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

[I Shrugged]

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.

That's a great observation.

[I Shrugged]

The writer Matt Ridley advances this idea:

We have six basic needs: food, clothing, health, education, shelter, and transport. In most countries the market supplies food and clothing, the state supplies healthcare and education, and shelter and transportation are of mixed supply.

The costs of food and clothing have gone down over the past decades.
The costs of health and education have gone steadily up, accompanied by much concern about the quality (less so of healthcare in the US).
Some costs of shelter and transport have favorable trends, such as deregulated air fares, and home building. The government infrastructure costs have risen greatly.

He sees a prima facie case that government involvement makes things cost a lot more.

[Pointedstick]

I view the "pulling future production into the present" phrase as shorthand for:

"Well, dang, we've got a whole lot of people sitting over here, and a whole lot of real resources over there, and we know how (are are pretty sure we can figure out how) to build machines that will turn those resources into useful things that will last and make people's lives easier, and we're not doing it because we lack money?! We're not that stupid!"

Of course, when we use up that pile of resources now, it despoils the environment and it isn't available later, so the price goes way up for people later. You see this in construction. All the good wood was used up a few generations ago and now houses are built out of fast-growing fir and pine which rot and mold and get eaten by termites, instead of the really hard slow-growing hardwoods of yore that lasted forever. It seems tempting to use up the pile of resources now, but maybe that weird money thing is trying to tell us something about sustainability--a topic we don't often associate with it.

[Pointedstick]

General comments:

* A fascinating article. Thanks for posting, PS.

* That primary education discussion was quite mind-blowing. Cost per pupil is a factor of 2.5 higher, and yet test scores have not budged! But teachers are being paid the same! Where is the money going?!

Makes you want to support abolishing the department of ed, huh?

"Where is the money going?" Is indeed the big question. I asked a bunch of my policy-minded Facebook friends this question recently about health care and we reached the following conclusions:

* Over-treatment, over-care, over-consumption, and unnecessary visits and procedures
* Price gouging in retail pharma and medical devices
* Denser administration, more bureaucracy and overhead
* Hospital mal-investment in pricey fixed costs with under-utilization; costs passed onto payers
* More end-of-life care

So basically what you would expect: irrationality, inefficiency, waste, etc.

Some relevant sources:

http://theincidentaleconomist.com/wordp ... roduction/
http://theincidentaleconomist.com/wordp ... razypants/
http://jamanetwork.com/journals/jama/fu ... le/2594716

Also notable: women consume a significant amount more medical care than men.

wheres the money going? have you seen the movie "the cartel" 2009 ? its an interesting look as school funding and results. (or lack of) in NJ...

[Pointedstick]

Something that was brought up in the common thread is that the "minimum choice" has gotten a lot bigger; it isn't just that things have gotten bigger, they've also gotten "better" (scare quotes intentional).

Like nowadays even the cheapest car comes with with air conditioning, anti-lock brakes, airbags, power windows and doors, a 200 horsepower engine, etc. There's no longer an option to buy a bare-bones 60s' style beater that a teenager you could tinker with on weekends and afford with a part-time job.

Similarly, you pretty much can't buy a new house without 2,000 square feet of space, central air conditioning, tile in the kitchens and bathrooms, front-loading washers and dryers, and stainless steel kitchen appliances. Nobody is building cottages and '50s-style bungalows. Did you know that the original Levittown suburbs featured houses that were 900-1100 square feet? Hard to believe now.

Not only that, we're buying more of these things. It's now common for a family to own 2 or 3 cars--or more. Many solidly middle-class people own a vacation house or other second dwelling.

You can spot the trends of bigger and more all over the place once you start looking. Restaurant meal portion size and number of restaurant meals eaten; TV screen size and number of TVs; road width and amount of roads; college building grandiosity and percentage of the population with a degree; the list goes on.

Everything is bigger and (theoretically) more luxurious--but certainly even more expensive than simple inflation alone would suggest.

Part of the problem is the government imposing higher minimums. Part of the problem is us--our propensity to consume and our psychological manipulability. Part of it the corporations, who manipulate us and the government. And part of it is debt-backed fiat money growth capitalism, which doesn't seem to work in a steady-state environment and subtly, systemically drives all the preceding factors.

[moda0306]

As someone who is a quasi-Keynesian but hates spending money and is a pretty big environmentalist, I'm fully aware of my little paradox, but it forces me to ask questions about how we account for certain economic happenings than others.

