Some thoughts on the cost problem

Scott Alexander has a post on the rapidly rising costs in areas like health, education and subway construction.  As usual, it’s excellent.  He considers many different theories, and does not find any of them to be all that persuasive.

I certainly don’t claim to have all the answers, but I do feel that much of the problem reflects the fact that governments often cover the cost of services in those three areas.  This leads producers to spend more than the socially optimal amount on these products.  I’m going to provide some examples, but before doing so recall that economic theory predicts that costs in those areas should be wildly excessive.  If the government paid 90% of the cost of any car you bought, and that didn’t lead to lots more people buying Porsches and Ferraris, then we’d have a major puzzle on our hands.

Scott mentions that private for-profit hospitals are also quite expensive.  But even there, costs are largely paid for by the government.  Close to half of all health care spending is directly paid for by the government (Medicare, Medicaid, Veterans, government employees, etc.) and a large share of the rest is indirectly paid for by taxpayers because health insurance is not just income tax free, but also payroll tax free.  I’d be stunned if health care spending had not soared in recent decades.

A sizable share of my health care spending has been unneeded, and I’m fairly healthy.  I met one person in their 80s who had a normal cold and went to see the doctor. They said it was probably just a normal cold, but let’s put you in the hospital overnight and do some tests, just in case.  There was nothing wrong, and the bill the next day was something in the $5000 to $10,000 range, I forget the exact amount.  This must happen all the time.  No way would they have opted for those services if Medicare weren’t picking up the tab.

Just to be clear, I don’t think any monocausal explanation is enough.  Governments also pay for health care in other countries, and the costs are far lower.  It’s likely the interaction of the US government picking up much of the tab, plus insurance regulations, plus American-style litigation, plus powerful provider lobbies that prevent European-style cost controls, etc., etc., lead to our unusually high cost structure.  So don’t take this as a screed against “socialized medicine.”  I’m making a narrower point, that a country where the government picks up most of the costs, and doesn’t have effective regulations to hold down spending, is likely to end up with very expensive medicine.

To be fair, there is evidence from veterinary medicine that demand for pet care has also soared, and that suggests people are becoming more risk averse, even for their pets.  But there is also evidence cutting the other way.  Plastic surgery has not seen costs skyrocket. (Both are medical fields where people tend to pay out of pocket.)

I started working at Bentley in 1982, teaching 4 courses a semester.  When I retired in 2015, I was making 7 times as much in nominal terms (nearly 3 times as much in real terms), and I was teaching 2 courses per semester. Thus I was being paid 14 times more per class (nearly 6 times as much in real terms).  No wonder higher education costs have soared!  (Even salaries for new hires have risen sharply in real terms.) Interestingly, the size of the student body at Bentley didn’t change noticeably over that period (about 4000 undergrads.)  But the physical size of the school rose dramatically, with many new buildings full of much fancier equipment.  Right now they are building a new hockey arena.  There are more non-teaching employees.  You can debate whether living standards for Americans have risen over time, but there’s no doubt that living standards for Americans age 18-22 have risen over time—by a lot.

As far as elementary school, my daughter had 2, 3, and once even 4 teachers in her classroom, with about 18 students.  We had one teacher for 30 students when I was young.  (I’m told classes are even bigger in Japan, and they don’t have janitors in their schools.  The students must mop the floors.  I love Japan!)

There are also lots more rules and regulations.  By the end of my career, I felt almost like I was spending as much time teaching 2 classes as I used to spend teaching 4.  Many of these rules were well intentioned, but in the end I really don’t think they led to students learning any more than back in 1982.  I wonder if Dodd/Frank is now making small town banking a frustrating profession in the way that earlier regs made medicine and teaching increasing frustrating professions.

People say this is a disease of the service sector.  But I don’t see skyrocketing prices in restaurants, dry clearers, barbers and lots of other service industries where people pay out of pocket.

The same is true of construction.  Scott estimates that NYC subways cost 20 times as much as in 1900, even adjusting for inflation.  The real cost of other types of construction (such as new homes), has risen far less.  Again, people pay for homes out of pocket, but government pays for subways.  Do I even need to mention the cost of weapons system like the F-35?

