Why do education, health care, and child care cost so much in America?

Three possible causes.

"health insurance claim form" by franchiseopportunitiesphotos, CC BY-SA 2.0

In a recent post over at his new substack (which you should check out), Marc Andreessen rails against the exploding prices of big-ticket service industries like college, health care, and child care. He posts the following famous graph from the American Enterprise Institute:

Source: AEI

I added the little blue box around “Average Hourly Wages”. Everything above that blue box has gotten less affordable for the average American wage earner since the turn of the century. Everything below it has gotten more affordable (even housing, though obviously not in cities like San Francisco). You can see that the things that have gotten less affordable are all big-ticket services — things where you pay human beings a large amount to take care of you or your family members. The things that have gotten more affordable are all physical goods.

Now, I myself have posted versions of this graph a bunch of times in the past, and I absolutely share Marc’s frustration. In a post back in December, I argued that the rising cost of services was a major reason that the U.S. middle class still feels squeezed, despite the good economy.

But it’s actually not so easy to figure out why this is happening. Marc argues that services are simply simply over-regulated and over-subsidized, and yes, this is one plausible explanation. But the story is probably more nuanced. When Timothy B. Lee looked at service industries overall, he found that there are a lot that have actually gotten a bit more affordable:

Source: Timothy B. Lee

Why should haircuts, laundry, restaurants, and car repair get more affordable over time, while lawn care, day care, college, veterinary care, and health care get less affordable? It defies simple explanation.

So when there’s no simple explanation, we go with a complex one. In this case, there are at least three major factors that are probably pushing up the prices of health care, child care, and college. First, let’s talk about the most basic factor — the tendency of labor-intensive services to get more expensive as the economy grows.

Factor 1: Baumol’s cost disease