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Comment by struppi | Hacker News Reader

Ok, maybe I'm getting this wrong, but to me, it's not entirely surprising that those costs have been rising, even when adjusted for inflation.

AFAIR, we spend a lot of money on food, transport, holidays, electronic devices, ... All of which have become cheaper over the last few decades. The consumer price index reflects this. So, if a lot of items have become cheaper, even adjusted for inflation, others must become more expensive, adjusted for inflation.

The article even mentions this effect:

  First, can we dismiss all of this as an illusion? Maybe adjusting for inflation is harder
  than I think. Inflation is an average, so some things have to have higher-than-average 
  inflation; maybe it’s education, health care, etc. Or maybe my sources have the wrong 
  statistics.

But: Maybe this does not explain the whole effect, and maybe I am missing something important. I am not an economist, after all.

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You don't have to use CPI-- just compare percentages of income spent on expenses for people performing the same job over time.

If the price of basic goods became cheaper, you might expect people to invest more of their money or buy more luxury goods. You wouldn't expect basic necessities like health care or education to increase their total cost percentage vs income.

FTA: "The average 1960 worker spent ten days’ worth of their yearly paycheck on health insurance; the average modern worker spends sixty days’ worth of it, a sixth of their entire earnings."

Why wouldn't you expect that to happen? Stuff like food and electronics has dropped in price thanks to a combination of automation, exporting the work to cheaper countries, and technology improvements. The same things haven't happened to education and health care. Since people's income has barely grown in line with CPI which has been dragged down by those price drops, of course healthcare and insurance are going to increase in cost percentage compared to income. In some sense, their income has dropped in real terms and that's just disguised by efficiency improvements pushing down the inflation figures.

> Stuff like food and electronics has dropped in price thanks to a combination of automation, exporting the work to cheaper countries, and technology improvements. The same things haven't happened to education and health care.

This explains why health care, education, etc. have increased in cost relative to consumer goods. It does not explain why those things have increased by an order of magnitude relative to wages, rather than staying constant relative to wages. And obvious explanations for the increase are false: these are all labour-intensive services, yet their cost has increased tenfold without increasing wages to workers, and in the face of increasing productivity of workers. None of the other raw materials required by these services (real estate, energy, tools, consumables) show price increases that explain the magnitude of cost increase. What objective evidence exists indicates that the quality of service has not increased substantially. So where is that extra share of my income going?

It's going exactly where you'd expect it to go now that workers are in a much worse negotiating position due to jobs being automated away, efficiency improvements, etc: to the owners of the businesses. This is probably an across-the-board thing, but in areas where increasing automation has pushed down costs heavily that helps to disguise the impact a little on the consumer side. Even there I think workers are getting a much smaller slice of the pie and owners a lot more.

There's an implicit assumption that the health care coverage a person recrived is roughly the same as it was in 1960, or at the very least that the expansion of health benefits is smaller than the possible price decrease due to improvements and commoditization. I'm not sure this assumption holds.

I think it does hold for education, however, specifically higher education.

If anything, costs should stay roughly the same for higher education- like broadcasting, higher education costs about the same to provide to 3 people as it does 300 (something "micro-degrees" take full advantage of). The only cost difference is the building and personnel to mark tests.

What has changed are two things.

First, more jobs now need university-educated people (or rather, people with the mental ability to make it to university- the proportion of the population that isn't university material likely hasn't changed). The average job for an individual in the 60s did not require the applicant to have even finished high school (national graduation rate: 72%). The decline in those jobs increased the graduation rate; it had nothing to do with the quality of education at the time as you can see from the average test scores.

Second (and as a consequence of the first point), a signalling war in education began. Employers started requiring high school graduation for positions that don't actually require it, and bachelor's degrees for positions that only really require high school graduation and possibly some specialized training (the signalling problem, also on SSC: http://slatestarcodex.com/2015/06/06/against-tulip-subsidies...). Education is still as much a golden ticket as it was in 1960, but the difference is that everyone has one now, so you must have one to be competitive, whether you need it or not.

The solution devalues it somehow; the assumption is that even without a degree graduates will be more competent than non-graduates. I'm not convinced that's true enough to avoid hurting a lot of people, but at least we can save those unfortunate enough to be currently stuck in the system and the people most invested don't vote.

Elite universities do have extremely low professor:student ratios. At Harvard it's 7. That does produce quite a difference – it's a level where 1:1 teaching happens fairly regularly.

Your analysis seems to rely on the price being a function of demand. I'm not sure if that holds, considering supply in this market is highly flexible.

The supply of elite universities with national reputations is pretty dang inflexible. You can't open another MIT, Harvard, Yale, Columbia, etc...

The supply of universities recognized at the state level is similarly fixed. In Texas all of the recognized state universities have been around for quite a while.

For profit tech schools are probably pretty flexible but they don't really compete on price as much as advertising and ability to get their students loans.

You can compare it against 1960s healthcare items, like doctors vists, basic blood tests, dental work, basic vet work, medications, broken bone surgery, etc. It will still be much cheaper than today.

That assumption is addressed in the article.

I thought the exact same thing, but then I scribbled out an imaginary two-good economy and realized that this is exactly accounted for in Baumol's cost disease (I think). If the price of (technology-neutral) school rises, the prices of (technology-neutral) teachers should rise equally. If the price of school is rising faster than wages, then it's a sign there's something more going on than measurement of dollars. I rather liked Scaevolus's alternative framing above to sidestep the issue of measuring dollars.

Good point, but I think that doesn't explain the "why" of the graphs, this observation only explains the fact.

The "why", then, in my (also non-expert) opinion, is (once again) globalization: We produce cheap electronics in China, so phones get cheaper, while we maintain the same, relatively high expenses for products and services that cannot be outsourced to countries with cheaper work-forces.

And because those local products and services are already "overpriced" (relatively speaking), there is also no way salaries will go up and will just stagnate from an inflation-adjusted point of view.

How does globalization increase the % of our GDP that goes to healthcare and education?

First, income in the US for most jobs has stagnated, inflation adjusted. Second, goods and services that can be produced cheaply due to technical advances get cheaper. This did not affect education, and medicine probably only got more expensive. At the same time, globalization accelerated this process greatly, pushing the "globalizable" products' prices even more, which means the "localized" products must get more expensive. This is known since at least 1996 as the "globalization trap."

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