To summarize, the case of pet medicine shows that costs can rise rapidly even when people pay out of pocket.  But the biggest and most important examples of cost inflation are in precisely those industries where government picks up a major part of the tab–health, education, and government procurement of complex products.  And excessive cost inflation is exactly what economic theory predicts will happen when governments heavily subsidize an activity, without adequate cost regulations.  Just as excessive risk taking is exactly what economic theory predicts will happen if government insures bank deposits, without adequate risk regulations.  Let’s not be surprised if the things that happen, are exactly what the textbooks predict would happen. Even FDR predicted that deposit insurance would lead to reckless behavior by banks, and he (reluctantly) signed the bill into law.



48 Responses to “Some thoughts on the cost problem”

  1. Gravatar of Major-Freedom Major-Freedom
    11. February 2017 at 11:49

    Sumner of course does not mention INFLATION of the money supply as a key determinant.

    Inflation does not affect the prices of all goods and services equally over time. It affects different goods and serious differently over time. The actual price and spending changes are “micro” first and foremost. The resulting statistics here then take on a “macro” level.

    Mathematically, inflation MUST be a factor, since the skyrocketing prices of such goods and services as healthcare and tuition have not been accompanied by equal deflation elsewhere in the economy. Everything (except electronics) is going up in price. The only explanation is more nominal demand, which the Federal Reserve System caused.

  2. Gravatar of Andy Andy
    11. February 2017 at 12:15

    Scott, this was one of the best anti-big government texts I’ve read. Usually I dismiss the Republican style “big government” talk as meaningless bullshit (probably because 99% of Republican talk is meaningless bullshit), but this was actually good and persuasive.

  3. Gravatar of ChargerCarl ChargerCarl
    11. February 2017 at 12:34

    Alon Levy has a good article on the origins of high US infrastructure costs:

  4. Gravatar of Jerry Brown Jerry Brown
    11. February 2017 at 13:03

    That definitely was a good article by Scott Alexander. I am happy that ChargerCarl pointed it out yesterday in the comments. And that you have featured it with some good analysis today.

    I do get the impression you had to walk to school uphill both ways in the snow all year long when you were young. That’s Ok- I did too.

  5. Gravatar of Jeremy Bancroft Brown Jeremy Bancroft Brown
    11. February 2017 at 13:22

    Hi Prof. Sumner, this is a great post. There is also a hypothesis that when the Fed stimulates demand, this can have heterogeneous effects, e.g. highly inflating the prices of equities and housing, even if overall CPI remains fairly low due to deflation in other sectors. See, for example, Barry Ritholtz’s recent interview of Sebastian Mallaby, in which Mallaby makes this claim. I would be interested to hear your take on this hypothesis in a future post.

  6. Gravatar of Scott Freelander Scott Freelander
    11. February 2017 at 13:45

    Good comments. I was assailed in a comment section of another site for merely pointing out that there are non-government econ 101 reasons for fast rising healthcare costs, like the combination of relatively inelastic demand and the increased need for capital investment in provision of medical treatment. This seems to explain a lot of what’s going on with the rising costs in veterinary medicine.

    It is very plausible that the government interventions in the healthcare market accelerate the rise in costs. Either a Singapore-type system, or single-payer system for catastrophic care would be a big improvement.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. February 2017 at 14:09

    Scott Alexander blew right through the NYC subway costs without mentioning that it was built in 1904 as a business venture, by the financier August Belmont (also a horse breeder who produced Man-O-War, and The Belmont Stakes every summer).

    It wasn’t until NYC’s politicians horned in on Belmont’s business–NYC refused to renew the contract he’d had for the first line, when the second line was built. Instead, the city became a partner with him, thinking they’d share in his massive profits, ha ha ha–that the NYC subway system began its descent into the mess it is today. Belmont’s heirs simply gave away their rights to it, to the city.

    For those interested in the story;

  8. Gravatar of ssumner ssumner
    11. February 2017 at 14:20

    Thanks Andy.

    Jerry, Well I did have a 1.5 mile walk to school, and in those days school did not close when it was 20 below zero, or when there was snow. (I’m told things are different now in Madison.)

    Jeremy, I think it’s misleading to talk about monetary policy stimulating asset prices. Yes, there’s a grain of truth in that obviously assets are worth more when monetary policy is doing its job well. But there should not be any implication that monetary policy creates “bubbles”, or artificially boosts asset prices.

    Patrick, Very interesting.

