid, thank god I don’t need a prescription for that anymore (how long did that take!)
"List" prices don't matter, the actual price is typically negotiated by the third-party insurer.
Thanks, I wasn't implying that the list price is what’s paid. But it does matter (reimbursement, extracting surplus from cash customers).
List prices matter to anyone without insurance. Or to anyone with insurance that is incomplete or otherwise screwed up. Most member cost shares are calculated based on list prices, which can make it very important (deductibles and coinsurance are usually based straight off the list price).
Moreover, high list price + low copay still means that all transactions have to flow through insurance. That always makes things more complicated then cash pay.
Does that fact argue for or against the conclusion? I.e., is that contributing to prices that don’t make sense, or to prices that reflect quality and demand?
As someone who has benefited from many medical advances in the last few decades that drastically improved my quality of life...I think the author is missing the point.
It is true that nerds and engineers invented lots of cool medicines and technologies and methods that have made our lives much better. It's not clear to me that "the healthcare system" was necessary for these things to happen. Between me and the prescription is a virtual army of service providers and administrators of quite dubious quality and value add. I know as I'm one of those people (I work in health insurance).
That disposable income goes into medical care is a tautology. If you need a prescription to save your life, of course you are going to put every dollar towards it that you have. And someone else's if you come to it.
Let me take a simple example. Insulin rose in cost From $30 to $300. If you need insulin and you don't get it, you die. So of course someone is going to put every dollar they have towards insulin.
Why did it do that? Well, we have a complicated health system that rewards something called "manufacturer rebates" so it made sense to jack up the list price and pay a rebate.
An army of highly trained professionals kept putting numbers into spreadsheets and trying to out spreadsheet jockey each other to take advantage of this system better then the professionals working for the other guy. Other professionals wrote white papers saying how the system should be changed to benefit one group of spreadsheet jockeys. Doctors had to spend time filling out Prior Authorizations so that insurers could credibly threaten to make getting a manufacturers drug difficult so that they would cough up more rebates (i.e. increase the nominal price faster).
None of that bullshit had anything to do with the innovation the nerds and engineers were coming up with. It's great that nowadays I have a device that sends live blood sugar readings to my phone. But nothing about the way the healthcare sector is designed was necessary for that to happen. It likely would have happened if we had a totally different healthcare system.
Singapore provides state of the art healthcare for 3% of GDP. And unlike Europe you can't complain its because they are poorer. Instead of wasting money in a Red Queen Race of dueling spreadsheet jockeys they get to deploy those resources in more useful ways.
This is my general critique of "things are better now." Yes, things are better because of nerds and engineers and some entrepreneurial businessmen. It's not clear that "the system" helped them do what they did, rather then they succeeded in spite of it.
"but these are treatments that an affluent society wants to make to keep “mom” and “dad” alive and well for 25 more years, “grandma” for 5 more years, and the “pre-me” baby alive 85 more years."
All of this happens in Singapore for 3% of GDP.
On education, it is clear that the growth in non-educational services is a big driver in the growth in cost. However, is it not true that the growth in non-educational services is driven, in part, by the necessity to obtain the diploma in the first place? If we are required to spend 4+ years to get a diploma in order to have "the good life", then why not make it fun?
On health care, as I am about to embark on a cataract surgery (in my 50s), I am reminded on how far that surgery has come since my grandfather had it in the 1970s, and even since my dad had it in the 1980s (in his 50s). In enabled my dad, and presumably will enable me, to have an extra couple of decades of productive capacity and improved quality of life. Unfortunately for my grandfather, he was born too early - it didn't work and he went blind.
However, pricing in health care is irrational, by design, in the US. It is a function of a pollical system that makes pricing non-transparent in order to hide the massive subsidies (and taxes). The lack of transparency and complexity is intuitively inefficient and wasteful. It is also highly inequitable and often arbitrary, which is mostly what infuriates so many people.
Not just that - 80% of healthcare expenditure is spent on the 20% sickest. There is NO WAY an extra year of life in the 20% sickest is worth $1M to the economy, or even the person, given that the majority of this population are retired or disabled.
And even in the 20% of healthcare going to the rest of the pop - even then, due to demographic pyramids and aging, most is going to retired people. Retired people are not driving $1M in economic value yearly, almost nobody is.
And to your point, 80%+ of anybody in the US aren't even ABLE to pay $1M for another year of life even if they valued it this high. That $1M per life year number is just flagrantly, blatantly, "not even wrong."
". . . income levels and growth accounts for almost all expenditure differences across countries and over the long run."
But this only begs the question as to why supply doesn't respond to expenditures over the long run. Prices can remain relatively higher over the long run in particular countries only if the supply can't migrate to the higher priced market. In the case of the medical racket in America, it is obvious that supply restrictions like professional licensing, Med School accreditation, FDA licensing, and patents are extremely valuable privileges that prevent cheap foreign doctors and cheap foreign drugs from flooding into America and limit the ability of unprivileged Americans and American firms to join the ranks of the privileged. Likewise, the academic racket has its accreditation restrictions and selective government subsidies protecting incumbent Universities against competition, notwithstanding the extreme surplus of domestic and foreign Ph.D.s who are capable of teaching.
