7 ms·

The question I'd ask in response to this post is "So where did the money actually go?" I suspect inequality and wealth transfer explains much more of the obser

The question I'd ask in response to this post is "So where did the money actually go?" I suspect inequality and wealth transfer explains much more of the observed trends than the author acknowledges at the end. In each of the verticals discussed, there have been strong (albeit sometimes less obvious) trends for consolidation among institutions and organizations. This includes companies, government contractors, and even vendors in ecosystems we tend to think of as decentralized like local schools, where significant consolidation might be occurring over time at the level of food suppliers like Aramark, utility companies, or diesel fuel suppliers for school buses. These organizations' compensation and capital structures, in turn, likely grew increasingly unequal over time. Stockholders, stakeholders like executives, and intermediaries like insurance companies in those organizations likely extracted more and more capital relative to traditional stakeholders like the college students, physicians, and teachers addressed in the post. Wealth transfer from traditional stakeholders (college students, physicians, teachers) to organizational stakeholders (execs, stockholders, suppliers in consolidating markets) seems like both a cause and a consequence of the 'cost disease' discussed in the post.

oli5679 10y ago
I think he's trying not to be too opinionated about the cause of the problem, mainly highlighting that the problem exists. Amongst people who are aware of cost-disease, conservatives and libertarians normally see the cause as excessive regulation and occupational licencing, whilst liberals jump to increasing corporate power and market failure. Determining which if these is the true cause is tricky, and can quickly become political. However, it is important for everyone to acknowledge the problem.
- deleted 10y ago
  [deleted]
- pjc50 10y ago
  The original formulation of Baumol's cost disease is that it's a relative effect caused by increasing efficiency in automatable fields making non-automatable fields look bad. If a job has to be done by a human in the West, of course it's expensive compared to those that have either been outsourced to cheaper humans or turned over to machines. The "exchange rate" between human-produced goods and machine-produced goods looks worse and worse over time. The classic example is whenever you hear someone describing "flatscreen TVs" as a lavish expense. They're not. All TVs are flatscreen and you can get perfectly adequate ones for under $100. Whereas ladies' haircuts can easily exceed that - after all, it's a job you can't export to the Far East. And a college education costs several hundred televisions.
  - oli5679 10y ago
    Baumol's model is interesting. It's definitely part of the story. It seems that there are other factors at play as well though. Scott shows that wages haven't risen as fast as costs in many of the problem sectors, and that there is significant cost variation between countries with similar wealth levels.
    - joe_the_user 10y ago
      An extension to Baumol would be that not only have wages in non-productive industries had to keep up with wages in productive industries but capital spending rates in non-productive industries have kept up with capital spending rates in productive industries. At least in education and health care, you see buildings, equipment, administrators and so-forth taking more and more of the expenses relative to the salaries of service provider. Admittedly that's automatic given cost increases without concomitant salary increases but I think one can this to standards of capitalization of productive industries bleeding over to non-productive industries. And there's a constant belief/hope/snake-oil that these increases in capital spending will make the industries productive. Indeed, the "captains" of these would never frame the industries as static, non-productive support industries.
      - bluGill 10y ago
        Except that that doesn't seem to be the case. A house in 1960 costs an inflation adjusted $100,000 today - The average house last year sold for about $300,000. So we can say infrastructure is 3 times as expensive - that doesn't seem to account for the 10x cost increase.
        joe_the_user 10y ago
        Obviously, the kind of thing I speculate on above is an industry-by-industry effect. However, as mentioned in the article, the average house that is built today is larger than a house built in 1960 and that can account for some of the increase also. Moreover, a 3x increase in one cost factor is a good start on explaining a 10x increase in overall costs. You can't expect any economic process, from grocery bills upwards, to yield an exactly proportional result between two "back of the envelope" estimates, now can you? One inflation estimator might not be akin to another etc, etc.
- mirimir 10y ago
  Both causes arguably play a role. Debt also plays an important role. Creating debt is a great way to stuff, at least for a while. Edit: ... hide stuff ... Although "stuff" works too, I guess.
- digi_owl 10y ago
  In the end they are perhaps both right, but focus on only part of the picture (because of their social myopia). Increasing corporate power begets more regulations that favor them (via minutae that their lawyers can manage, but that new entrants will run afoul) that begets increased corporate power.
jessriedel 10y ago
But do you think this has happened much, much more in the industries under discussion than elsewhere? I've never heard anyone suggest education is expensive because of, say, the salaries of CEOs of test-prep companies. And if it's not the CEOs, but the general cost of test-prep, then this isn't an inequality argument but an inefficiency argument.
- ShriekBob 10y ago
  I don't really know the answer to this, but most of the areas he's talking about seem like they would suffer from inelastic demand?
ashark 10y ago
In the case of public k-12 schools, I've observed that there's an incredible amount of flailing when it comes to the curriculum, and every time they thrash about and change course a ton of money is spent on consultants (training, implementation) and new materials. I suspect there are also admin and support positions that exist mostly due to the strain caused by all of this (curriculum experts and such). This is constant, but they can also count on each new US President to create some initiative that makes them spend a bunch of money every 4-8 years. My guess is this was not the case in the 60s and 70s, or not to the same degree. I know, I know, "new math" and all that, but that may have been just the beginning of this trend of constant curriculum strategy churn, which seems to be getting worse with each passing year. I wonder what educational material and consulting company revenues look like over the last 5-6 decades?
- cschneid 10y ago
  You hit on a problem I hear from my high school teacher girlfriend. It typically looks like: 1. One or several motivated schools attempt a new style of teaching / grading / curriculum. 2. It succeeds amazingly. 3. Other schools rush to grab some of that success. The issue is that the causality between #1 and #2 is: "A motivated admin & teaching staff all working in the same direction can improve outcomes". While #3 is assuming: "a magic curriculum will do it for us". Then after adopting the new-hotness fails, repeat with another new idea.
  - wwweston 10y ago
    I wonder if there's anything professionals developing software could learn from this by analogy.
    - maxxxxx 10y ago
      Motivated team chooses technology X. Succeeds. Other team chooses X but forgets to have motivated people?
      - mark-r 10y ago
SilasX 10y ago
He actually touched on the answer of where it's all going: litigation, and the related indirect costs. (Sorry for the long quote, but can't clip much out.) >Fifth, might the increased regulatory complexity happen not through literal regulations, but through fear of lawsuits? That is, might institutions add extra layers of administration and expense not because they’re forced to, but because they fear being sued if they don’t and then something goes wrong? >I see this 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 really upset about all of this. Any normal person would say “You had a heart attack, of course you’re upset, get over it.” But if his doctor says this, and then a year later he commits suicide for some unrelated reason, his family can sue the doctor for “not picking up the warning signs” and win several million dollars. So now the doctor consults a psychiatrist, who does an hour-long evaluation, charges the insurance company $500, and determines using her immense clinical expertise that the patient is upset because he just had a heart attack. That is, a big fraction of medicine is "we have to cover this base for fear of being sued", and it's hard to look at external metrics to evaluate "this was a legit cost, vital to the patient's care" vs "this was just covering bases". I would say that such "legal insurance" is subject to "Knightian uncertainty". It's not like "oh, 5% will get sued a year, which costs $50k each". There is wild variation in what juries award, what goes to trial etc. Needless to say, that forces the insurance/prevention cost up very high, even when it doesn't correspond to a jury verdict. Think about the cost to insure a satellite launch failure vs first contact with aliens. Europe and Asia lack this cost because many of these incidents don't have to go to trial. "Oh, the operation botched your life? Boom, the social insurance gives you this nice predictable payout." Nothing lost in the legal black hold of jackpot justice.
clay_to_n 10y ago
Section IV addresses this question. Corporate profits may be part of it, but the author claims there's evidence that it's not much of it. He lays out 7 additional causes that may also be going on.

