I think your list is unsatisfying because you don’t factor in actual supply restrictions.

The AMA restricts the supply of new doctors.

College accreditation boards have been captured by the professional administrative class and used as vehicles for abject featherbedding.

Day care seems cost-diseased by land use restrictions.

I think these really help explain the missing piece better. Not ALL of it, but MOST of what’s missing.

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Mar 6, 2023Liked by Noah Smith

I think you might have missed the impact of location and consequently the price of real estate (purchase or renting). The services you mentioned can only be produced close to their market. Most physical goods can be produced in a location that is far cheaper in real estate and then shipped to the market cheaper than if it was produced closed to the market.

Hospitals, universities/colleges, child care has to be close to either were people live, people work or along the path between the two. That in general means higher cost base due to real estate and also higher cost base for works (pushing up their salary demands).

It also largely goes for restaurants as well. They have to be in costly locations. Dark kitchens and the like would put downward pressure on prices since those can be located away from were people congregate.

Other services such as laundry and hair cutting I suspect you are seeing the impact of smaller popup stores, door-to-door service (laundry pickup/dropoff and hair cutting at home etc) and other ways of reducing the reliance on expensive real estate.

My hypothesis is that you reduce the real estate costs (purchase, rent and business rates) would make a significant impact on the costs of these services. Add in reducing zoning restrictions (why can't people run a laundry or hair cutting service from home like in Japan?) would also go a long way to reducing the costs of the services.

Being back and forth for a while between UK and Poland, I've always been struck by how much the cost of real estate (purchase, rent, development) impacts the cost of living/cost of business.

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Mar 6, 2023Liked by Noah Smith

Narrowly on the higher ed point: my mental model has been that there is a wage premium for the degree, and the college price is a market negotiation of how to split that surplus between supplier and customer? Fair?

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One reason it is hard to shop around for childcare is that there is a shortage of open spots in the existing supply. My niece told me she quit her job when she found out she was pregnant and started a daycare because she did research on childcare resources in her area (Nashville area) and found that the going rate for full time childcare for infants was $1500/month. She said she would be basically working to pay for childcare (she has a 5 year old who would need after school care as well). She and her husband make about $5K a month and their mortgage is $2K/m. It didn't make sense to pay for care that was really out of her control in regards to quality. Here in central NY, one of our nurses is about to come off maternity leave. She has not been able to find childcare for her infant in her community (close to home). As a result, she is coming back half-time and her husband is going to provide care for the baby while he is working from home. Of course this puts us short a nurse (another nurse is taking maternity leave for a newborn she is caring for as a foster).

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Mar 6, 2023·edited Mar 6, 2023Liked by Noah Smith

I think it's pretty clear that colleges like the Ivy League, at least, put their prices up to maintain exclusivity.

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Mar 6, 2023·edited Mar 6, 2023Liked by Noah Smith

I really love your work Noah. So. I had to subscribe. My profession for 45 years essentially, is Product commercialization, market, product, pricing Customer development. Here's my take.

Healthcare. Health is not a fungible product. There is no Ford or Chevy choice for your wife, daughter or son. We pay 2x 20% GDP for 1/2 half the Healthcare outcomes. The absolute proof that we need national Healthcare came from the Universal Test of the World's Healthcare - Covid-19. It stress tested them all. The US placed 170th out 200 nations in Deaths/GDP. We were only better than some pretty poor nations. M4A.

The difference between PCs and Autos versus Hospitals with higher price increases than inflation, is simple. Mass production lends to ongoing productivity. Who drives productivity in small service businesses? No one effectively. People don't scale well. But..Healthcare Insurance is useless and redundant.

One of my major clients is in the Veterinary space. Think of it as the 2nd sister to human health. Vets get zero new drugs mostly and zero new diagnostic equipment. Repurposed and hand me down Xray, Ultrasound. Also the number of pet owners grows. Pets are are analog to family. While we euthanize animals gracefully, people will spend major money to extend quality of life. Example. TPLO. Tibial Plateau Leveling Ostoetomy. Knee surgery to cure something like an ACL with plates installed. Ultra high success rate. 90M dogs. Over 1M a year surgeries. $5,000 each. New and growing over the last 10 years.

But if you overlay Veterinary Services with the graph above, it has risen with inflation. Not greater. ~74% at 2023.

There is less mystery to me in these.

Mass production - think semis

Labor units of a few - vets

Labor generally rises close to inflation

Non products - Healthcare is not compliant with mormal macroeconomics because People are not fungible. Cleary profit gouging and non value add from the useless insurance scheme. Never existed before late 80s.

Dogs and cats, are fungible. Vet services rise as inflation.

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Mar 6, 2023Liked by Noah Smith

I would be very interested in your rebuttal of Random Critical Analysis' argument.

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You're much nicer about the slapdash post from Marc "it's time to build (but not in my backyard)" Andreesen than I would be!

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From my non-economist eyes, it seems like the difference between things that outpaced infllation versus the things that didn't is the clarity of the price. I was very recently in college, 2016-2021, and I could not tell you how much it cost me on the whole. I had large scholarships, small scholarships, large loans, big loans, work-study programs, etc., that totaled up to a big ?? in terms of the real actual cost for my degrees. There's a similar problem with healthcare. I have no idea how much something is going to cost when I go to urgent care, the ER, or a specialist. I can't make a cost-benefit calculation because I don't know the cost.

