Another economic sourpuss

Back in December I wrote a post about some economists who remind Americans that, after adjusting for population growth, our economy is not in fact growing and that our expenses for healthcare, housing, and education are “soaring”.

A friend recently shared Scott Alexander’s “Considerations on Cost Disease,” which is along similar lines.

On our public schools:

Costs really did more-or-less double without any concomitant increase in measurable quality.

So, imagine you’re a poor person. White, minority, whatever. Which would you prefer? Sending your child to a 2016 school? Or sending your child to a 1975 school, and getting a check for $5,000 every year?

On universities:

Inflation-adjusted cost of a university education was something like $2000/year in 1980. Now it’s closer to $20,000/year. No, it’s not because of decreased government funding, and there are similar trajectories for public and private schools.

I don’t know if there’s an equivalent of “test scores” measuring how well colleges perform, so just use your best judgment. Do you think that modern colleges provide $18,000/year greater value than colleges did in your parents’ day? Would you rather graduate from a modern college, or graduate from a college more like the one your parents went to, plus get a check for $72,000?

(or, more realistically, have $72,000 less in student loans to pay off)

My uncle paid for his tuition at a really good college just by working a pretty easy summer job – not so hard when college cost a tenth of what it did now.

On health care:

The average 1960 worker spent ten days’ worth of their yearly paycheck on health insurance; the average modern worker spends sixty days’ worth of it, a sixth of their entire earnings.

Countries like South Korea and Israel have about the same life expectancy as the US but pay about 25% of what we do.

On building a subway system:

[the original cost of building New York City subway lines] looks like it’s about the inflation-adjusted equivalent of $100 million/kilometer today, though I’m very uncertain about that estimate. In contrast, Vox notes that a new New York subway line being opened this year costs about $2.2 billion per kilometer, suggesting a cost increase of twenty times – although I’m very uncertain about this estimate.

Maybe this is all fine because we’re paying ourselves more?

health care and education aren’t paying their workers more; in fact, quite the opposite.

Conclusion:

If some government program found a way to give poor people good health insurance for a few hundred dollars a year, college tuition for about a thousand, and housing for only two-thirds what it costs now, that would be the greatest anti-poverty advance in history. That program is called “having things be as efficient as they were a few decades ago”.

Right now the standard of living isn’t just stagnant, it’s at risk of declining, and a lot of that is student loans and health insurance costs and so on.

Readers: What do you think of Scott Alexander’s analysis? He admits that he has no solutions to offer (though perhaps returning education and health care to the market economy would be a start?).

Related:

26 Comments

  1. G C

    March 4, 2017 @ 1:01 pm

    1

    I think inflation is much, much higher than is commonly accepted. This would explain an awfully lot.

  2. B

    March 4, 2017 @ 1:37 pm

    2

    I wonder if the cost for the same types of procedures, medicines, diagnostics available in the 1960’s would cost much more today– ie what would the premium be for an insurance policy today that only used 1960’s technology and knowledge?

  3. N

    March 4, 2017 @ 2:40 pm

    3

    Health care is completely different than it was in the 1960s. Health care today has thousands of interventions that were not available in the 1960s, so comparisons are pretty much moot.

  4. Scott

    March 4, 2017 @ 3:30 pm

    4

    It’s very solid analysis. However, he is not an economist, he is a psychiatrist.

  5. patxaran

    March 4, 2017 @ 3:56 pm

    5

    The analysis is absolutely correct. The question is of course, why we are confronted with this reality? The truth is that the current state of affairs has created many winners and those who are in a better position to effect change are often those who are the least affected by the issues described in your posting (in some cases they benefit from it).

    An American family making $400K/year pays the same (more or less) in health care as one making $50K, the percent of income is of course different, and the affluent family has therefore less interest in change.

    Most educated Medicare recipients know the flaws of the system, but since the flaws seem not to affect them, they prefer the current program to any alternative that may introduce limits they dislike.

    Families send their kids to schools where they don’t learn much. But so do their neighbors and China and Finland are too distant to make obvious comparisons. “My kid doesn’t know how to solve a quadratic equation but neither do his friends.”

