Why Do Things Cost So Much?

A few months ago Slate Star codex wrote a post about cost disease. I figured I’d publish some notes about it in a couple of posts.

Why do the following cost so much today in the US?

  • Education
  • Healthcare
  • Public infrastructure

(Housing – not included since growth in prices seem more reasonable and easier to explain.)

Compare current US costs with:

  • Cost in other countries – US may have slightly higher GDP per capita, but not enough to justify spending 2x – 5x more than other developed countries. 
  • Cost in the past.
  • Bonus – compare with cost of goods and services in other sectors (where the markets appear to work better).

Two questions:

  • Where is the increased spending going?
  • Why is this happening (especially compared to other countries)

Where is the money going?

In general, the US doesn’t appear to be getting higher quality results than other countries. So where is the extra spending going?

  • Administrator bloat
  • More people employed to do the same things (compliance, redundancy, etc.)
  • Increased salaries and benefits
  • More “features” offered, even if overall outcomes aren’t improved
  • More people getting services

Why is this happening?

  • Powerful public sector unions cause increased costs:
    • Higher salaries and benefits
    • Extra employees
    • Enforce extra requirements, restrictions on automation, etc.
    • Leaves the question – how did they get more powerful in the US of all places?
  • Government system
    • More divided
    • Common law? (See UK which also has increased expenses)
    • Politics is influenced more by money and special interests?
    • (See The American Interest)
  • Increased regulations – This can explain some of the changes over time, but is the US more extreme than other countries?
  • Lawsuits – In the US, people sue more often and for money, which raises costs:
    • Increased fees to balance risks of lawsuits
    • Expensive “defensive” actions to prevent lawsuits
  • Salaries increased to compete with other higher paying jobs.
    • This increase in salaries is greater than the GDP per capita difference between the US and Europe.
    • See post on higher Actual Individual Consumption in the US.
  • Changed values
    • Have more money to spend so spend a greater proportion of it on health and education since they’re important, and other things are cheap anyways. 
    • Believe more in helping everyone achieve the same goals. Overall results may not show great improvement, but spend a lot on people who would have received less in the past.

The US is supposed to be more capitalist than European countries so one would expect it to have greater competition and reduced union power. However public sector unions appear to have greater power in the US than they do in other countries. This seems to be partially connected to the US political system and perhaps also connected to certain aspects of US culture.

In a future post, I plan to look into the specific areas in more detail.

Todo

If  anyone has the time, it would be nice to examine the evidence more carefully:

  • Find existing research on this topic.
  • Compare different countries and US states to see how spending changes based on specific factors.
  • Find people with personal experience who can explain some the differences between the US and elsewhere, or between today and the past.