Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

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Pointedstick
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Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Pointedstick » Fri Feb 10, 2017 2:34 pm

That's my subtitle for Scott Alexander's Considerations on Cost Disease.

If you read one thing this week, make it this. Do it, then come back.













Read it yet? No? Go read it!











Okay, so construction, infrastructure, health care, education, and a lot of other things are getting more expensive way faster than inflation or wage growth and we don't know why. Alexander makes the point that most of today's contentious policy debates are really dancing around this fact:
Imagine if tomorrow, the price of water dectupled. Suddenly people have to choose between drinking and washing dishes. Activists argue that taking a shower is a basic human right, and grumpy talk show hosts point out that in their day, parents taught their children not to waste water. A coalition promotes laws ensuring government-subsidized free water for poor families; a Fox News investigative report shows that some people receiving water on the government dime are taking long luxurious showers. Everyone gets really angry and there’s lots of talk about basic compassion and personal responsibility and whatever but all of this is secondary to why does water costs ten times what it used to?
[...]
If we give everyone free college education, that solves a big social problem. It also locks in a price which is ten times too high for no reason. This isn’t fair to the government, which has to pay ten times more than it should. It’s not fair to the poor people, who have to face the stigma of accepting handouts for something they could easily have afforded themselves if it was at its proper price. And it’s not fair to future generations if colleges take this opportunity to increase the cost by twenty times, and then our children have to subsidize that.
So what the hell is going on? The available information suggests to a lot of depressing conclusions for a lot of different types of people.

First, let's make libertarians cry: markets don't work. Okay, to be fair, they can work for simple commodity goods and familiar comprehensible products where there aren't more than a handful of choices and where social status isn't a major factor. But when we start talking about anything else, it turns out that people have no clue how to evaluate things or how much they should cost, and even if they do, they often behave as if cost is irrelevant compared to status markers that probably are irrelevant (installing central air conditioning for $10,000 instead of four $200 window AC units, or ignoring the free college education in favor of the fancier school that costs $100,000 in student loan debt?). You can't easily comparison-shop for a lot of goods (emergency medicine), or most of the options are really non-options (living in a ghetto to save money on housing), and so on. Also, modern psychology understands human behavior better than ever and this information is ruthlessly used by institutions to manipulate people into professing preferences that aren't really theirs and acting against their own long-term interests. People are successfully manipulated into fearing all sorts of unlikely harms, leading to overconsumption of things like insurance, firearms, and houses in "good neighborhoods."

Liberals are right: without government regulation, people just get manipulated and exploited in these markets, and corporations end up doing reeeeeeally bad things like sponsoring coups in Latin America and dumping known toxins in everybody's water supply.


Now let's make liberals cry: government doesn't work. Fields that are heavily regulated or managed by the government like medicine, education, and construction, display the most dysfunctional behaviors, with spiraling costs, worsening outcomes, falling worker wages, and generally everything sucking a bit more every year. Regulations have compliance costs that trickle down everywhere, and a pervasive fear of lawsuits due to the proliferation of liability and IP laws make everyone defensive and encourages the growth and cost of of every type of insurance. And every "reform" makes things worse since it just increases complexity which is the root of the problem. Furthermore, the phenomenon of a growing number of non-payers being subsidized by payers is a huge contributor. The non-payers overconsume, and the indirect payment system destroys institutional accountability.

Libertarians are right: without market accountability, there is no systemic force to make anything better; government slowly strangles the host society in red tape and inefficiency and must be reigned in before it isn't cost-effective to do anything domestically. And conservatives are right too: there really was a mid-century golden age when you could see a movie for a nickel and work your way through college with a decent humane job and get a doctor to come to your house when you were sick for less than the price of a load of groceries.

I don't know if we can make conservatives cry here because honestly their actual preferences seem contradictory or incomprehensible, but most of what they say they want has more to do with culture and less to do with this how-are-goods-distributed-throughout-society stuff.

But let's make everyone cry: the problem is us. We spend much less of our incomes on food and clothing now, but didn't save the difference or lobby for policies or laws to let us work less. Instead, we plowed it into things that don't actually increase our marginal happiness that much: bigger, fancier houses in neighborhoods with more respectable school districts; more bigger, fancier cars; more fancier college degrees; more gadgets and junk than ever before; prolonging the lives of miserable dying people by 6 months.

