Thread by @Noahpinion

1/Today's @bopinion post is about America's ridiculously high costs for health care and education. Why do we pay so much for these things?

bloomberg.com/opinion/articl…

2/I'm sure you've seen this chart making the rounds.

3/In a recent paper, @ATabarrok and Eric Helland blame these rising prices on Baumol Cost Disease.

mercatus.org/system/files/h…

4/Baumol Cost Disease is the idea that as productivity improves in some sectors, costs rise in other sectors because outside options become more valuable.

vox.com/new-money/2017…

5/Tabarrok and Helland say that prices for health care and education have risen primarily because of rises in the wages of teachers, professors, doctors, and nurses. And that these wages have risen because of better outside options for these skilled workers.

6/But I highly doubt that this is the whole explanation. Wages for people with advanced degrees (or college degrees) just haven't risen nearly as fast as the costs of health care and education.

7/Higher education really does face higher administrative costs (though this is not the biggest reason for tuition increases).

8/And America does pay much higher prices for health care than other developed countries, despite receiving around the same quality of care.

9/So why do Americans spend pay such high prices for these things?

For college, it might be a case of increased demand meeting stagnant supply. More people want to go to college, to get the the college wage premium, but the number of good college spots hasn't increased.

10/For health care, some have suggested that as countries get richer, they simply *want* to pay more for health care.

randomcriticalanalysis.com/2018/11/19/why…

11/In fact, there is a plausible theoretical reason this could happen. As people get richer, they might throw more and more money at prolonging their lives just a little bit more.

nber.org/papers/w10737

12/But I don't buy that this is the main answer either, for a couple of reasons.

First, if you assume that as countries get richer, they spend exponentially more of their income on health, you reach a point where getting richer actually immiserates a country! That's unrealistic.

13/Second, when you look at the micro data of U.S. health care pricing, lots of stuff looks very fishy.

healthcarepricingproject.org

14/The same non-emergency hospital service can cost 3 times more in hospital as in another hospital down the road.

And hospitals with less local competition command considerably higher prices.

nber.org/papers/w21815

15/Finally, these simple explanations - Baumol Cost Disease and income effects - don't really explain the rise in the cost of construction in America.

brookings.edu/blog/up-front/…

16/By some measures, construction productivity in the U.S. has fallen by half. That's not something that can be explained with Baumol effects or income effects.

economist.com/leaders/2017/0…

17/It seems likely that America's cost disease is multifactorial - that we've simply allowed a vast number of inefficiencies to creep into our systems for purchasing health care, education, construction, etc.

slatestarcodex.com/2017/02/09/con…

18/So I'd say we still don't know what's causing cost bloat. We know a couple of likely factors, but there are probably still a lot that we don't know.

(end)

bloomberg.com/opinion/articl…