On top of this "shit breaks and nobody knows how to fix it" is the fact that now you have plastics in metals in a junk yard at a rate far higher than they would have needed to have been if we had bought a higher quality product.

A lot of this has to do with faulty accounting at the individual level. If something's going to last me twice as long and work twice as well (think a blender), it's worth way more to me than the alternative. What's more, it has less of a negative environmental externality impact. And accounting for externalities, while certainly difficult, is obviously an under-appreciated process. Not to mention, part of the reason China can offer cheaper products is that it can pollute more than we can here in the U.S. So once you account for those two items, I do wonder how "cheap" foreign-made products are.

Mind-you, I don't think this is a cogent argument for taking what is essentially an automation problem and turning it into one of "Dey took ourr jeerbs!!" I think we're rearranging deck chairs on the Titanic by trying to use immigration and reversing free trade as the tip of our collective swords, but I wholeheartedly agree that we're not properly measuring economic and social/familial "externalities" in our economic calculations.

[Pointedstick]

Moda, that's actually the flip side of what we're talking about. The goods that are low-priced today (clothing, electronics, food) are all so historically cheap because of unpriced externalities, or slave labor, or something like that. I had a 90-minute phone conversation with my mother last night about immigration and really rattled her by talking about illegal immigration as essentially a supply of slave labor that the republicans tricked the democrats into accepting by letting them believe it would lead to a future demographic majority (it didn't).

What's weird is that all this cheap stuff made by exploited people encourages people to consume a ton of it... but we also consume more of things that are unprecedentedly expensive. You can understand a family with 3 TVs and half a dozen smartphones at $200 a pop, but 3 new vehicles costing $20-50k in a $300k particleboard McMansion? That's what's really killing us. Why do we do this?

As others have mentioned, debt has to be part of this: tricking our monkey brains to overvalue the smaller upfront price and discount the higher overall long-term price, which encourages prices to slowly creep higher over time to capture more of people's incomes.

[flyingpylon]

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?

But without debt, there would not be the level of demand or consumption that there is now. People are buying things today that they will not pay for until tomorrow.

[WiseOne]

I think the observations about government subsidies & debt driving up costs are right on. If student loans were more difficult to get, universities simply wouldn't be able to charge such high tuition, unless they want a highly polarized student body composed entirely of exceedingly wealthy students and heavily subsidized minorities. If routine health care went back to the cash payment that was the norm in the 1960s, and insurance were relegated to big-ticket items like hospitalizations and some chronic conditions, prices would immediately start to come down. My mother talks about taking us to the pediatrician for everything from ear infections to chicken pox and paying cash for visits. My father's salary at that time was not high, maybe $6,000/year, but it was all manageable.

Anyone think there's a role played by the mass incursion of low-skilled immigrants? In general, they cost far more than they can ever contribute, especially in those 6 basic service areas. Those costs have to be borne by the rest of us, and the proportion of the population who can help pay the bill is steadily decreasing as the number of low-skilled newcomers increases. This has a direct effect on pricing, since universities and hospitals have to recoup the costs of non-payment and financial aid (respectively), but there are also increased indirect costs e.g. property taxes which is a big driver of increased rents.

[Pointedstick]

I think the observations about government subsidies & debt driving up costs are right on. If student loans were more difficult to get, universities simply wouldn't be able to charge such high tuition, unless they want a highly polarized student body composed entirely of exceedingly wealthy students and heavily subsidized minorities.

That's exactly what a lot of universities do look like these days (especially the private liberal arts colleges). It's why college campuses are such tinderboxes of strife and bitterness.

[WiseOne]

I was actually thinking as I was typing that such a student body might be precisely what many colleges are desperate for. How depressing.

Neither of those groups (super wealthy, minorities) are going to provide much in the way of academic superstars though. Which means that the Ivies and similarly high ranked schools are surviving on those students who are willing to run up enormous debts in order to get the academic pedigree they need to get the head start you need for certain careers. And in addition to providing most of the reputation of these schools, these high-debt students are subsidizing the students that allow the school to score high on "diversity" in the US News and World Report ranking.

[Libertarian666]

I was actually thinking as I was typing that such a student body might be precisely what many colleges are desperate for. How depressing.