  9. Gravatar of Jeff G. Jeff G.
    11. February 2017 at 14:29

    Here is a story I like to tell about my experience with hospitals. I live in the U.S. and have pretty good coverage. A few years ago I had a nasty cut over my eye from getting head-butted in a soccer match. It was after hours, so I had to go to the hospital if I wanted it fixed. The cut was bad but obviously not life-threatening. I literally had no idea what a trip to the hospital would cost. I wouldn’t be surprised if it was $100 or $100K. When I arrived I asked the insurance specialist what this would cost. She couldn’t tell me what the cost of care would be (be she wasn’t a doctor) but she could say my out-of-pocket would be around $150. I said, OK and waited for a doctor. Once I got to see someone, he took about 20 minutes to glue up my eye and check for a concussion. I sat on a gurney in the hall the whole time. When I got the statement of services I noticed that the whole bill was around $15K. I was floored. It was something like $3K to the doctor and $12K to the hospital. I though how can the hospital charge $12K for 15 minutes in the hall? Can they really charge me for a room if I never sat in one? Did they charge for the whole hour, even though I was only there for less than 30 minutes? Ultimately I didn’t care because I didn’t pay. I also didn’t care that I had a $6k/hr trauma surgeon glue my eye when an RN could have done just as good a job. Months later I also learned that the hospital had an after-hours primary care office in the back of the building that no-one bothered to mention. I’m guessing a visit there would have been much less than $18K and I would have been in-n-out much faster.

  10. Gravatar of morgan warstler morgan warstler
    11. February 2017 at 14:55

    Notice Scott didn’t confront goofy fake story on 3Am call.

    Great paper on digital deflation and invisible GDP growth.

  11. Gravatar of ssumner ssumner
    11. February 2017 at 15:24

    Jeff, Good story.

    Morgan, What is 3Am call? I can I “confront” something I’ve never seen?

  12. Gravatar of E. Harding E. Harding
    11. February 2017 at 15:27

    Yup. I found it bizarre Scott the psychiatrist forgot his piece on tulip subsidies, didn’t notice the massive and non-cyclical growth in employment in these sectors, and paid so much more attention to supply-side factors than demand-side ones. However, I’m banned at SSC for being too pro-Trump, so who cares. There was nothing “excellent” about that piece; yours here is far better.

    “(I’m told classes are even bigger in Japan, and they don’t have janitors in their schools. The students must mop the floors. I love Japan!)”


    “By the end of my career, I felt almost like I was spending as much time teaching 2 classes as I used to spend teaching 4. Many of these rules were well intentioned, but in the end I really don’t think they led to students learning any more than back in 1982.”

    -Can you expound on this?

  13. Gravatar of Matthew Waters Matthew Waters
    11. February 2017 at 15:55

    I don’t know how good the pet vs. human health care cost parallel is. Generally, people are more willing to pay dubious premiums on goods that are lower percentage of income. The biggest markups, percentage-wise, are on things like candy bars and cokes. Where people

    Veterinary care is not a huge expense year after year, at least nothing like human health care or health insurance. The magnitude of health care spending is similar to housing and transportation, where consumers are very cost-conscious and efficient in their buying.

    K-12 and infrastructure systems have particular American causes. K-12 student/teacher ratio has gone down, school boards have much more compliance costs, and plus public-sector pensions and health care plans. Infrastructure in US is overbuilt and strict low-bid rules increase paperwork.

  14. Gravatar of Andrew Andrew
    11. February 2017 at 16:03

    I do think that the veterinary medicine piece pushes back against the idea that government subsidies play the dominant role here.

    I was recently at the vet’s with an old cat who, it turned out, had kidney failure. I was ASTOUNDED to learn that (apparently) most people with old cats who have kidney failure keep them alive by feeding them special expensive food and giving them a wide variety of frequent medical treatments. (We put the cat down).

    It occurs to me that education and health care (for the most part) are services that are provided for the young and the elderly. And it has become socially unacceptable, at least in this country, to decide to save money by spending less money on children or on the elderly (or on pets). Atul Gawande’s “Being Mortal” makes clear how guilty many people feel about withholding medical care from their dying parents (even if their parents may be better off without it!). And many people believe they need to provide “the very best” for their children. This is true both at an individual level and at a societal level. If we socialized all of medicine but were more cold-blooded about which medical treatments were actually worth paying for, I believe that would be a big improvement over the status quo.

    Government involvement clearly plays a large role (subways after all are a different story) but I think that culture plays a larger one still.

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. February 2017 at 16:03

    Measuring the increase in the administrative tail might be a good general indicator.

    I am reminded of how folk remarkably often get the decline of the Roman Empire wrong. Historians regularly write that “the Empire got too large to be administered by one man, so it was split”. This is crap, the empire was territorially slightly smaller when it was split, because Hadrian had led some border areas go.

