Cost disease: what it is & why it matters

Last month, Democrats in New York City nominated a Democratic Socialist for mayor. This month, MAGA jammed through Congress legislation slashing healthcare for the poor and taxes for the rich. Neither democratic socialism nor crony capitalism will deliver financial freedom.

Rent control and government grocery stores will not help the middle class. Neither can the middle class afford to service more national debt and higher health insurance premiums. The middle class needs an agenda for financial freedom.

As Senator Elissa Slotkin said in a recent speech:

“The middle class doesn't have a lobbyist, they don't have a super PAC, they don't have a corporate PAC, but they should have the Democratic Party.”

Yes, they should. I propose a Democratic agenda for financial freedom. It is 10 words:

Treat cost disease, reduce the debt, and save Social Security.

Over the next three weeks, I will outline each of those three elements. I don't expect the policies to resonate as viscerally as the populist pitches of the left or right. I do expect them to work.

This week: treating cost disease. Cost disease is when prices in a sector go up faster than overall wages, year over year.

From my Economist op-ed last week:

"Cost disease is also known as the Baumol effect. It helps explain why rent and healthcare consume ever-more of Americans' wallets. Economist William Baumol detailed how inflation is not evenly spread across the economy. Service industries with low productivity growth inflate fast. Manufactured goods and automated services deflate prices.

The Baumol effect is both esoteric and—everywhere. Housing construction and hospital services are highlighted here because these two service industries are consuming so much money. Housing and healthcare costs absorb half of a middle class family’s income in America. Families wondering why their rent and health insurance premiums are going up faster than their income are asking the question that Professor Baumol helped to answer.

Three decades before Baumol described the problem in 1965, Theodore Wright found the cure for cost disease. Wright’s law observed that cost per unit goes down as more units are produced. Want a service to be affordable? Turn the service into a product. Then, manufacture the product at scale to lower cost per unit. New manufacturing jobs will not be taken from other countries through tariffs. They will be created from services, by turning them into products.

Take computers. A century ago, a ‘computer’ was a person. Sitting side-by-side, hundreds of individuals penciled out algorithms. It was an expensive service. Then, a ‘computer’ became a product. It was a machine as big as a room. That first product was expensive, too. But then computer manufacturing took off, and cost per unit went down. Today, computing is cheap. It was cured of cost disease."

Housing, healthcare, and utilities all still suffer from cost disease. Curing it – making those red lines in the graph look more like the blue lines – should be a prime promise from Democrats. Cut regulations that drive up costs, like zoning does for housing. Promote technology that takes out cost, particularly in hospital services. Take on special interests, like the health insurance corporations, that keep prices high.

We strive for an economy where Americans are building more, better and faster to lower prices. We reject an economy captured by middlemen or monopolists. We embrace an economy that works like Legos, not Monopoly.

Read the full op-ed in The Economist, here.

Next week: reducing the debt.