Neither of those groups (super wealthy, minorities) are going to provide much in the way of academic superstars though. Which means that the Ivies and similarly high ranked schools are surviving on those students who are willing to run up enormous debts in order to get the academic pedigree they need to get the head start you need for certain careers. And in addition to providing most of the reputation of these schools, these high-debt students are subsidizing the students that allow the school to score high on "diversity" in the US News and World Report ranking.

"Things that cannot continue will end." The question, as always, is timing.

[Kriegsspiel]

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?

But without debt, there would not be the level of demand or consumption that there is now. People are buying things today that they will not pay for until tomorrow.

Yes that's what I meant. Actually, pretty much everything you guys wrote is what I think too, ya'll are really smart.

[Pointedstick]

I think Tech and the libertarians are also right about the unstable currency. This dovetails with debt to systematically encourage overconsumption in the present (among other effects). It doesn't seem like a crazy coincidence that these trends and price increases really took off after Nixon wiped out what remained of the gold standard.

[moda0306]

Moda, that's actually the flip side of what we're talking about. The goods that are low-priced today (clothing, electronics, food) are all so historically cheap because of unpriced externalities, or slave labor, or something like that. I had a 90-minute phone conversation with my mother last night about immigration and really rattled her by talking about illegal immigration as essentially a supply of slave labor that the republicans tricked the democrats into accepting by letting them believe it would lead to a future demographic majority (it didn't).

What's weird is that all this cheap stuff made by exploited people encourages people to consume a ton of it... but we also consume more of things that are unprecedentedly expensive. You can understand a family with 3 TVs and half a dozen smartphones at $200 a pop, but 3 new vehicles costing $20-50k in a $300k particleboard McMansion? That's what's really killing us. Why do we do this?

As others have mentioned, debt has to be part of this: tricking our monkey brains to overvalue the smaller upfront price and discount the higher overall long-term price, which encourages prices to slowly creep higher over time to capture more of people's incomes.

The slave labor doesn't just happen by letting foreign populations in, but by allowing Western investors to gobble up gobs and gobs of natural resources in foreign countries. This is why I get frustrated by people in the U.S. complaining about foreigners. Imagine being in any one of the foreign countries where all of a sudden some Rockefeller & his co-cronies owns a massive chunk of the means of production? This is why the Euro was probably a bad idea. Similar to immigration, a country can only take on so much foreign investment before it begins to exhibit societal resentment. And I don't blame them... you can't really "own" land and natural resources IMO. You especially can't "own" them if you're 2,000 miles away and bought them from a dictator with friendly ties to the Dulles Bros in Washington.

Anyway... I digress yet again.

[Pointedstick]

I guess I see this differently. Decisions to use precious resources above their replacement rate were made by people. Decisions to despoil the environment (or, at the very least, not go too deep into the question of "what could go wrong") were made by people.

Sure, but debt is the mechanism that allows people to make that decision in a capitalist market economy. A functioning market takes into account a good or resource's replacement rate.

It's funny how the problem space has changed over time. For most of human history, the problem was generating enough resources that people could actually consume some nice things. Now that we've totally mastered that, the problem shifts to preventing overconsumption so we don't squander scarce resources and despoil the environment.

[moda0306]

I guess I see this differently. Decisions to use precious resources above their replacement rate were made by people. Decisions to despoil the environment (or, at the very least, not go too deep into the question of "what could go wrong") were made by people.

Sure, but debt is the mechanism that allows people to make that decision in a capitalist market economy. A functioning market takes into account a good or resource's replacement rate.

It's funny how the problem space has changed over time. For most of human history, the problem was generating enough resources that people could actually consume some nice things. Now that we've totally mastered that, the problem shifts to preventing overconsumption so we don't squander scarce resources and despoil the environment.

From what I've seen, CONSUMERS are really bad at taking into consideration the deterioration rate of non-asthetic aspects of products. So if the consumer doesn't care, the builder isn't going to care too much for the 9 months it sits on their inventory.

Further, even for businesses, many managers are measured on relatively short-term indicators. If they're building a new facility, it's doubtful that they're keenly aware of whether the materials have a 20 vs 50 year useful life.

[WiseOne]

cf recent discussion on globalization. We hit on all these main themes:

- globalization's main reason to exist is to transfer production to places where labor is cheap (i.e. practically slave labor)
- manufacturing in such places results in cheap crap that doesn't last long and ends up filling our landfills and costing more in the end
- environmental impact of long-distance shipping, contradicting the personal views of many who are globalization advocates
- illegal and unskilled immigration is merely the flip side of globalism, with essentially the same goal

Maybe the problem isn't that prices in education, health care, and real estate are rising "too fast". They're rising faster than the CPI - but the CPI is based primarily on goods and services whose prices have been artificially depressed by the twin factors of globalization and unskilled immigration. Perhaps we are actually in a state of high inflation, or rather we would be without these unappetizing, and unsustainable methods of keeping prices down.