    The bureaucracy was hugely greater when the Empire was split. (From Augustus to Caracella, Emperors administered the empire with around 300 permanent officials. Diocletian and his successors oversaw a bureaucracy of about 30-35,000.) That is what had become so much larger to administer.

    Numbers taken from here: p.83.

    Much of this was due to the collapse of the Rome-Han trading system and Roman silver production, leading to much more taxation in kind. The “Crisis of the Third Century” was a general one (Han collapsed, the Sassanids overthrew the Parthians, the Kushan Empire dwindled, a range of Indian ocean states collapsed), Rome’s distinction was to survive it. But at the cost of a hugely expanded administrative tail. Led by much more insular and less educated officials than the cosmopolitan trading Senators and Equites whose self-paid staffs had previously administered the empire. (Christianisation then followed: there may be some parallels with green-identity-progressivism.)

    Similarly, the significance of the Battle of Adrianople (378) when the Goths annihilated the field Army of the Eastern Empire, killing the Emperor Valens and lots of senior officers, has been regularly misinterpreted. It was not the triumph of cavalry over infantry (if anything, it was something of a re-run of Hannibal’s victory at Cannae (216BC). It was proof that the Roman’s had no longer any significant operational advantage over their opponents, with much more extensive administrative tail. This was not the basis for long term survival, at least not for the half of the empire with much longer exposed borders and much less people and revenue.

  16. Gravatar of Matthew Waters Matthew Waters
    11. February 2017 at 16:10

    “When I got the statement of services I noticed that the whole bill was around $15K.”

    This is the chargemaster rate, which is always insanely higher than what any insurer actually pays. Almost no patient off the street pays it either. Until recently, hospitals could claim the chargemaster rate as the “cost” of charity care for tax writeoff. High chargemaster rates may also be gamesmanship with negotiations with out-of-pocket patients and insurers.

    There is also gamesmanship with regard to hospital coding, as hospitals push doctors to higher codes. Hospitals have an upper hand in negotiations with insurers. Auto insurer/Body shop negotiations work much more smoothly in my experience as the insurer has more negotiating power. I’m torn about whether the imbalanced hospital-insurer negotiations are part of employer health insurance model or because hospitals are natural monopolies.

  17. Gravatar of Benjamin Cole Benjamin Cole
    11. February 2017 at 16:39

    Great post.

    Yes I remember the elementary school with 20 to 30 students per teacher, one school principal and one school nurse.

    The Empire State Building took a year to build.

    In WWII weapons systems went from concept to battle in a year. The British “Mosquito” was a wonderful plane.

    Soldiers lived in quonset huts, barracks.

  18. Gravatar of Benjamin Cole Benjamin Cole
    11. February 2017 at 16:50

    Washington Post
    Republican green-card holder who voted illegally in Texas gets 8 years in prison
    Washington Post  – ‎1 hour ago‎
    A permanent U.S. resident living in Texas has been sentenced to eight years in prison for illegally voting, a punishment that will likely result in the woman’s deportation after she completes her sentence.


    Is there a prison complex driving up costs?

    We have to take care of this lady for eight years?

  19. Gravatar of dtoh dtoh
    11. February 2017 at 17:27

    I think there is a lot of detail that’s being missed….but basically.

    – Lack of competition (including unionization) leads to higher prices
    – Subsidizing consumption or risk leads to higher prices
    – Regulation leads to higher prices
    – Government employees are bad at doing things
    – U.S. government employees are horribly awfully unbelievably bad a doing things.

    Don’t conflate health, health care, and medical care. They are different things. The quality of medical care has improved dramatically….. we just consume too much of it.

    The veterinary thing is a substitution effect….. people are replacing children with pets and treating them like children. In Tokyo there are now more dogs than children.

  20. Gravatar of Jerry Brown Jerry Brown
    11. February 2017 at 18:29

    Lorenzo, economic history is important, and definitely under-rated, but you may be stretching the envelope a bit too much with the analogy to the Roman Empire. I admit that it is interesting though.

  21. Gravatar of Major-Freedom Major-Freedom
    11. February 2017 at 19:06

    Jeremy, you were told it is “misleading” to talk about monetary policy stimulating asset prices. That there is but a “grain of truth” to the relationship between monetary policy and asset prices by way of assets are “worth more” when there is “good” monetary policy.