For most things, I think uncertainty about the price would reduce consumption but higher ed and healthcare are things that are generally considered very important so people (well, probably middle class and up) err on the side of accepting the cost, which the industries have exploited to continually raise the price. I suspect that if families knew for certain the total cost of attendance when choosing which schools to apply to and if they knew for certain the cost of medical care, there would be much more frugality and price shopping.

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Part of explanation for college is also that what you mean by “college” today isn’t quite what was meant by “college” 20, 30 or 40 years ago. I am a physicist spending the day writing a lecture on quantum computing for my class at a large state university tomorrow - a subject that didn’t exist when I was in graduate school, was esoteric speculation 20 years ago, and is now must include material. The students get more bang for their tuition dollar now.

I see this on the consumer side as well. My son’s chemistry education at a fancy private college is way beyond what kids got in my college years. I’m amazed at what they are learning already as undergrads and the opportunities they have to do advanced lab work. The bar is continually raised.

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For healthcare, one of the factors that we overlook is that hospitals have incredible market power, especially in rural communities. They also often face an inelastic demand curve.

Emergency rooms in particular can often function as outright monopolies. If you have a heart attack and someone calls an ambulance, you don’t get to pick a hospital or compare prices, or even compare quality. The ambulance simply takes you to the nearest emergency room and they treat you and then charge you whatever they like.

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Interesting piece... On education, it is an area which I have studied quite a bit.. even did a Ted talk on it (https://www.ted.com/talks/dr_rahul_razdan_sir_ken_robinson_was_right_about_the_symptom_now_let_s_talk). Anyway, government involvement is ABSOLUTELY the issue. There is NO reason that education has to be as expensive as it is. Nearly all markets start with a "craftsmen" model and then evolve through injection of technology and process to deliver services with more capability and lower cost. Your assumption that education is human resource focused by definition is very limiting to innovation...however exposes the norms. These norms inform the compensation/incentive models built by government officials and then are supported by incumbents. The game in the halls of power in education is primarly to build mechanisms to capture public dollars.

Anyway, there is a recognition of these issues to some degree in the marketplace. The professional education sector (which is not regulated nor supported by government sources) is booming and providing a great deal of value. Youtube is likely the greatest educational institution in the world and interestingly substack information sources such as your column are a part of this picture. Credentialing is catching up and employers are recognizing the benefits. The "amazons" of education are forming right now with solutions from entities such as ASU, WGU, and Perdue Global. These are highly scalable model which don't require the level of human capital investment as the traditional classroom model. Isn't it amazing that today's model has not changed much since the 1800s.

Anyway, society's support for education is generally goodness. However, the mechanisms for this support should always be flexible to innovation and always empower the customer/consumer. After all, they have the greatest incentive to capture value and weigh price. This is not the case with education. I am not as familiar with medical world.. but this seems to be a similar situation.

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Some ideas on childcare as luxury:

Nannies and daycares draw from a similar labor supply. If you accept nannies as luxury, then an increase in nanny demand raises the price of childcare labor overall. And consider that nannies are generally much less efficient on a per-child basis than daycares.

Childcare may also be tied to wealth and housing. I have a hunch that wealthier households are less likely to be intergenerational. People who can afford not to live with their parents tend not to live with them. But that makes it harder to rely on them as a source of childcare!

Lastly, I'm not sure the idea that wealthier parents are more likely to be stay-at-home cuts that much against their demand on daycare services. Anecdotally, I've met a fair number of wealthy stay at home parents who have their nanny drop off their toddler at a daycare for socialization, early education, etc.

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I'm not sure about many of the areas you covered, but I am convienced that the lack of transparency and competiton are big factors in driving up the cost of healthcare. I was once advised by a registered nurse to always get two or three opinions before undertaking any expensive medical proceedure. My reply was, "I am not a doctor, how can I know which opinion is the most correct?" Lack of knowledge is a big handicap when trying check prices.

Large sums are spent on advertising drugs on TV. The drug companies want you to ask your doctor for thse drugs if you think you have the problems they are addressing in their advertisement. Once again we are confronted with ignorance about things such as side-effects, interaction with drugs you are already taking, and possible long-term effects from this new drug. Finally, there are the large sums spent on doctors trying to get them to prescribe one drug over another. Many of these excesses are not allowed in Europe.

Our healthcare system works in a backward manner. Doctors should be paid to keep us healthy, not repair us when we get sick. What would happen if doctors made more money with healthy patients than they do with sick patients. Of course, this would require the cooperation of the patient, but it might be worth a try, at least with some peeople.

Then we have the patent system which keeps generic drugs from being produced for an unnecessarilty long period of time. This helps the drug companies make even more money and also creates situations such as what has recently happened to the price of insulin. Drug companies acting like organized crime, only instead of killing you with a gun, they can kill you by making a life-saving drug so expensive you can't afford it.

With all the excess cash in the coffers of the drug companies they can buy as many people in Congress as they need to protect themselves from cost saving measures - such as stopping the import of drugs from Canada or even keeping the government from getting competative bids on the drugs they buy.

Our healthcare system is a cesspool of corruption and not an example of free market capitalism.

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The vet cost increase in part a function of the dearth of available vets. There are only 32 vet schools in the US, graduating ~3000 vets/year. We need more vet schools to train more vets in the same way we need more residency spots to train more docs.

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I imagine a big factor in day care costs is that as 2 income families become more common less middle class families are able to forego an income during early childhood, boosting demand for daycares.

Likewise, as family units become smaller and have less children, daycare becomes less expensive as a total expenditure (ie cost of sending 1 or 2 children to daycare rather than 3), so it becomes an option for more families, boosting demand. (This might be related to the previous point too - need for a 2nd income prevents families from being as large as before).

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