Another measure is the price of food that isn't government subsidized. That is, fresh fruits and vegetables and grass-fed/pastured meats. I've noticed that these have increased in price far more than the subsidized items. Has anyone else seen this?

[Mountaineer]

cf recent discussion on globalization. We hit on all these main themes:

- globalization's main reason to exist is to transfer production to places where labor is cheap (i.e. practically slave labor)
- manufacturing in such places results in cheap crap that doesn't last long and ends up filling our landfills and costing more in the end
- environmental impact of long-distance shipping, contradicting the personal views of many who are globalization advocates
- illegal and unskilled immigration is merely the flip side of globalism, with essentially the same goal

Maybe the problem isn't that prices in education, health care, and real estate are rising "too fast". They're rising faster than the CPI - but the CPI is based primarily on goods and services whose prices have been artificially depressed by the twin factors of globalization and unskilled immigration. Perhaps we are actually in a state of high inflation, or rather we would be without these unappetizing, and unsustainable methods of keeping prices down.

Another measure is the price of food that isn't government subsidized. That is, fresh fruits and vegetables and grass-fed/pastured meats. I've noticed that these have increased in price far more than the subsidized items. Has anyone else seen this?

Yes. I've also noticed restaurant prices seem to continue the noticeably upward trend in our area (mid-Atlantic), possibly related to the food you mention.

[Pointedstick]

Insightful observations, WiseOne. There's a lot to chew on there.

[Pointedstick]

Scott posted a retrospective of the best comments and theories on the phenomenon. I particularly like Megan McArdle's:

It’s pretty easy to tell a libertarian story where markets work fine, but government intrusions into these markets have rendered them so unfree that they no longer function the way they’re supposed to. And I think that is at least part of the story here.
[...]
But that’s perhaps a little simplistic. Agriculture is also the focus of a great deal of government intervention, as are sundry things such as air travel, and we don’t see the same phenomenon there. So we need to dig a little deeper and describe what’s special about these three sectors (we’ll leave public transportation out of it, because there, the answer is pretty much “union featherbedding combined with increasingly dysfunctional procurement and regulatory processes”).

First, and most obviously, they involve vital purchases made on long time horizons, and with considerable uncertainty. Food is more vital than health care to our well-being, but its price and quality are really easy to assess: if you buy a piece of fruit, you know pretty quickly whether you liked it or not. This is a robust market, and it’s going to take communist-level intervention to fundamentally mess it up so that food is both scarce and not very good.

Homes, schooling and health care, on the other hand, are more complicated products. You don’t know when you buy them how much value they will be to you, and it is often difficult for a lay person to assess the quality of the product. You can read hospital rankings and pay a home inspector, but these things only go so far.
[...]
But that’s only part of the story. A big part of the story is that America just isn’t very good at regulation. When you talk to people who live elsewhere about what their government does, one thing that really strikes you about those conversations is how much more competent other rich industrial governments seem to be at regulating things and delivering services. Their bureaucracies are not perfect, but they are better than ours.

That’s not to say that America could have an awesome big government. Our regulatory state has been incompetent compared to others for decades, since long before the Reagan Revolution that Democrats like to blame. There are many, many factors in this, from our immigration history (vital to understanding how modern urban bureaucracies work in this country), to the fact that we have many competing centers of power instead of a single unified government providing over a single bureaucratic hierarchy. There is no way to fix this on a national level, and even at the level of local bureaucratic reform, it’s darned near impossible.

In other words, this is probably what we’re stuck with. It may not be Baumol’s cost disease — but it’s potentially even more serious, and it’s going to be a lingering condition.

There are a lot of other really good ones there, too.

[LC475]

First, let's make libertarians cry: markets don't work.

Umm, define "work".

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.

Speak for yourself, Stick, because Asceticism Works!

[I Shrugged]

[ochotona]

If these current financial and real estate bubbles were to pop, and we had another Great Depression, could we at least expect some 1930s style deflation to lower these prices? Or would we have stagflation?

[I Shrugged]

We'd get Abenomics.