    You are 100% on the right track. It is Sumner who is misleading on this issue. Monetary policy can cause and has indeed caused unsustainable asset bubbles, and more relevantly, it can and has caused abnormally high rates of price inflation in certain sectors and industries, since as you pointed out, inflation of the money supply has heterogenous effects on prices.

    Even though Sumner claims these heterogeneous effects are empirically minimal, and not worth any serious investigation, what he is actually saying when he argues like that is that his own theory is incomplete and cannot account for these effects. His mentality is focused on aggregates only, which mask and cloud the reality of what is in fact taking place. He would rather write simple posts using simple models, than accept the fact that the world is better explained with other theories.

  22. Gravatar of Ravi Ravi
    11. February 2017 at 19:44

    I think information asymmetry explains a good part of the cost disease we are seeing. Quality measurement is difficult in education and healthcare. This creates opportunities for rent-seekers to restrict supply and induce demand. Most countries have centralized political authority, which somewhat limits the ability of producers to skim rents. All American politics is local. When decisions are made at higher levels of government, more logrolling (rent-seeking by local interests) is needed. For example, Cory Booker’s vote on the pharmaceutical bill makes perfect sense given that he represents New Jersey. Cost disease will be more intense in the US until it either takes the plunge and centralizes authority like most nations, or decentralizes more decisions like Switzerland. Trying to run a federal republic with a separation of powers as if it were a parliamentary democracy is the worst of both world.

  23. Gravatar of Bob Bob
    11. February 2017 at 20:51

    The argument for misaligned incentives making sure that nobody is interested in lower prices is pretty strong on most cases: You’ll see liberals make it when it comes to medicine, and sometimes when it comes to higher education too. The fact that republicans and democrats aim for completely opposite approaches to this misalignment is one of America’s greatest economic tragedies.

    When it comes to elementary education though, especially when it comes to private schools, I believe that higher costs and higher prices are often something that is done on purpose. It seems to me that a big part of primary education is not a quest for the best teachers, but other families and other kids that we like: In places with a lot of private schools, we see behaviors that resemble white flight, although the reasoning is not only racial.

    At that point, making sure a school is not affordable for anyone other than high society families, instead of available to someone that really cares about their kid’s education and is somewhat less wealthy, is a feature. This is what gives us high schools with a dozen squash courts, multiple indoor swimming pools, and lab equipment that looks like what you’d find in a professional research lab.

    Going back to the Ferraris: If government paid for 90% of car prices, we’d not see more people with Ferraris, but far faster, more luxurious Ferraris that only the very rich could afford after the subsidy. Toyotas would start having seats with Alcantara though.

    This is why I wonder if any kind of government voucher program would provide us noticeably better educational outcomes: If school choice resembles finding a spouse, giving everyone more money to spend on dates will not make it more likely that I’ll end up being able to marry an actress or bikini model.

  24. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. February 2017 at 23:59

    Patrick: New York City memorably being able to run betting shops at a loss.

    Jerry: Thanks, and yes, historical analogies are a fraught business. They can be fun, though.

    I like to point out that Qing China and the Ottoman Empire both indicate that meritocracy is overrated. Both administrations were much more meritocratic than their Western opponents: Qing administration was much more meritocratic than the British one which walloped them in the first Opium War, Ottoman administration more than its Holy League opponents who crushed its field army at Vienna in 1683. And, on both occasions, their aristocratic-patronage enemies had significantly fewer troops than did the meritocratic autocracies.

    Adopting and adapting the Chinese public service entry-via-examination system likely did improve Western administration, but over-estimation of the benefit thereof may have led to a tendency to over-estimate the resultant reliable efficiency.

  25. Gravatar of mbka mbka
    12. February 2017 at 01:31


    as you point out, one part of the explanation can be found in government subsidies that lead to much higher demand than otherwise expected. Then there’s regulations, health and safety and environmental etc. These were not necessarily asked-for by the end customer, but with time we all got used to them and by now probably most people expect them. They are effectively a form of consumption.

    And finally there is regular increase in quality not accounted for even by hedonic adjustments. Same story as for regulations, people weren’t necessarily asking for all those gizmos in their cars and I miss nothing in my 1987 model car. But, at the end of the day, the “same” middle class car today has a lot more features, including the unseen cost of making production and operation more environmentally sustainable, than the car of 30 years ago.