oli5679 10y ago

I think he's trying not to be too opinionated about the cause of the problem, mainly highlighting that the problem exists. Amongst people who are aware of cost-disease, conservatives and libertarians normally see the cause as excessive regulation and occupational licencing, whilst liberals jump to increasing corporate power and market failure. Determining which if these is the true cause is tricky, and can quickly become political. However, it is important for everyone to acknowledge the problem.

deleted 10y ago
[deleted]
pjc50 10y ago
The original formulation of Baumol's cost disease is that it's a relative effect caused by increasing efficiency in automatable fields making non-automatable fields look bad. If a job has to be done by a human in the West, of course it's expensive compared to those that have either been outsourced to cheaper humans or turned over to machines. The "exchange rate" between human-produced goods and machine-produced goods looks worse and worse over time. The classic example is whenever you hear someone describing "flatscreen TVs" as a lavish expense. They're not. All TVs are flatscreen and you can get perfectly adequate ones for under $100. Whereas ladies' haircuts can easily exceed that - after all, it's a job you can't export to the Far East. And a college education costs several hundred televisions.
- oli5679 10y ago
  Baumol's model is interesting. It's definitely part of the story. It seems that there are other factors at play as well though. Scott shows that wages haven't risen as fast as costs in many of the problem sectors, and that there is significant cost variation between countries with similar wealth levels.
  - joe_the_user 10y ago
    An extension to Baumol would be that not only have wages in non-productive industries had to keep up with wages in productive industries but capital spending rates in non-productive industries have kept up with capital spending rates in productive industries. At least in education and health care, you see buildings, equipment, administrators and so-forth taking more and more of the expenses relative to the salaries of service provider. Admittedly that's automatic given cost increases without concomitant salary increases but I think one can this to standards of capitalization of productive industries bleeding over to non-productive industries. And there's a constant belief/hope/snake-oil that these increases in capital spending will make the industries productive. Indeed, the "captains" of these would never frame the industries as static, non-productive support industries.
    - bluGill 10y ago
      Except that that doesn't seem to be the case. A house in 1960 costs an inflation adjusted $100,000 today - The average house last year sold for about $300,000. So we can say infrastructure is 3 times as expensive - that doesn't seem to account for the 10x cost increase.
      - joe_the_user 10y ago
        Obviously, the kind of thing I speculate on above is an industry-by-industry effect. However, as mentioned in the article, the average house that is built today is larger than a house built in 1960 and that can account for some of the increase also. Moreover, a 3x increase in one cost factor is a good start on explaining a 10x increase in overall costs. You can't expect any economic process, from grocery bills upwards, to yield an exactly proportional result between two "back of the envelope" estimates, now can you? One inflation estimator might not be akin to another etc, etc.
mirimir 10y ago
Both causes arguably play a role. Debt also plays an important role. Creating debt is a great way to stuff, at least for a while. Edit: ... hide stuff ... Although "stuff" works too, I guess.
digi_owl 10y ago
In the end they are perhaps both right, but focus on only part of the picture (because of their social myopia). Increasing corporate power begets more regulations that favor them (via minutae that their lawyers can manage, but that new entrants will run afoul) that begets increased corporate power.

