Patrick Collison poses and tracks possible responses to broad questions on his website. In one, he asks:
Why are certain things getting so much more expensive?
Spending on healthcare in the US is up 9X in real terms since 1960. K12 education spending in the US has increased by 2-3X per student per year since 1960. The cost of college in the US has more than doubled (again, in real terms) since 1984. Growth in everything from construction costs to childcare costs is significantly outpacing inflation. Lots more at SSC and from Tyler.
What’s going on? Why are we seeing dramatic declines in costs in many areas of the economy and such steep increases in others? How much of the cost growth is unmeasured improvement in quality and how much is growing inefficiency? How should one predict a priori whether a sector will exhibit increasing or decreasing costs relative to inflation? What do we do about it all?
Economist Arnold Kling had an interesting response to this in a short essay on, in particular, health care and education. One (very visible) factor is category creep, of which we’re all familiar:
Measurements of the education and health care sectors also are affected by what I term category creep. What we call a college education now includes nice dorm rooms, fancy gyms and performing arts centers, extensive psychiatric counseling services, and many more choices of courses and majors than was true 50 years ago. If a college today were limited to the same amenities, courses, and instructional techniques used in 1968, the increase in tuition since then would not have been as great.
Health care now includes many diagnostic procedures, pharmaceuticals, and medical specialties that did not exist 50 years ago. Even if the cost of every single medical procedure were to decline, spending on health care could increase as new procedures are introduced and existing procedures are modified to make them safer and less uncomfortable. In other words, if health insurance only covered the medical procedures that were available in 1968, it would be much more affordable today.
He also cites our comfort with policing production over consumption, because there’s a deeper specialty there. This leads to desires from producers to restrict supply (to reduce competition) and have the government subsidize demand (for obvious reasons):
Another explanation for price increases in some sectors is derived from what economists call public choice theory. In reality, you do not produce everything in the economy. You are much more specialized in production than in consumption. This makes you much more motivated to affect public policy in the sector where you produce than in the sector where you consume.
In theory, government policy is supposed to promote the general welfare. But as a producer, your goal for government policy is to increase demand and restrict supply in your industry. If you are in the field of education, you want to see more government spending devoted to education, tuition grants and subsidies for student loans, in order to increase demand. You want to make it difficult to launch new schools and colleges, in order to restrict supply. If you run a hospital, you want the government to subsidize demand by providing and/or mandating health insurance coverage. But you want to restrict supply by, for example, requiring prospective hospitals to obtain a “certificate of need.” If you are a yoga therapist, you want the government to mandate coverage for yoga therapy, but only if it is provided by someone with the proper license.