Ideas on Cost Disease

Hey, I read a nice article recently and I thought I’d bring it to the forum’s attention:

I want to resist this thread diving into specific instances or anecdotes of Cost Disease in our lives today, but instead discuss what high level theoretical framework can best explain this trajectory, and offer ways out of it. Below are some thoughts I’ve been mulling over:

Theory 1 - “Reversion to the mean”: Ancient humans lived under subsistence conditions. There wasn’t much difference in GDP per capita between a Roman slave or a medieval serf. Slowly, productivity gains started accumulating through better technology, but at first these were taken up by population growth, mostly keeping the human condition at subsistence levels. (Think the city of London growing in size, but before the Industrial revolution hit yet). Then, around 250 years ago productivity growth through technological improvements really hit its exponential/hyperbolic stride, and living conditions in the West improved drastically. The last 80 years has been somewhat of a golden age. But now, we are returning back to a new world of subsistence living, where we get to keep the plenty of cheap goods that benefited from technology and economies of scale, but any services become at best something that most people can only save up for once-or-twice in a lifetime.

Theory 2 - “The economy is so complicated, we better let an AI run it for us”: A combination of factors mean that it’s impossible to pick out the exact causes of cost disease, but it’s mostly still Baumol’s fundamental idea “that the rise of salaries in jobs that have experienced no or low increase of labor productivity, in response to rising salaries in other jobs that have experienced higher labor productivity growth”. It will continue to get worse, until we get “over the hump” in terms of technology. Ex. having a house keeper will get less and less affordable, adding pressure, until someone develops a Roomba that can empty the dishwasher and fold the laundry.

I feel the author thrashes around, trying to define the problem.

Is it just that inflation is MUCH worse than you think but the US has much cheaper stuff than you realize, so the stuff that hasn’t dropped in price remarkably has shot up by comparison?

Yeah, that’s a good point with inflation. The “hedonic adjustment” that’s part of CPI metrics has always stricken me as very not-in-line with how people actually spend their money. Ex. you buy a new Playstation every couple of years when you want to upgrade, but you don’t factor in the “cost per MB of RAM” on it like the CPI metrics do. (Fun fact: The CPI in 1999 included roughly $500/yr on computer spending. By 2019, that fell to $30/yr because they factored in how much more RAM, storage, and performance a computer today has compared to one twenty years ago)

Another quote from the same blog along the same lines:

If healthcare is a closer metric to “true prices” then manufactured good, then that means median wages have fallen by around 80%. It also means that overall GDP has crashed since 1970, since the price deflator now averages 6-7%, and nominal GDP has only averaged around 4%. It would mean that the economy has literally been in recession 90% of the past 40 year
Highlights From The Comments On Cost Disease | Slate Star Codex

Another theory I heard today was that perhaps some skills have gotten removed from the workforce, making the price of the remaining services much higher. Ex. these days you probably use GPS, and it would feel like a lot of work to navigate with just a paper map. But on the less-used occurrences where this skill would be needed in the labor-market, it’s hard to find and more expensive.

‘Like for like’ comparisons. You have to get beyond CPI and every other metric.

Break down a Doctor’s visit in 1950 vs 2021. Can a PA/NP do the job of the 1950 visit? Can a CNA? Remember the 1950’s doc needed to know everything available at the time. Advanced care in 2021 has a host of things not available in 1950, and maybe the CNA could do the job of the 1950’s doc. Which… changes the cost basis a bit. Unless you /insist/ on the MD.

Break down that 1950 college degree. Consider what’s in that degree, what was taught, etc. Some things are invaluable - how to examine data, how to argue a point … but do those, again, require a PhD? Maybe… but how about the fact-learning process? Could those not be… well, broken down into super cheap CBT with the same equivalent value?

Personally? I think that our system does provide that 1950 level of care at a much lower price (PA/CNP in the walmart urgent care, etc) even inflation adjusted. But we’re also not satisfied with that level of care.

Good point, it could be a form of “induced demand”, or at least a version of that based on quality rather than quantity.

Yeah. It’s really hard to compare ‘like for like’.

Obviously with the physical goods - A 1980s TV or computer? Pennies today. Even staples like coffee - your 1980 coffee was likely sitting in a warehouse longer, had a longer supply chain from roast to table… etc.

How do you compare an education? Different skills, different methods … could cost reductions be made? I mean you can fudge the ‘standard basket of goods’ in most inflation models to get something close. Maybe.

