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May 23rd, 2018
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  1. In this artice author introduces the concept of cost disease.
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  3. Tyler Cowen writes about cost disease. I’d previously heard the term used to refer only to a specific theory of why costs are increasing, involving labor becoming more efficient in some areas than others. Cowen seems to use it indiscriminately to refer to increasing costs in general – which I guess is fine, goodness knows we need a word for that.
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  5. Cowen assumes his readers already understand that cost disease exists. I don’t know if this is true. My impression is that most people still don’t know about cost disease, or don’t realize the extent of it. So I thought I would make the case for the cost disease in the sectors Tyler mentions – health care and education – plus a couple more.
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  7. First let’s look at primary education:
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  10. There was some argument about the style of this graph, but the basic claim is true. Per student spending has increased about 2.5x in the past forty years even after adjusting for inflation.
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  12. At the same time, test scores have stayed relatively stagnant. You can see the full numbers here, but in short, high school students’ reading scores went from 285 in 1971 to 287 today – a difference of 0.7%.
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  14. There is some heterogenity across races – white students’ test scores increased 1.4% and minority students’ scores by about 20%. But it is hard to credit school spending for the minority students’ improvement, which occurred almost entirely during the period from 1975-1985. School spending has been on exactly the same trajectory before and after that time, and in white and minority areas, suggesting that there was something specific about that decade which improved minority (but not white) scores. Most likely this was the general improvement in minorities’ conditions around that time, giving them better nutrition and a more stable family life. It’s hard to construct a narrative where it was school spending that did it – and even if it did, note that the majority of the increase in school spending happened from 1985 on, and demonstrably helped neither whites nor minorities.
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  16. I discuss this phenomenon more here and here, but the summary is: no, it’s not just because of special ed; no, it’s not just a factor of how you measure test scores; no, there’s not a “ceiling effect”. Costs really did more-or-less double without any concomitant increase in measurable quality.
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  18. So, imagine you’re a poor person. White, minority, whatever. Which would you prefer? Sending your child to a 2016 school? Or sending your child to a 1975 school, and getting a check for $5,000 every year?
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  20. I’m proposing that choice because as far as I can tell that is the stakes here. 2016 schools have whatever tiny test score advantage they have over 1975 schools, and cost $5000/year more, inflation adjusted. That $5000 comes out of the pocket of somebody – either taxpayers, or other people who could be helped by government programs.
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  22. Second, college is even worse:
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  25. Inflation-adjusted cost of a university education was something like $2000/year in 1980. Now it’s closer to $20,000/year. No, it’s not because of decreased government funding, and there are similar trajectories for public and private schools.
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  27. I don’t know if there’s an equivalent of “test scores” measuring how well colleges perform, so just use your best judgment. Do you think that modern colleges provide $18,000/year greater value than colleges did in your parents’ day? Would you rather graduate from a modern college, or graduate from a college more like the one your parents went to, plus get a check for $72,000?
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  29. (or, more realistically, have $72,000 less in student loans to pay off)
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  31. Was your parents’ college even noticeably worse than yours? My parents sometimes talk about their college experience, and it seems to have had all the relevant features of a college experience. Clubs. Classes. Professors. Roommates. I might have gotten something extra for my $72,000, but it’s hard to see what it was.
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  33. Third, health care. The graph is starting to look disappointingly familiar:
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  36. The cost of health care has about quintupled since 1970. It’s actually been rising since earlier than that, but I can’t find a good graph; it looks like it would have been about $1200 in today’s dollars in 1960, for an increase of about 800% in those fifty years.
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  38. This has had the expected effects. 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.
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  40. This time I can’t say with 100% certainty that all this extra spending has been for nothing. Life expectancy has gone way up since qqq:
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  43. But a lot of people think that life expectancy depends on other things a lot more than healthcare spending. Sanitation, nutrition, quitting smoking, plus advances in health technology that don’t involve spending more money. ACE inhibitors (invented in 1975) are great and probably increased lifespan a lot, but they cost $20 for a year’s supply and replaced older drugs that cost about the same amount.
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  45. In terms of calculating how much lifespan gain healthcare spending has produced, we have a couple of options. Start with by country:
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  48. Countries like South Korea and Israel have about the same life expectancy as the US but pay about 25% of what we do. Some people use this to prove the superiority of centralized government health systems, although Random Critical Analysis has an alternative perspective. In any case, it seems very possible to get the same improving life expectancies as the US without octupling health care spending.
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  50. The Netherlands increased their health budget by a lot around 2000, sparking a bunch of studies on whether that increased life expectancy or not. There’s a good meta-analysis here, which lists six studies trying to calculate how much of the change in life expectancy was due to the large increases in health spending during this period. There’s a broad range of estimates: 0.3%, 1.8%, 8.0%, 17.2%, 22.1%, 27.5% (I’m taking their numbers for men; the numbers for women are pretty similar). They also mention two studies that they did not officially include; one finding 0% effect and one finding 50% effect (I’m not sure why these studies weren’t included).
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  52. In none of these studies is the issue of reverse causality addressed; sometimes it is not even mentioned. This implies that the effect of health care spending on mortality may be overestimated.
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  54. Do you think the average poor or middle-class person would rather:
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  56. a) Get modern health care
  57. b) Get the same amount of health care as their parents’ generation, but with modern technology like ACE inhibitors, and also earn $8000 extra a year
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