    All of this means that it’s not just the costs that rose, it is the (often unseen) product gizmos, quality, and services we get today which we weren’t getting in 1960. The consumption value really did increase dramatically. The utility didn’t follow at the same pace of course, because 80/20 applies. In a world where the public expects 100% solutions for everything, these solutions will be very expensive, because the last 1% will cost you a lot more than the previous 99%. So it’s not a complete mystery where the cost comes from.

    As to your academic income, congratulations, but here I have seen too many counterexamples. This includes the European-style split between old style fully protected well paid employees supplemented by an army of underpaid and underprotected contract hires. Even here, the system was produced by regulations of a kind. Without the tenure system and the habit of hiring star researchers to decorate a University’s prestige, things would look more even and more reasonable.

  26. Gravatar of Postkey Postkey
    12. February 2017 at 01:34

    “Jeremy, I think it’s misleading to talk about monetary policy stimulating asset prices.”


     “During the height of the 1980s Japanese property bubble, the palace grounds were valued by some as more than the value of all the real estate in the state of California.”[1][2]

  27. Gravatar of Benny Lava Benny Lava
    12. February 2017 at 03:39

    I love the conservatard claptrap about New York’s subways being some sort of private for profit venture when they were originally built with taxpayer money that required new laws and jurisprudence from the state Supreme Court to proceed. It was a big government innovation from beginning to end.

  28. Gravatar of flow5 flow5
    12. February 2017 at 04:07

    “Even FDR predicted that deposit insurance would lead to reckless behavior by banks, and he (reluctantly) signed the bill into law”

    How absurd. The FDIC (set up for CBs) and FSLIC (set up for thrifts) were to protect depositor’s pooled savings. And the pooled savings that were activated by the thrifts were responsible for the “Golden Era” in U.S. economics.

    When the DIDMCA destroyed the non-banks (and the FSLIC), this created Larry Summer’s secular strangulation.

    The problem is that economists like John Cochrane and Scott Sumner (Keynesian economists), don’t know a debit from a credit.

  29. Gravatar of Sw Sw
    12. February 2017 at 06:10

    Scott Alexander writes off Baumols explanation of the cost disease because teacher wages have not increased. But that’s not what Baumol suggested. From Baumols book on the Cost Disease: “in the long run,wages for all workers throughout a country’s economy tend to go up and down together. Otherwise an activity whose wage rate falls behind will tend to lose its labor force. Auto workers and police officers will see their wage rise at roughly the same rate in the long run, but if productivity on the assembly line advances while productivity in the patrol car does not, then the cost of police protection will increase relative to manufacturing. Over several decades the two sectors differing cost growth will add up, making personal services enormously more expensive than manufactured goods.”

    Here, “auto workers” represent any activity that is easy to automate. Cops represent any activity that is hard to automate. At least until robocop arrives.

    Btw, according to BLS paper “100 years of price change” the price of a men’s haircut was $1.42 in 1955. The equivalent today would be less than $13. The actual average price of a men’s haircut in the us is at least double that.

  30. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. February 2017 at 06:58

    Benny Lava: since there were two private operators, not entirely “big government innovation”.

  31. Gravatar of Ray Lopez Ray Lopez
    12. February 2017 at 07:32

    @Sw – Wow! You stole my post. I said the same thing when the Scott Alexander story ran on MR, see the comments section, and was going to repeat it here. Alexander, who dissed TC of MR (see my comment there) for getting ‘cost disease’ wrong, himself, as Sw points out, gets cost disease wrong. And the counterexample Alexander gives to refute cost disease is that teacher salaries have stayed constant, when in fact they have not, because in fact teacher productivity has increased, due to class sizes getting larger during the Baby Boomer generation. So in fact teacher salaries have fallen and are inapt to illustrate Baumol’s cost disease. A better example is cops or orchestral players.

    @Sumner – blog on Jan. 15, 2015 in the CH franc. And a 3Am call is any call at 3 AM over an obscure question, like Trump did to his general over an exchange rate question (shows Trump’s crazy mind to even consider asking a military guy such a question).

  32. Gravatar of Christian List Christian List
    12. February 2017 at 07:47

    OT: Ooops. Tarullo is gone. Trump can change FED how he wants to.

    Tarullo’s departure means Trump will soon get to fill three of the Fed’s seven board positions, as there are two existing vacancies. In addition, Janet Yellen’s term as chair expires in Feb. 2018, followed by Stanley Fischer’s term as vice chair in June of next year. The openings give Trump the chance to significantly put his stamp on the world’s most powerful central bank.