One of the serious problems with any of these cost or CPI or GDP initiatives, and really any economic measurements whatsoever, are that they fundamentally ignore the essential primary economy of raw materials and environment which makes all of the produced goods and financial paper schemes possible and coherent. Ignoring the mechanisms themselves, I see a few fundamental causes hiding behind the hidden and manipulated price increases and wage suppression:

  • The increasing disconnect behind financial valuation and markets (e.g. stocks, bonds, derivatives, all forms of “money that makes money”) – let’s call this the “tertiary economy” – and the actual production of goods and services that have tangible “value”, which I’ll call the “secondary economy”.
  • The increasing disconnect between the expectations and demands placed on the secondary economy and the primary economy of raw materials in the earth and the environmental conditions (clean air, water, stable climate, etc) that are necessary to produce, consume, and enjoy those goods and services and which fundamentally enable them (this includes energy in raw forms, as well), and
  • The deliberate politicization of ignoring the costs and drawdown effects of the primary economy in valuing the tertiary, at the expense of the secondary which gets squeezed - preventing any successful reconciliation of the two (read: too big to fail, there is no alternative, etc…).

If that’s a bit too abstract (but do try to think through it), basically we’ve started pretending that “value” and “cost” and “money” are all the same terms - if you can’t value it in money you don’t have an accurate cost. But money isn’t actually value, it’s just one of many plausible yardsticks for it, and there is such a thing as real value. The analogy of four stranded billionaires on a desert island with all their wealth in cash washed ashore comes to mind - they have immense amounts of money, but nothing of value in their situation. If they start trading derivatives for all they’re worth, they still won’t get food and shelter no matter how much economic “value” they create.

Now, take this same principle and apply it to today’s world of ever-increasing real costs of energy (that is, costs in energy terms, not money terms) - energy is a very unique good, because without it you cannot substitute other types of goods for each other. Substitution requires energy in some form - the common example of being able to substitute (still relatively abundant) taconite for high grade iron ore (which is now virtually depleted) demonstrates this principle very well - it requires massively more energy to mine and process taconite into a given quantity of iron than it does to process the high grade ore. Without that energy being comparatively cheap, the cost of iron goes up as we deplete the more readily available forms. But that isn’t priced into anything because we expect the “price” of energy to be the driver for that signal. Energy of course is astoundingly cheap compared to its value, today, but it is clear that the EROEI (energy returned on energy invested - the cost in energy terms to get more energy) is dropping rapidly and has been dropping fairly steadily since even before global peak oil was hit in the early 2010’s. In other words, energy is getting more costly to get at, regardless of how much of it we have to get. If it takes more than a barrel of oil’s worth of energy to get a barrel of oil out of the ground, there’s no economic case in the world that will justify getting that barrel of oil for the purpose of energy (we might get it for the purpose of essential chemical production, perhaps, but it’s a net loss if we get it just to burn - better to use the greater quantity of energy we put into getting it out instead). Again, the cost in money terms of that barrel has nothing to do with it because that price has been intentionally and artificially decoupled from the real value, and thus hides this underlying reality of massively increasing real costs to the prime input of the primary and secondary economies. This increase is hidden by the manipulations of the tertiary (financial paper) economy, which is in a very real way the only market that economics consider when it comes to metrics.

So what I think is really driving this so-called “cost disease” is that “cost” (or at least monetary price) is the wrong metric for, well, pretty much any financial measurement ever, because price has never factored in the true value of the fundamental primary economy except in highly distorted and decoupled ways - meaning that the measurements of economic value and activity are inaccurate and deceptive if you care about the actual fundamentals of economic production and drivers of activity. Economics are not just about money and its flows - they’re fundamentally about value and the distribution and production thereof and money is, again, simply one yardstick of this concept of “value” - and an increasingly decoupled one at that. This distortion is the true “cost disease”, and it’s a false equivalence to look at cost at all as a meaningful model of the actual economy.

This applies across the board, whether it is healthcare or houses or food or services or tractor tires, the distortions of the tertiary economy far outweigh the real economic signals the primary and secondary economy are generating right now, and the tl;dr of this whole thing is that those distortions are why we experience the obvious problems of insane prices on genuine needs in hidden ways. There is a reckoning coming that’s been successfully (well, for the upper classes, at least) postponed for decades now, but (again, refer to the desert island analogy) literally cannot be postponed forever, though it may well destroy far more than it already has on its way to guttering out, depending on whether or not the systems we have in place are able to continue mitigating destabilizing shocks or end up miscalculating one time too many and turn a gradual slide into a Seneca cliff.

(These points and many others are covered very well in “The Wealth of Nature” by Greer, as well as Ugo Bardi and Gail Tverberg’s writings, and are all fundamentally extrapolations of the deep economic research and practice documented by E.F. Schumacher, who coined the primary, secondary, and tertiary economy terms, identified the uniqueness of energy as a fundamental good, and formulated the initial critique of Adam Smith’s theories upon which the above points are based.)