jessriedel 10y ago

But do you think this has happened much, much more in the industries under discussion than elsewhere? I've never heard anyone suggest education is expensive because of, say, the salaries of CEOs of test-prep companies. And if it's not the CEOs, but the general cost of test-prep, then this isn't an inequality argument but an inefficiency argument.

ShriekBob 10y ago
I don't really know the answer to this, but most of the areas he's talking about seem like they would suffer from inelastic demand?

ashark 10y ago

In the case of public k-12 schools, I've observed that there's an incredible amount of flailing when it comes to the curriculum, and every time they thrash about and change course a ton of money is spent on consultants (training, implementation) and new materials. I suspect there are also admin and support positions that exist mostly due to the strain caused by all of this (curriculum experts and such). This is constant, but they can also count on each new US President to create some initiative that makes them spend a bunch of money every 4-8 years. My guess is this was not the case in the 60s and 70s, or not to the same degree. I know, I know, "new math" and all that, but that may have been just the beginning of this trend of constant curriculum strategy churn, which seems to be getting worse with each passing year. I wonder what educational material and consulting company revenues look like over the last 5-6 decades?

cschneid 10y ago
You hit on a problem I hear from my high school teacher girlfriend. It typically looks like: 1. One or several motivated schools attempt a new style of teaching / grading / curriculum. 2. It succeeds amazingly. 3. Other schools rush to grab some of that success. The issue is that the causality between #1 and #2 is: "A motivated admin & teaching staff all working in the same direction can improve outcomes". While #3 is assuming: "a magic curriculum will do it for us". Then after adopting the new-hotness fails, repeat with another new idea.
- wwweston 10y ago
  I wonder if there's anything professionals developing software could learn from this by analogy.
  - maxxxxx 10y ago
    Motivated team chooses technology X. Succeeds. Other team chooses X but forgets to have motivated people?
    - mark-r 10y ago

SilasX 10y ago

He actually touched on the answer of where it's all going: litigation, and the related indirect costs. (Sorry for the long quote, but can't clip much out.) >Fifth, might the increased regulatory complexity happen not through literal regulations, but through fear of lawsuits? That is, might institutions add extra layers of administration and expense not because they’re forced to, but because they fear being sued if they don’t and then something goes wrong? >I see this 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 really upset about all of this. Any normal person would say “You had a heart attack, of course you’re upset, get over it.” But if his doctor says this, and then a year later he commits suicide for some unrelated reason, his family can sue the doctor for “not picking up the warning signs” and win several million dollars. So now the doctor consults a psychiatrist, who does an hour-long evaluation, charges the insurance company $500, and determines using her immense clinical expertise that the patient is upset because he just had a heart attack. That is, a big fraction of medicine is "we have to cover this base for fear of being sued", and it's hard to look at external metrics to evaluate "this was a legit cost, vital to the patient's care" vs "this was just covering bases". I would say that such "legal insurance" is subject to "Knightian uncertainty". It's not like "oh, 5% will get sued a year, which costs $50k each". There is wild variation in what juries award, what goes to trial etc. Needless to say, that forces the insurance/prevention cost up very high, even when it doesn't correspond to a jury verdict. Think about the cost to insure a satellite launch failure vs first contact with aliens. Europe and Asia lack this cost because many of these incidents don't have to go to trial. "Oh, the operation botched your life? Boom, the social insurance gives you this nice predictable payout." Nothing lost in the legal black hold of jackpot justice.

clay_to_n 10y ago

Section IV addresses this question. Corporate profits may be part of it, but the author claims there's evidence that it's not much of it. He lays out 7 additional causes that may also be going on.