    There is surprisingly, in my opinion, little appetite on the part of the majority of Americans to carry out reforms. I think is because in the words of Spinoza:

    “Men judge of things according to their mental disposition, and rather imagine than understand.”

  6. G C

    March 4, 2017 @ 4:55 pm

    6

    John Maynard Keynes’ comments on inflation are worth reading.
    “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Quote taken from here:
    http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html

  7. Jack

    March 4, 2017 @ 5:36 pm

    7

    NYC spends about $23,000 annually per pupil on public education. What parent would not prefer to be able to choose how to spend that money rather than letting the NYC board of education decide? For that amount of money you should be able to purchase a first rate education — rather than what NYC now provides.

  8. patxaran

    March 4, 2017 @ 6:09 pm

    8

    The budget of the NYC DOE is about $25 billion dollars. Since the bulk of that money is spent on payroll, it is safe to assume that tens of thousands of New Yorkers (some of whom spend their days in a “rubber room”) love the current system.

    It should be noted that private schools in NYC cost a lot more than $23K/year and they don’t produce great students. The top public schools contain many more National Merit Semifinalists than the top private ones:

    http://www.syracuse.com/schools/index.ssf/2015/09/2016_national_merit_scholarship_semifinalists_new_york_state_who_won_from_your_s.html?appSession=93660915234923

    If you search the site you’ll see that “prestigious” private schools like Fieldstone had just three students who were National Merit Semifinalists (Hunter College, a public school has more than sixty…).

    Money is wasted on education in NYC in both the private and public schools…

  9. Russil Wvong

    March 4, 2017 @ 6:59 pm

    9

    Thanks for posting these. Both the Gallup report and Scott Alexander’s analysis make for fascinating reading.

    There’s an interesting connection between public education and high housing costs. Public schools in the US are funded locally, and there’s wide variation in quality. Parents want to send their kids to the good schools, so they’ve bid up the price of houses near those schools. In particular, over the last 30 years or so it’s become typical to have both parents working instead of one parent. (This is like the classic collective action problem where someone stands up at a football game to get a better view, and then everyone stands up: now nobody has a better view than before, but everyone’s standing instead of sitting.) For details, see Warren and Tyagi’s The Two-Income Trap.

    More generally, I tend to interpret problems like this as collective action problems, where each individual actor pursues their own interest, and everyone ends up worse off as a result. The US appears to have suffered from a drastic deterioration in trust since Vietnam and Watergate, which makes it difficult to tackle these problems. A thorough-going review and reform of regulations might well improve efficiency drastically, but who would you trust to oversee such a reform? So you get paralysis and drift.

  10. M

    March 4, 2017 @ 7:21 pm

    10

    Money is wasted in NYC? I am shocked, shocked…

    Lots of money is wasted everywhere in this country, which helps to feed the caste of rent-seekers and bureaucrats. Need convincing? just how much real estate is taken by customers’ accounts and related departments at any hospital.

    It feels like the major problem is governance, not government, which is bad news.

    The favorite way of handling a problem has been throwing money on it until the said problem cannot be seen anymore. Examples include the US foreign policy (e.g., training the Iraqi military), the national health policy (Obamacare), the IT infrastructure  healthcare.gov that collapsed on day one of operation despite its billion dollar budget), the transportation policy (the 2nd Ave subway in NYC at a cost of $3.6 billion per mile, as per the VOX link above), the agriculture policy (no American would want to pick the crops), and so on.

    It often feels that no one wants to do anything other than manage those who would do some actual work on the cheap. And how do you convince them to work on the cheap? Just use illegal labor, because they are cheaper; and why you are at that, call them immigrants and push aside legal immigrants who also work cheaply, just not *that* cheaply, because they are legal. Just screw real (legal) immigrants for an extra 50c and be the boss.

  11. wally

    March 4, 2017 @ 8:36 pm

    11

    Regarding the outrageous cost of higher education there are partial antidotes. I have two high-priced degrees from ‘elite’ schools and yet the three best courses I ever took were:

    a) Learning from Data, EdX
    b) Integer Programming, Coursera
    c) Machine Learning, Coursera

    Since I’ve taken those far more recently than my ‘elite’ college courses, perhaps I’m afflicted with some sort of primacy/recency bias. But besides the non-trivial amount of time needed to master the material, these courses were free, except for a) which had an excellent (optional) companion book that cost ~ $50. I bought it; it’s a wonderful book that I would’ve paid 10x for.