  33. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. February 2017 at 11:02

    ‘I love the conservatard claptrap about New York’s subways being some sort of private for profit venture when they were originally built with taxpayer money that required new laws and jurisprudence from the state Supreme Court to proceed. It was a big government innovation from beginning to end.’

    Absolutely false. Belmont stepped in after years of failure by NYC to build a subway line. The only thing he needed from government was the legal right to tunnel under others’ property (standard definition of property rights).

    True, he had NYC float the bond issue of $30 million that provided the capital for the construction, but that was only because the interest rate was lower doing it that way. Belmont had to put up a surety of $5 million of his own to guarantee that he would pay off the city’s bond issue. Which he did with fare box revenues.

    In addition, Belmont paid for the trains, rails and other equipment from his own funds. Which you would have known had you bothered to click on the link I provided.

    Here’s how the NY Times put it at the time;

    ‘…at the expiration of a shorter period (fifty years [with an option to renew for another 25]) the city will own this tunnel railroad that will have cost $36,500,000, and which is the key to the rapid transit situation, without the expenditure of a single dollar for construction or interest, it having simply used its credit under carefully guarded guarantees for the time being to the advantage of the lessee, who meanwhile pays the interest as it falls due and provides for the liquidation of the bonds at the expiration of his lease.” ‘

    Note well that; ‘without the expenditure of a single dollar for construction or interest [by the city of NY].’

  34. Gravatar of Jim Glass Jim Glass
    12. February 2017 at 13:01

    I love the conservatard claptrap about New York’s subways being some sort of private for profit venture when they were originally built with taxpayer money … It was a big government innovation from beginning to end.

    Well, somewhat more accurately…

    Circa 1900 the urgent need for a subway system was obvious to all – but nobody trusted the government to build and run it because of the staggering record of corruption of Tammany Hall, while private transit operators couldn’t finance the massive tunneling pre-startup cost. So…

    * Private operators paid for all the rolling stock, capital equipment, stations, etc, and built, owned and operated the system, while the city floated bonds to pay for the tunneling which the operators had to service and pay down, paying the city an extra interest charge on top.

    * The 1904 opening was an immense success, on time and under budget. Hundreds of thousands immediately fled from lower Manhattan to far better housing in upper Manhattan, the Bronx and Brooklyn, the poor could holiday Coney Island,etc., travelling through stations designed by the city’s most famous architects, all for five cents. After servicing the city’s bonds the operators made a 20% profit.

    * The second leg construction was financed the same way, *except* that the politicians insisted that the city now get 50% of those profits, instead of having the operators service the tunneling bonds.

    * The World War I inflation hit and the politicians price controlled the “nickel fare” forever, destroying the system’s profits. Note well: The politicians traded the city’s place as a secured bondholder for profit sharing, then destroyed the profits to get votes. There is a timeless lesson about political incentives here. Thereafter the system began to decay and the city had to pay on the bonds.

    * John “Red Mike” Hylan became Mayor, attacking private providers of public services generally and subway operators with a personal vendetta. (He’d worked for the BMT while a law student, and had been fired for nearly running down the head of the line while reading a law book while moving a train through the yard.) Hyland created the new city-run IND line largely to undercut the IRT and BMT lines by running parallel to them.

    * LaGuardia became mayor with the IND hemorrhaging money, its costs literally multiples of those of the other lines, which themselves were barely hanging on. He bought out the private operators planning to have their managements take over the IND to improve its operations. Instead they left and the IND’s managers and politicians took over everything.

    * With the system now city-owned the “nickel fare” is forgotten, the fare goes up, up as service collapses into the ruin seen in 1970s movies. E.g., at that point trains coming out of repair shops ran fewer miles between breakdowns than before they went in.

    * The state removed city politicians from direct control over the system by moving it into the semi-independent MTA, then after the crisis of the ’70s forced reforms through the MTA that have improved service quality greatly, costs and budgeting not so much.

    That’s the digest version. For the full story see, say, 722 Miles: The Building of the Subways.

  35. Gravatar of Jim Glass Jim Glass
    12. February 2017 at 13:08

    Hey, Patrick, fancy meeting you here talking about this too.

  36. Gravatar of ssumner ssumner
    12. February 2017 at 20:24

    Thanks everyone, Outstanding comment section—I should post on this more often. I learned a lot.

    Postkey, Even if it was a bubble, there is no indication that monetary policy had anything to do with it.