So... what do we do?
Last edited by Pointedstick on Fri Feb 10, 2017 4:06 pm, edited 1 time in total.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Pointedstick » Fri Feb 10, 2017 2:45 pm

I also wonder if tech is a major culprit. 40 years ago, IT budgets were zero; they didn't exist. Today they're huge. A ton of money has gone into producing this totally new product field that didn't even exist and apparently wasn't needed (judging by human civilization's ability to go without it for the first 9,960 years or so). Another one of those "lots of money going into something that doesn't add much to marginal happiness" cases.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Kriegsspiel » Fri Feb 10, 2017 5:18 pm

But let's make everyone cry: the problem is us. We spend much less of our incomes on food and clothing now, but didn't save the difference or lobby for policies or laws to let us work less. Instead, we plowed it into things that don't actually increase our marginal happiness that much: bigger, fancier houses in neighborhoods with more respectable school districts; more bigger, fancier cars; more fancier college degrees; more gadgets and junk than ever before; prolonging the lives of miserable dying people by 6 months.

So... what do we do?
In reality there shouldn't be an expectation at this point that everyone CAN live like an affluent American. Maybe this is the economy starting to reflect that reality.

But at the level of ME? The closest thing to a solution is... don't do that stuff. As an individual. You can win by yourself, even if everyone around you is making dumb choices. Tyler Cowen and Marshall Brain may have captured the feeling of what the future will look like. Some of us stand a good chance of being the winners of the future; the competition is not very high.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Mr Vacuum » Fri Feb 10, 2017 6:05 pm

I was nodding along with the whole article except for the part that got really personal. Would I want my parents' healthcare at half the price of today's care? As the father of a joyful 5yo daughter who likely wouldn't be here today without open heart surgery at 5mo, I'll take the $120k surgery and annual $1k echo cardiogram. It's not all a waste. Could the same care be had for less in India? That sounds OK, too, but I do like living here and learning about their air quality improvement findings over the Internet.

The article raises excellent questions and data, though. The analogy with the choice of elderly people to save money but risk falling at home is particularly poignant.

It's almost impossible to even consider the idea that IT isn't worth it, given how ingrained is the idea of IT as inevitable and progressive, and that I make my living (and pay that health insurance) in it.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by I Shrugged » Fri Feb 10, 2017 6:18 pm

Haven't read the article yet.
In your short excerpt, he makes one glaring mis-characterization. Namely that the high cost of college isn't fair to the government, which has to pay ten times the cost it should.

The "government" has no money of its own.

I think that is an important point, and one that many people just don't get.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by I Shrugged » Fri Feb 10, 2017 6:34 pm

It is way too much hand-wringing. The average welfare recipient in the US lives way better than a king lived 500 years ago. Food, medicine, hvac, entertainment, comfort, clothing, safety, you name it.

20 years ago the book The Dilbert Principle had a big effect on me. It made me realize that people are not logical, and never will be. No amount of centrally-planned optimization if ever going to change that. People are going to do what they want to do, no matter what. If they want to spend themselves silly buying too much house and cars, they will. In consideration of that, I would say markets DO work. People get what they want, or if not, they get what they deserve. (Tongue in cheek quoting the political economist Bill Bonner.)

Government does NOT work, not when it ventures into central planning. Which today is most of government. It's always trying to manage actions and outcomes, and does not operate from truly good intentions but with an eye towards trading votes for money.

I posted a few weeks ago about being owned by money. A lot of people aren't. They get money, they spend it. "Whatever." They are still living high on the hog, compared to most in the world, ever.

I agree with Kriegspiel.

Adding: I'm not saying the points are not valid. Deep down I agree with most of it. But I'm saying this is the human condition, and the desire to improve the world by planning and force is both omnipresent and fraught with bad unforeseen outcomes. Society figures itself out.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Pointedstick » Fri Feb 10, 2017 7:23 pm

I Shrugged wrote:Haven't read the article yet.
In your short excerpt, he makes one glaring mis-characterization. Namely that the high cost of college isn't fair to the government, which has to pay ten times the cost it should.

The "government" has no money of its own.

I think that is an important point, and one that many people just don't get.
I think it's fairly obvious that fiscally speaking, "the government" is a synecdoche for "taxpayers." If the government has to pay ten times too much for something, that just means that the taxpayers eventually have to either pay ten times too much for that, or forego something else to afford it that they might prefer their government to spend the money on (e.g. fixing or rebuilding some of those public bridges that are classified as structurally unsound).
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by whatchamacallit » Fri Feb 10, 2017 7:52 pm

After a little thought, is it as simple as debt payments being baked into the cost of those things?

http://www.macrotrends.net/1381/debt-to ... ical-chart

I wonder if local governments and corporate debt would look similar.