    It seems to me someone could go the juco/local state school route, augmented, as necessary, with coursera, edx, udacity…etc and get a nice education at a reasonable price.

  12. N

    March 4, 2017 @ 10:43 pm

    12

    But Wally, you’d completely lose out on the imprimatur of an elite college education, which opens doors into the highest levels of society if done properly. You have to really excel to to make up that difference from a lesser institution.

  13. Senorpablo

    March 5, 2017 @ 12:23 am

    13

    Something that has gone down, not up:

    Corporate share of federal tax revenue has dropped by two-thirds in 60 years — from 32% in 1952 to 10% in 2013.

    https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-corporate-tax-rates/

  14. Tom

    March 5, 2017 @ 3:14 am

    14

    Also known as Baumol’s Cost Disease. (Baumol is still alive, by the way.) Though I think we see something worse than Baumol’s version, in that costs are not just required to track the general salary levels, but actually have exploded.

    As another example of this, we have Phil’s entertaining (and/or concerning) article about US versus Mexican health care and outcomes.

  15. the other Donald

    March 5, 2017 @ 10:38 am

    15

    We are living in the wrong century, but take heart – we who remember how all those things were actually done will be out of the way soon.

    OT, philg, did you see the NBC News story on the plight of General Aviation in Palm Beach? A Robinson owner said he is wiped out by Trump flight bans and a FBO guy said he can’t stand much longer losing $30,000 a Trump Weekend. Meanwhile, a realtor said it’s great for business.

  16. philg

    March 5, 2017 @ 11:55 am

    16

    Did I watch NBC News? Not necessary! Remember we live the “only one American can work at a time” system right here in New England whenever (1) there is a Red Sox game and we can’t get revenue from Boston helicopter tours [post 9/11 regulation ostensibly for security but in reality a long-desired way to ban banner-towing airplanes by major league sports], or (2) a President shows up for a fund-raiser or a vacation on Martha’s Vineyard.

  17. Neal

    March 5, 2017 @ 12:00 pm

    17

    While it is plausible that our society (and especially government) is in some ways less “efficient” now than decades ago, the idea of attributing macro cost changes entirely to “inefficiency” is flawed. There is too much else going on. For example:

    In public education, we now educate many children whose (expensive) special needs were previously ignored. High school dropout rates have gone down which means we are retaining more harder to reach kids in the system. At the other end of the spectrum, the fraction of teenagers taking calculus in high school has gone up significantly. All of these trends cost money.

    In public works, more attention is now giving to assessing and mitigating environmental impacts and higher standards are used to handle/abate hazardous materials and waste. This has produced genuine environmental improvements and had the effect of internalizing project costs which were previously borne by society at large. Admittedly, these trends have also contributed to “inefficiency” by giving project opponents more levers to delay projects (some would call this democracy) and contractors more ways to jack up costs.

    Evaluating subway construction costs on a per mile basis is problematic because the costs are mainly in the stations. Building a subway station in New York is certainly much more complex today than when the subways were originally built because there is a lot more already underground.

  18. G. Ranma

    March 5, 2017 @ 2:01 pm

    18

    @wally – it’s clear to me the main value in choosing highly selective ‘elite’ school is the sorting and networking benefits they offer. There is no other credible explanation to justify the faster than inflation cost increases of the last 20 years.

    If you want an education or technical training the resources are in most cases freely available to anyone, no need to spend money. Only time is required.

    Will the coming education bubble burst increase the selective school’s appeal even more or will those institutions drink their own koolaid to the extent of jeopardizing their main sorting and selection value?

  19. philg

    March 5, 2017 @ 3:33 pm

    19

    Why is there an unquestioned assumption that going to an Ivy League school leads to a life of wealth, luxury, and connections?

    https://www.brookings.edu/articles/who-needs-harvard/ summarizes research suggesting that there is less value to attending a Harvard-style school than in being the kind of person Harvard would accept.