Moreover, we shouldn't overlook the fact that many American individuals don't enjoy high income levels, and that there would be a demand for more affordable healthcare and educational services if the market were permitted to cater to their needs. Instead of getting rid of the restrictions on competition that drive up costs in America (or instead of confronting medical monopolists with a monopsonist single payer, as is the case in most industrialized countries), however, the D.C. regime's policy instead is to subsidize the poor so they can pay the restrictionist prices too and thus make the politicians look good even as we throttle our ability to accumulate capital goods (meaning that incomes and expenditures only grow in nominal terms, not in real terms) with accelerated creation of dollars out of thin air.
As a french, I view the exorbitant cost of healthcare and college as a failure of US society to deliver basic services and with curiosity. For a review of US and other systems (in French): https://economiepublique.blogspot.com/2019/07/le-cout-de-lassurance-maladie.html
Healthcare and College Tuition: a Baumol Disease for American Only
Arguably, over the last 20 years, US GDP has been growing because more production was delivered per worker in all sectors except these 2 sectors. While Amazon warehouse employees became more and more productive at packing and shipping, university and hospital work was not reorganized in a way that improves their productivity as quickly.
The rise of forced expense has Americans them to work more and increase the American GDP to obtain the provision of education and healthcare whereas European and Japanese did not experience cost increase in these sectors. The European and Japanese GDP did not increase as much. My view is that American drive world economic growth because they are college and healthcare debt slaves.
While healthcare costs 15% (or is it 17%) of US GDP, Europe and Japan reach better health outcomes at half that cost. Singapore spends 4% of its GDP on public healthcare and the rest is financed through personal health savings account.
The rot in the US comes from a bad institutional foundation: the story goes that corporation threw money into inefficient private insurance as they were desperate to offer tax-exempt company perks in an era of 90% marginal incomes. Incentives did the rest.
The tuition cost is another mystery to me. I had to spend $50 a month to follow the Stanford Coursera Deep Learning Specialisation, which took me 6 month to complete, and seemed money well spent to me. I can imagine spending five times that amount per month if I want to study full time. I could pay for $2000 of textbooks if I don't go to the library, but there again, the same textbooks in China cost around $10 each. So now we are talking of $50 of textbooks...
France "free education" actually costs 12000 euros per year per college student, but the elite institution cost twice that to the State. So again, we are talking of $26,000 for something like the MIT and $10000 for some non-selective university.
For tuition fee, it also seems to me that these are bad incentives and wrong feedback loops at play.
That is the fundamental misunderstanding – your Coursera point. You’re paying $50 for the course, and $49,950 per year for access to and training on how to get wired into the Stanford network. A networked economy turns ordinary humans into insane mode productivity beasts once they are hardwired into the right networks. That is what Stanford is selling you. That’s why those graduates go onto to earn $500k a year within a few years
It seems to me more signaling value than networking here, but you have a point for these trophy diplomas. They have a great roi. Now the increasing tuition price does not per se make a university more prestigious, so there seem to be some Ricardian rent extraction here.
There’s definitely some signaling, but in my experience, at least, in business related disciplines, the bulk of the value isn’t getting hardwired into the relevant networks
I'm worried that consumers are somewhat irrational and lacking willpower, and that this causes a lot of cost disease inflation.
For your example, the fancier haircut. OK, sure, it feels nicer if they take their time and pamper you with a shampoo. It costs maybe $10 more, and most people can afford that. But it's not *much* nicer. People pay for it carelessly, without really thinking about whether it's "worth it." They just think "I can afford $10," not thinking about how they've basically chosen to double the cost of haircuts for the rest of their life. And pretty soon the barber stops *offering* the cheap cuts, because they can make more money from fancy cuts, so now the rest of us have no choice but to pay extra.
So many things are like that. The cheap, basic options that I used to rely on have mostly disappeared. Now the "fancy" option is the only option, at least without a long search for the one last guy still doing cheap haircuts/meals/whatever (usually in the immigrant neighborhoods).
Does that mean that consumers are not somewhat irrational and lacking willpower in other markets that have not experienced a lot of cost disease inflation? That just takes us back to square one, what the heck is going on?
I feel like consumers are *semi* rational, and some markets just make it much easier to be rational than others.
EG, it's easy to look at the price of gas, and it's all the same stuff (commodity). That makes it really hard to upsell consumers on "fancy" gas, so gas stations are still the same slightly scuzzy, cheap places they've always been.