I wonder if it was as common historically as it is today for localities to take on debt for schools and infrastructure instead of saving for it.

Edit: Another thought related to debt. Maybe inflation really is a lot higher than we realize due to the wealth inequality. There is a lot of pent up wealth that does not get spent.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by technovelist » Sat Feb 11, 2017 12:23 am

End the fed, restore sound money.

Did you not realize that all the fake money had to go somewhere? You just named where it went.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by sophie » Sat Feb 11, 2017 9:51 am

Thank you for the article PS!! Great Saturday morning reading over coffee.

Regulation has a lot to do with these cost increases, but at least for college tuition and health care the biggest factor is an extremely perverse form of competition. The free market in these cases is about attracting patients and students to your organization - particularly ones with money who can be leaned on to make nice, fat donations. And that usually doesn't happen because of cost, in fact, higher costs are often interpreted as evidence of higher quality services. People are more likely to want to go to an expensive university hospital than a cheap, local private practice, since the former is much better advertised and they pay the same in either situation.

A major factor is the university's or hospital's rank on the US News and World Report. For colleges, criteria are things like graduation rates, diversity, student life, and levels of research grant funding. For hospitals, it's patient satisfaction (determined by everything from how nice the waiting room is to how often they get stuff they ask for even if it's unnecessary or even harmful) and (you guessed it) research grant funding. Both universities and hospital centers are thus incentivized to splurge on gorgeous new buildings, expensive, high profile services, and high profile researchers who will bring in lots of federal grant money.

So deregulating may not be enough. You'd have to fix the US News and World Report ranking criteria to include a measure of cost efficiency, and even then that might just increase costs further because such things would have to be measured. And as with all measures, it would be an imperfect reflection and would cost a lot of money and effort to pull off. Maybe the problem is that we have all come to expect a layer of glitz and luxury on everything, and the best possible this and that even when we're not sure what that means.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Kriegsspiel » Sat Feb 11, 2017 11:58 am

If you look at the things that are inflating out of control, they're mostly financial technology (bonds, stocks, insurance, etc), or things that can be financed with debt (houses, college, cars, medical bills, transportation infrastructure).

It seems like at some point in the semi-near past, there was a realization that growth is not possible when living "within one's budget," and future production was increasingly pulled into the present (with debt). At first, it was physical things (the aforementioned houses, cars, boats, subdivisions). This required natural resources like timber, fossil fuels, minerals. In a non-full world, with vast resources and not many people, it was possible to mine/cut/dig enough raw materials to make things, and people were productive enough to trade whatever they were making for someone else's stuff.

People were able to get their hands on a fridge, stove, inside lighting, indoor plumbing. This is all reflected in increasing standards of living worldwide, decreasing poverty. But like Gordon showed in The Rise And Fall Of American Growth, full saturation has pretty much been achieved for all of the best and most useful inventions for everyone who's ever going to have them. Eventually, the world became more full. American saturation was reached long ago, back before the massive debt explosion. There was a quote in The Age Of Stagnation, by Das, where (I think) a CEO of a manufacturing corporation intimated that he could borrow a billion dollars tomorrow, no problem. The issue was, what was he going to do with it? So now, in order to achieve growth, non-physical, abstract things, are being purchased with debt (the big one being college), Americans take on larger debt obligations for traditionally financed things like housing and infrastructure, and Americans are also pulling future production into the present for things that are wasteful. Like suburbs, car-based development, since pretty much none of those things pay for themselves.

So since there isn't much more physical growth to be had, we (stupid people)1 are financing things that shouldn't cost this much in order to keep achieving growth. Because without growth, our economic system fails.

"Too many accumulations of money are seeking ways to grow exponentially in a world in which the physical scale of the economy is already so large relative to the ecosystem that there is not much room left for growth of anything that has physical dimensions"
- Daly, Beyond Growth

Thoughts?2

1. I think my previous point stands, individually you can opt out of/inure yourself from this game to a large extent.
2. I've been drinking.
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Re: Everything costs too much and everybody is wrong about it and who the hell knows how to fix it?

Post by Xan » Sat Feb 11, 2017 2:28 pm

Interesting ideas, Krieg, but I'm not sure just what it means to be "pulling future production into the present". Things are being produced now because there's demand for them now. The fact that it's something called "debt" rather than anything else being used as a medium for exchange doesn't change the fact that present production matches present consumption, right?
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