Thread by @eriktorenberg

1/ There are two types of American industries: one that has had rapid innovation and falling prices, and one that has had the opposite.

2/ In the first—e.g. software, manufacturing—consumers have grown accustomed to paying less for more. In the second—e.g healthcare, education, construction—they pay more for the same (or worse).

3/ In the past fifty years, university costs have gone up 10x, health insurance costs have gone up 10x, and housing costs have increased by about fifty percent.

4/ You’d expect these industries to get cheaper because of technology and globalization. Instead they are getting far more expensive (much faster than inflation) and the product isn’t getting better.

Why is this the case?

5/ One explanation is Baumol’s cost disease.

Basically, these industries are getting more expensive because wages are going up, even though labor productivity isn’t, largely to offset the gains in other industries.

6/ Put differently, As technology increases productivity for workers in productive industries, then unproductive industries have to pay their workers more to compete. That’s why salaries rise even though labor productivity doesn’t.

7/ This seems to be partly true but not the entire story. Another explanation is possible bad government intervention. Not the fact that government intervenes, just that it’s poorly done. (e.g. Gov’t regulating healthcare via occupational licensing, education subsidies via loans)

8/ Gov’t uniquely distorts these markets in ways that makes them neither market driven nor government provided (like other countries have)

Opaque markets — no transparent pricing
Entrenched industries — can’t modify regulations
Intermediated markets — patient isn’t the customer

9/ Another explanation, and this one positive, is that we simply give more people access to these services. More patients, more students, means more staff — total cost goes up because we serve more and employ more people.

10/ Some people try to justify cost-disease in numerous ways.

One claim is that cost disease is endemic to service sectors. But we don’t see skyrocketing prices in other service industries where people pay out of pocket (e.g restaurants or fast food places).

11/ Others try to reframe it entirely by saying it’s less of a cost disease and more of a “wage bonus”. Our teachers and doctors get to make more money, and we can thus attract great to those professions (yay!)

12/ Zooming out: In 1930s, Keynes predicted, based on the rate of GDP growth, that his grandchildren would only work 15 hour work weeks because they wouldn’t have to in a richer society.

13/ We’ve gotten as rich as we expected, but we’re no where near Keynes' vision.
Partially this is because the cost of basic needs (healthcare, education) has gone up faster than wages have gone up.

14) I also want to emphasize how big of a deal cost disease is:

If we didn’t have technological growth & globalization, would healthcare be 50x as expensive? 100x?

15/ @pmarca's response :”Our problem isn't too much technology or people being too excited about technology. The problem is we don't have nearly enough technology. These cartel-like legacy industries are way too hard to disrupt.”

16/ @Pt response:” Marc is right that we can figure out how to get labor productivity in traditionally unproductive industries, though we don't know and timelines also matter. The revolution can happen before we get there!

I’d go further and say "software must eat the world"

17./ “or else these unproductive industries will eat the economy and we will have no option but to have government manage redistribution of wealth across the board to allow workers (99% in healthcare, edu, etc) to afford the services they provide, which we obviously all need.”

18/ “Effectively, we need a call to arms that acknowledges cost disease and the need to see technological innovation (I.e bending the cost curves) in these ‘unproductive’ industries (e.g healthcare + education)"

19/ “Liberals should love this, they want cheaper education and cheaper healthcare, and conservatives should love this as well, they should understand that without rapid innovation in these sectors the government will rush to fill the gap and that’s scary AF.”