People will also put more effort into scrutinizing a really big purchase, like a house or a car. There's still some cost creep that happens, but you can't just throw in a stupid service, double the price, and expect people to people to pay it. All the old, basic houses/cars are still on the market, too.
But for fast food and quick, cheap services? People just don't have the time or attention to be properly rational there.
Sorry, all due respect, your arguments don’t stand up here.
Note you have shifted from education and healthcare (for the latter of which it is quite obvious we have nothing like a typical free market, and for the former I wouldn’t argue we do either) to pedestrian, free market, buyer-foots-the-bill services.
Even if you are correct that consumers don’t have the time to be “properly rational” there, entrepreneurs do. If there were a sufficiently large market for a cheaper service at a lower price, someone would likely fill it - and exploit the market opportunity that existed to provide a lesser bundle at a lower price.
I also submit that in your personal definition of “properly rational” you are ignoring the value of people’s time. And I do not mean by this the time spent searching out the less expensive product/service bundle. The fact that these lower quality, lower cost services don’t exist (except “in immigrant neighborhoods”, as you note) is a pretty good indicator that the market of people who think the way you claim they should is for the most part insufficiently large. It’s one thing to claim that “many” people are irrational. Claiming that *almost all* are is a pretty strong statement.
While I’m not claiming that all consumers are perfectly rational, I do think that claim for the types of services you’re referring to is closer to reality than your “not properly rational” one.
Those are some good critiques. I don't really have an answer for them, I will just say that I'm not a professional economist, just a guy who reads econ blogs for fun. I have a vague *feel* that something's not right with the economy, and I try to explain that feeling as best I can, but I wish that a professional economist could do it better than I can.
Does that boil down to the conventi9nal explanation, that regulation and third party payment has caused the cost disease?
Third party payment no doubt contributes substantially to health care costs, and quite reasonably applies to education costs, sure.
It does not apply to any of the other goods or services Charlie is arguing.
Very good piece by Goff. I had to laugh at that this line "....get their kids not just into Harvard or Stanford but places such as USC." I am sure it is not his intention but it makes USC sound like some storefront college. I will have you know that USC students can wear sweaters around their necks with the best of them.
" . . . even USC . . . "
"I mean it's one thing for movie stars to commit felonies and pay hundreds of thousands to get their kids into a Harvard, Yale, MIT, or Stanford . . . but USC ??? Is that even above a community college?"
Excellent post. Along the same lines Brian Goff argues in his post above, I used Joe Newhouse's article to make the point about quality of medical care. It was published in 1992. Newhouse makes a crucial error by omission but, nevertheless, his basic case stands. The article is here: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.6.3.3
Thanks for the detailed analysis. Tyler has previously written that one of the reasons that health care expenditure in the US is so high, is that health care is a consumable good, and that citizens of the US are among the biggest consumers in the world (US = 5% of the world’s population, but 25% of legal opioid consumption, ~50% of the world’s defence expenditure).
However, what is not clear is why the cost of health care is double the OECD average, even when adjusted for quality.
In fact, access is an important measure of quality, and providing 5 star care to the wealthy, but no/minimal care to the poor does not solve the health care problem.
Life expectancy (a measure of population level health care/culture/health behaviours/cost of health) shows the US well behind other developed countries.
In fact, life expectancy is going down in the US with time (even before the COVID epidemic).
Obesity/diabetes/deaths of despair are all health issues.
Whilst at the level of a wealthy individual (or well insured individual), health care in the US is at or better than world best; but at a population level, care is too expensive or non existent for most of the rest of the population.
Govt provided population level health care works well in Germany and France, works not so well in the UK (the problems of the NHS are well described).
Blended Govt/Private models like Canada and Australia work very well at both the individual and at the population level, and are affordable for the taxpayer.
A comparative analysis of health systems which work well versus the US system would be great.
Relying on the wealthy, who can afford to consume high levels of health expenditure, only proves part of the issue.
Philip
Excellent read.
Goff writes: "Do we really think that all of these students and families are being duped?"
Not "all" for sure.
But I work with lots of first gen college grads. They are, indeed, often duped. They don't even like the preppy parties, hot yoga, cafeteria wild mushroom risotto, and the rest of the "experience" that much. They do naively expect wage returns for, shall we say, non-STEM majors.
They have no college grad parent to explain "Um, Art History?" con here.
Read: "Peeling The College Career Services Office Onion: Why They Are Terrible."
Even as seniors, many get false reassurance the job stuff will work out. Until they're across the stage and out the door.
I think the piece is well reasoned and makes valid points that are indeed likely explanatory in *part*, and in particular on the higher education side the point re: more than one product.
However, his argument does nothing to explain the almost equal rise in the cost of “lower education” / secondary education (534 vs 586 for higher education per Helland and Tabarrok).
I’d be curious to hear Goff’s explanation of the rise in secondary education costs and spending.
Median net worth never exceeds $1 million at any age so it’s hard to think that we place that value on a life year in general in the US.