=economics =politics



This slatestarcodex post notes some ways that things in America have gotten more expensive. Americans spend much more than other countries and more than they used to for education, healthcare, childcare, and public construction projects. This is the typical level of discourse: "Things are more expensive, and nobody knows why!"


This post by Jonathan Tepper lays out a case that these problems are caused by reduced competition between American firms. This is a good start, but it's incomplete, doesn't consider solutions, and can't explain government programs becoming less efficient relative to other countries.


The question I want to answer here is what could have been done if leaders were intelligent and public choice problems were not an issue.



America doesn't break up big companies the way it used to. The intellectual justification for that lack of action is basically that companies aren't exploiting their monopoly power, and until they do, antitrust action isn't needed. This has two parts:


1) arguments that companies aren't raising prices where they have a monopoly, so antitrust action would not improve consumer surplus


2) arguments that profit margins of (nonfinancial) companies have only increased a little bit, so there is no exploitation that can be eliminated


Both are fundamentally flawed: (1) misunderstands the nature of monopoly, and (2) misunderstands the nature of firms.



vertical integration


Car manufacturing is an industry with strong international competition. American car makers must compete with imported cars from other countries, such as Japan. What we have seen in American car manufacturing is not vertical integration but vertical disintegration - manufacturers switching to buying car parts from separate part manufacturing companies, rather than making those parts themselves. In general, vertical integration does not reduce costs. Yet, companies are often eager to do vertical integration.


Consider Walmart, which runs distribution centers in addition to retail stores. Why does Walmart run the distribution centers itself instead of contracting with other firms specializing in that? Supposedly this vertical integration reduces costs, but in reality, the reason why Walmart wants to own those distribution centers is to prevent competitors from using them.


What government could have done is force separation between retail and distribution centers, so that potential competitors could use the same distribution centers as Walmart stores.


Consider cellphone service providers, which both operate cellular base stations and sell service plans to consumers. Each provider has used its own base stations and not those of competitors, forcing overlapping coverage by multiple companies.


What government could have done is force separation between base station operation and selling service packages to consumers. That way, most service sellers could rent usage from most base station operators, improving both coverage and competition.





The number of administrators at American universities has increased dramatically. The same goes for American high schools. The same goes for American hospitals.


Without strong pressure such as from competition, if administrators have all the power, all the money ends up going to administrators. If a company has a monopoly that allows them higher profits, then this reduced competition also means that the company management is under less pressure and gets more of that money. Nonprofits don't make a profit for shareholders, but they're often less efficient than profitable firms. Where does the wasted money go? It goes to the management, and friends of the management.


For a long time, it was commonly said that fiber to the home was simply impractical. The "last mile" problem was too great. Smart engineers studied possible alternatives. Japan and Korea just ran fiber lines to apartments, but Americans were stuck with slower DSL lines. But Google Fiber has had an interesting effect. In multiple cases, after Google fiber coming to an area was announced, the telephone/internet provider in that area installed fiber and had it available slightly before Google fiber. Then, sometimes, the cable/internet company ran its own fiber to compete with the better service from the telephone/internet company, and suddenly an area had three fiber lines instead of zero.


As it turns out, sometimes companies just need to do things instead of whining about them being impractical. For another example of that, you can look at the reluctance of American companies to stop using hydrogenated vegetable oil in food products despite it being trivially easy to replace.





Building a new hospital in the US is generally illegal without a certificate of need which certifies that the area in question has inadequate hospital capacity.


The costs for the same medical procedure varies widely between hospitals, and not because of quality differences. People can't simply go to the cheapest hospital, because their insurance only works for certain hospitals, and because hospitals don't list prices for procedures. But what if people could look up prices and go to the cheapest hospital? There's not enough capacity for everyone to use the cheaper hospitals. Most of the capacity has to be used, so the expensive hospitals would still need to be used.


If there is no excess capacity in a region, then there's no real competition between hospitals. What would have created competition? Breaking up hospitals: instead of having a unitary administration for the hospital, force hospitals to have multiple independent clinics for each field of medicine, and multiple competing firms handling general administration.





America has a shortage of doctors, mainly because there aren't enough spots at medical schools. There are many qualified people who try to get into medical schools but are unable to. (Yes, the limiting factor is medical schools, rather than residency spots, but both are issues to consider.) New medical schools must be certified by the LCME, and it guards this privilege jealously. The AMA is politically powerful, and there are also boards for each medical specialty.


What the US government could have done is allow doctors trained in certain other developed countries (such as Canada, Russia, and Germany) to practice in the USA. This would have forced American medical schools to be somewhat more competitive. The US government could also have created a new medical school certification body if the LCME was unwilling to certify new medical schools in order to create a shortage of doctors or maintain the power of medical school administrators.





Unions are always run by people who have been around for a long time, not by new employees. If long term employees have all the power, then they will try to shift benefits to themselves, and if the available money is limited, that means benefits that only long term employees get. The usual approach to doing that is pensions. In America, pensions of public sector employees have increased over time, and are now often comparable to salary. Unions also try to make firing long term employees difficult.


As Pedestrian Observations notes, current pensions cause problems: employees who have worked somewhere for a while need to stay there to get their pensions, so they stay even if they want to quit. At the same time, the employees are hard to fire. So you have people who want to get out, they hate their job or maybe just don't care about it, but they have to stay to get their pension, so they do a bad job but they can't be fired.



project management


Pedestrian Observations is also known for (justly) criticizing Elon Musk's Hyperloop and tunnel plans. The latter post links to this report on how some Spanish subways were built for much less than American ones. The key points are: a competent head engineer with the authority to make engineering decisions, and decisions by elected officials on key questions being done in days instead of months. Those two things alone can reduce costs by more than half.



government departments


Government departments are often quite inefficient. For example, American public schools spend a lot on unnecessary administrators.


The solution here is basically the same as the solution in the private sector. Why is there a Department of Education? Why not divide schools between two competing departments, or three? Competition is more important than avoiding redundancy.



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