Why do things cost so much?

cost_putoff

Scott Alexander, a physician in the Midwest, points out on his blog that during the past 50 years—

  • U.S. housing costs have increased about 50 percent.
  • U.S. education costs have increased 100 percent
  • U.S. college costs have increased 400 percent.
  • U.S. subway fares have increased 400 percent or more.

All of this is adjusted for inflation.

  • Health care in the United States costs about four times as much as equivalent health care in other First World countries
  • U.S. subways costs about eight times as much as equivalent subways on other First World countries.

The wages and salaries of public school teachers, college professors, nurses and physicians has meanwhile remained relatively flat.

As Alexander points out, this is strange.

Note that these figures are not adjusted for inflation

Note that these figures are not adjusted for inflation

Alexander looks at a lot of possible reasons why this is so.  Here are some that he rejects.

  • Inefficiency of government compared to private enterprise.
  • Excess corporate profits.

Here are some that he thinks might have some validity, although they don’t fully explain the trend.

  • Inability of consumers to make informed choices, so that institutions can charge what the traffic will bear.
  • Cost of government regulation.
  • Unnecessary work due to fear of lawsuits.
  • Unnecessary costs due to inability of the public to tolerate risks.
  • Large amounts of money in health care being spent on a small percentage of the population.
  • Increasing inequality, with the benefit of productivity gains going to the rich.

I agree, with a couple of reservations.

Regulations to protect workers’ rights, public health and the environment are good and necessary, at least up to a point.

The problem in the United States today is that while our government regulates the behavior of ordinary citizens in great detail, there is little or no accountability to corporate executives responsible for financial fraud or industrial pollution.

I would put a lot more emphasis than Alexander does on increasing inequality and upward redistribution to income to the ultra-rich.

I say the main reason for rising costs is too many people who earn high incomes without creating value.

I don’t have the information at my fingertips to prove this, but I think if you look at any large organization—governmental, for-profit or (theoretically) non-profit—you will find the number and incomes of the administrators going up and the number and incomes of people doing the actual work are flat or going down.

Excess administrators not only contribute little of value themselves, they interfere with those who are doing the actual work.   Friends tell me all the time how they like their work, but can’t get it done because of micro-management, often from people removed from the actual work.

Another cause is the domination of the U.S. economy by the financial sector.  Instead of serving the productive economy by turning savings into capital, today’s financiers are usurers in the Biblical sense.  They thrive on debt instead of investment.

That affects education, health care, public transportation and other public services because the higher the percentage of the national income that goes to hedge fund managers, the less is available for nurses and school teachers.   That’s why American public schools and public services are starved for resources.

But I’m getting away from Alexander’s important point.  Young people today are the first generation of Americans who on average will be worse off than their parents.  A big part of the reason is the excess cost of essential goods and services.

If these costs were going down and not up, a lot of American social and political problems would either go away, or become a lot easier to solve.

LINK

Considerations On Cost Disease by Scott Alexander on Slate Star Codex.   If you don’t have time to read this well-researched post, I recommend you glance through his charts, which tell a story in themselves.

You don’t have to be stupid to work here, but it helps by Andre Spicer for Aeon.

Why Capitalism Creates Pointless Jobs by David Graeber.

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2 Responses to “Why do things cost so much?”

  1. Edward Says:

    We live in an economy of imperial decline. As you write, there are too many economic parasites.

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  2. Craig Says:

    Medical care increases are highly affected by the price (not the cost) of prescription drugs. And more is spent on marketing than research. In addition, they are selling high priced medical treatments for people in the last few years of their life. As a result, insurance rates are leaping upward.

    Education has gone up with the advent of for profit colleges, some of which spend up to half of their revenues on marketing. Students get government guaranteed loans so institutions get the cash up front, and students get stuck with huge debt that can’t be forgiven through bankruptcy.

    There are many other reasons for these increases, but at the root of it, in my opinion is unfettered capitalism.

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