Last week he posted a long essay on the economic phenomenon known as “cost disease.” What is cost disease? It’s a condition where the costs of a good accelerate in a dramatic and sustained way for reasons which are not obviously apparent.
Alexander looks at four sectors—public school education, healthcare, college, and housing—where the cost structure over the last two generations has increased, in real dollars, several hundred percent. He then presents a number of theories as to why these costs have been so out of whack. But before we get to that, he makes one deeply profound point: A great number of the political arguments we have today are really about cost disease. Here’s Alexander:
Libertarian-minded people keep talking about how there’s too much red tape and the economy is being throttled. And less libertarian-minded people keep interpreting it as not caring about the poor, or not understanding that government has an important role in a civilized society, or as a “dog whistle” for racism, or whatever. I don’t know why more people don’t just come out and say “LOOK, REALLY OUR MAIN PROBLEM IS THAT ALL THE MOST IMPORTANT THINGS COST TEN TIMES AS MUCH AS THEY USED TO FOR NO REASON, PLUS THEY SEEM TO BE GOING DOWN IN QUALITY, AND NOBODY KNOWS WHY, AND WE’RE MOSTLY JUST DESPERATELY FLAILING AROUND LOOKING FOR SOLUTIONS HERE.” State that clearly, and a lot of political debates take on a different light. For example: some people promote free universal college education, remembering a time when it was easy for middle class people to afford college if they wanted it. Other people oppose the policy, remembering a time when people didn’t depend on government handouts. Both are true! 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.
No matter what your politics are, this should bring you up short. Because I’d take Alexander’s argument even further: The entire state of our politics—where the country feels broken, polarization is out of control, Democrats embraced an honest-to-God socialist and Republicans threw in with an aspiring authoritarian—is because we are faced with a world in which many people can no longer expect, as a matter of course, to be better off than their parents.
Oh sure, you’ll have better phones than your folks did. And you’ll be able to get a taxi 30 seconds faster. But on the big-ticket items? Forget about it. And the politics of pie-shrinking are both ugly and unpredictable.
Anyway, there’s more to be said on this—a lot more—but for now, let that thought marinate a bit.
The problem with cost disease is that no one knows where it comes from. The answer is probably multi-faceted. Regulations. Government intervention. The Baumol effect. Alexander explains how some of the costs get driven in his profession:
[M]ight 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. Those outside the field have no idea how much of medicine is built on this principle.
But the unnerving thought is this: What if cost disease is something that happens when markets fail? As Alexander asks, what if markets just don’t work?
I know this is kind of an extreme question to ask in a post on economics, but maybe nobody knows what they’re doing in a lot of these fields and people can just increase costs and not suffer any decreased demand because of it. Suppose that people proved beyond a shadow of a doubt that Khan Academy could teach you just as much as a normal college education, but for free. People would still ask questions like – will employers accept my Khan Academy degree? Will it look good on a resume? Will people make fun of me for it? The same is true of community colleges, second-tier colleges, for-profit colleges, et cetera. I got offered a free scholarship to a mediocre state college, and I turned it down on the grounds that I knew nothing about anything and maybe years from now I would be locked out of some sort of Exciting Opportunity because my college wasn’t prestigious enough. Assuming everyone thinks like this, can colleges just charge whatever they want? Likewise, my workplace offered me three different health insurance plans, and I chose the middle-expensiveness one, on the grounds that I had no idea how health insurance worked but maybe if I bought the cheap one I’d get sick and regret my choice, and maybe if I bought the expensive one I wouldn’t be sick and regret my choice. I am a doctor, my employer is a hospital, and the health insurance was for treatment in my own health system. The moral of the story is that I am an idiot. The second moral of the story is that people probably are not super-informed health care consumers.
There are no answers here, I’m afraid. The problem with this mystery is that it’s a mystery. But even though we can’t adequately explain cost disease, it’s important to understand it and to recognize the enormous extent to which is has eaten away at America and transformed our lives, our futures, and our politics.