    In the STEM fields that math- and science-averse politicians like to suggest to other people’s children, there seems to be no value at all: https://www.wsj.com/articles/do-elite-colleges-lead-to-higher-salaries-only-for-some-professions-1454295674

    The theory that you show up at Harvard and suddenly spend all of your time networking with America’s richest brats is a good one, but how would it work in practice? Harvard is a big place. Why would the child of a billionaire want to interact socially with the graduate of a public school? Maybe it could work for an exceptionally charming middle-class kid, but the typical public school grad who gets into Harvard spent a lot more time studying for the SATs than studying how to be charming.

  20. Tiago

    March 6, 2017 @ 5:17 am

    20

    Where is the money going? If Americans are paying a lot more, and salaries are not going up there are two options: (1) more people are hired in said industries (education, health care) and/or (2) the administrators/corporations are getting a larger slice of the cake. Looking at several indicators I strongly suspect it is mostly (2).

    How to reverse this trend? It seems that in America it is fair game to complain about excessive charges (especially if these tend to go to governments), but out of bounds to question an administrator/entrepreneur’s compensation. It is a god-given right and a testament to their efficiency. To question that one would have to be a useless, socialist pig that wants to grab money from hard working people.

  21. Sam

    March 6, 2017 @ 9:00 am

    21

    Tiago – How to reverse this trend? Open up avenues for competition.

  22. Aloke

    March 6, 2017 @ 12:20 pm

    22

    It seems like a lot of the examples in Alexander’s article are about prices increasing. Prices are determined by supply and demand, not necessarily by the cost of inputs. Maybe the reason health care costs, housing costs, education costs, etc. are increasing in the US is because of increasing demand? And why would there be increasing demand? I think it is because these US services are becoming increasingly valuable. Specifically the returns to the highest quality US education and US healthcare are in great demand among those who can afford it. Alexander’s quote about getting 20 years ago health care plus a check is thought provoking. That really does sound good doesn’t it? But he could equally have offered the possibility of moving to South Korea and getting a check. I’m sure there’d be a lot fewer takers; what do you think net immigration is from the US to South Korea or even Canada? To me a lot of the examples point to the conclusion that the value of US lives is the highest in the world and getting higher all the time. This translates into higher demand for all sorts of US services. The answer to why these are not being captured by teachers and health-care workers might just be that we are hiring more of them per capita than before to provide that high quality service.

  23. wally

    March 6, 2017 @ 9:18 pm

    23

    @Aloke, that’s a great point. We may be totally f%^ked up, but we produce some kick-ass IPAs, for which I am extremely grateful. In fact I’m writing this after two Racer-5’s, brewed ~ 2800 miles from my house, yet somehow still reasonably fresh and quite delicious!

  24. M

    March 7, 2017 @ 6:02 pm

    24

    @wally, that’s a great point.
    Have you ever tried an IPA brewed in India, just because of the name?
    I’d never thought much of IPA before I tried a Kingfisher in Jalandhar, Punjab.

  25. Natalia

    March 10, 2017 @ 4:28 pm

    25

    @wally @G.Ranma @philg

    That is my line of thinking as well- why pay premium for elite institutions when at this day and age all can be learned easily for free.

    However, take a look at the NBER research report (it’s from 1996 , so perhaps needs to be updated as there was no Coursera back then)- apparently there is hard evidence regarding value of elite school ‘Even after controlling for selection effects there is strong evidence of significant economic return to attending an elite private institution, and some evidence that this premium has increased over time. ‘ : http://www.nber.org/papers/w5613

  26. philg

    March 10, 2017 @ 7:40 pm

    26

    Natalia: I am familiar with that part of the report. And maybe if one’s kid does get into some super-elite school it is worth paying the price (though we also have to consider the fact that research universities put very little effort into teaching undergrads!). But circling back to the original posting, as the U.S. population has grown and the number of elite school slots has remained roughly constant, the chance that a particular American 18-year-old will get into an elite school has fallen. The article discussed in the original post refers to college education in the aggregate. I don’t think that we can say that the return to the median college education has gone up commensurate with the 10X increase in cost.

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