    Harding, This probably won’t mean much to you, but to try to answer your question:

    1. “Assurance of learning”
    2. “Writing intensive courses”
    3. Non-stop email (didn’t exist when I started out)

    It’s not literally true that I spent twice as much time per class, but sometimes it felt that way. The writing intensive classes were the biggest complaint for me. Lots of time spent giving writing suggestions, after first grading for economic content.

    Don’t get me wrong, college teaching is not a bad job. I read somewhere that even librarians find their jobs to be very stressful.

  37. Gravatar of Postkey Postkey
    13. February 2017 at 00:43

    “Postkey, Even if it was a bubble, there is no indication that monetary policy had anything to do with it.”

    Here us someone who has studied the Japanese economy and has this to say: “Since credit was also used for non-GDP transactions (especially speculative loans to the real estate sector), . . . ”

    For a more expansive explanation, see his book: ‘Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy’
    30 Apr 2003. Or, Werner, Richard (2005), ‘New Paradigm in Macroeconomics’, Basingstoke: Palgrave Macmillan

  38. Gravatar of Postkey Postkey
    13. February 2017 at 02:21

    1h 23’50”
    From 2004 over 20% credit creation {per annum} in Portugal, Greece, Spain and Ireland.
    Property prices rocketed.

  39. Gravatar of Michael Rulle Michael Rulle
    13. February 2017 at 07:48


    I find monetary policy completely non intuitive and have difficulty following most of your posts. It becomes even more complex as you often comment on another economist who has a different view, and sometimes an opposite view. Still, targeting NGDP seems to make sense, as it is simpler than targeting inflation and employment. Plus I do like the idea of market feedback.

    This post, on the other hand, seems obvious. I have always thought everyone knew this. In fact, it is the only thing I ever felt comfortable regarding my knowledge of economics. In fact, it seems so obvious, my reaction was “why is he writing this—-everyone knows this”.

    So maybe I am missing something.

  40. Gravatar of Robert Simmons Robert Simmons
    13. February 2017 at 08:23

    “To be fair, there is evidence from veterinary medicine that demand for pet care has also soared, and that suggests people are becoming more risk averse, even for their pets. But there is also evidence cutting the other way. Plastic surgery has not seen costs skyrocket. (Both are medical fields where people tend to pay out of pocket.)”
    Pet insurance is actually a decent size business.
    I’d also add that elective healthcare like plastic surgery should have different cost dynamics over time, even granting that pet medicine is (somewhat) elective as well.

  41. Gravatar of Benny Lava Benny Lava
    13. February 2017 at 11:14


    You mean a government chartered monopoly created by insiders for the purpose of operating a government funded creation? That is your idea of a “free market”? Retards.

    The book about this is in the public record so I cannot absolve you of your ignorance.

  42. Gravatar of ssumner ssumner
    13. February 2017 at 11:26

    Benny, You are making a fool of yourself. Just stop.

  43. Gravatar of morgan warstler morgan warstler
    14. February 2017 at 05:17

    Sourced by HUFFPO.

    Ny god.

  44. Gravatar of Carl Carl
    14. February 2017 at 08:25

    Coming late to the conversation, but on the matter of veterinary care, there are more payment options today than there used to be: pet insurance, payment plans, third party charitable funds. That might explain some of the increase in costs.

  45. Gravatar of ssumner ssumner
    14. February 2017 at 14:26

    Carl, At the risk of sounding cruel, just put the animals to sleep. Replace animal hours of life that are miserable with animal hours of life that are happy. I mean if personal identity doesn’t exist for humans (my view) then it sure as heck doesn’t exist for animals.

    (I know, this isn’t about the animals, it’s about their owners.)

  46. Gravatar of Carl Carl
    14. February 2017 at 21:16

    I take it you aren’t asked to do a lot of pet sitting.

    Actually, I agree. I’m not one to buy insurance to make it easier to put Fido on chemo. But it sounds like the number of people who are doing so is increasing.

  47. Gravatar of LK Beland LK Beland
    16. February 2017 at 08:39

    Two notes:
    In regards to K-12 spending (2014 constant dollars):
    2002: $10,455
    2014: $11,009

    In regards to spending in public higher education institutions:
    Total educational revenue per FTE (Constant Adjusted Dollars):
    1990: $11,583
    2015: $12,907

    Honestly, these numbers just don’t seem that bad.

  48. Gravatar of Matt Matt
    17. February 2017 at 06:11

    I think a key distinction between health care for pets and elective surgery (cosmetic, weight loss, lasik) is Tolstoy’s old observation that much of health care is about signalling you care.

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