Tag Archives: Housing

On Cost Disease

SSC has written on cost disease. Essentially, a lot of important goods and services (health care, education, infrastructure, and housing) have increased by up to 10x their cost with no improvements in service for no discernible reason. He gave some though to it, and a number of others provided explanations.

The explanation that immediately sticks out of course is government over-regulation and over-involvement, as those industries listed are some of the more heavily regulated industries in the US. I’ve written of factors effecting housing costs a few times before.

I think those have a decent amount to do with it, but I think there are two fundamental problems that no one in those posts mentioned. They relate to two principles you’ve probably heard before: the Pareto principle and the iron law of bureaucracy.

****

Pareto Principle

The PP, also known as the 80/20 rule, is a basic rule of thumb essentially stating that 80% of the results come from 20% of the causes. Ex: 80% of the work is done by 20% of the workers. Following from this rule, you can also mathematically determine other rules. 20% of the 20% is going to cause 80% of the 80%; in other words, 64% of the outcome will come from 4% of the cause. This can then be extended to 51% of the outcome will be caused by 1%, and so on down the line. The rule’s not perfect and shouldn’t be taken as gospel, but it’s a nice rule of thumb.

In this particular case of cost disease, we’ll apply the PP to costs. By the PP, 20% of the population causes 80% of the costs. Or stated elsewise, the 20% uses 4x as much resources as the 80%.

So what happens when you add a new 20%?

For example, health care. I, like most people reading this, cost the health care system very little. I’ve been to the emergency room twice in in my adult life, and I go to a walk-in doctor about once every 2 years when I have a particularly vicious or inexplicable pain or cough. The 80% of the people like us can be treated relatively low cost; we get an occasional check-up and the rare emergency.

On the other hand, there are those with chronic illness or other conditions who use more health care in a month or two than I’ve used in the last decade. 20% of the people cost 80% of the health care resources. That’s not an indictment on the 20% (if I got hit by a bus on the way home today, I’d probably be in that 20%), but it’s undeniable that if us 80% simply stopped caring about the 20% and just let them suffer and die, health care costs would be 20% of what they are now.

Over time we’ve been going increasingly towards being able to treat more health problems and keep the nearly dead alive longer. Take AIDS: in the 80’s someone with AIDS was dead in a months. Now, he can be kept alive for decades using expensive drug cocktails.

So, let’s put some very rough numbers to it.* Let’s say 20% of that 20% (4%) used to just die quickly, because we couldn’t treat them. So, we have the 80%, the 16%, and the 4%. The 80% still can be treated; we cost stay the same. The 16% still use 4x the amount of resources the 80% use; a broken pelvis doesn’t treat itself. But now the 4% of AIDS patients and the like can be kept alive through expensive new technologies. This 4% is now 64% of the budget, which the budget has grown to accommodate. Keeping 4% people alive has well over doubled the costs of health care.

Now wait an unspecified amount of time for expensive new technologies and drugs that can treat a new 20% of the 4%who couldn’t previously be treated. Costs double again. Then another unspecified time later they double again and so on.

But that’s not including the new costs you impose. We 80% used to go to the ER once a decade and the doctor once a year, then die in our sleep from a heart attack at 70. But now, instead of dying at home in bed, new technologies and new detection we are able to detect and prevent that heart attack, so now we are heroically rescued by new medical technology, so we can die a decade or two later from a different age related condition. Then when our alloted time is over, instead of just giving up the ghost, we keep ourselves alive at great cost for a few extra months. We are now the 20%, maybe even the 4%.

This is not just hyperbole: 30% of Medicare spending goes to just 5% of people who will die within the year. 10% of Medicare goes to those people’s last month of life. Those extra few months are costly.

For education, we get the same thing. Look at this chart:

In 1973, 30% of people dropped out in high school. It’s safe to assume these are mostly the hardest and most expensive to educate 30%, they’re probably mostly handicapped, persistent trouble-makers, class clowns, generally stupid, or future ex-cons. In 2018, only 10% dropped out. So, rounding the PP off widely for ease, 70% of the students using 20% of the resources, 20% of the students using 80%, with 10% still dropped out. So you’ve added 20 percentage points of troublesome and costly students which have increased the amount of resources used by 4x.

The 10% left are the real costly troublemakers, these are the ones that are dumb as bricks, violent offenders, hate school with a passion, have hourly seizures, or whatever. So, if we start to include these very troublesome students, the will be the new 4%, and increase costs even more. The more stupid and disruptive the people we try to force to stay in school, and the longer we force them to stay there, the more costs per pupil inflate. If the education for everyone doesn’t stop, eventually, we’ll be spending half the education budget keeping 100 psychotic mass-murdering teenagers and low-functioning autists who enjoy biting teachers in a Supermax high school from killing each other and trying to learn their times tables.

College is no different. I’ve looked at the tuition bubble before, but let’s briefly go over it again. Look at that chart again: in 1973 only 28% of people had a degree, there were statistically no college dropouts. in 2018, 45% will have a degree and 17% will dropout. The college keeps adding new 20%’s. The 28% getting degrees in 1973 were, likely, the top 30% of the population in terms of intelligence and/or work ethic. They didn’t require much resources to teach themselves. Now 60% of people are going to college. People with below average intelligence and work ethic are having to be accommodated. A new 20% has been at least 3 times since 1973. Using the PP we can estimate costs would have risen by over 50x. Now, this is not entirely accurate, there are likely costs savings due to scale and at the most expensive of those waves mostly drops out, but you get the point.

Let’s look at infrastructure. Here’s a story I randomly saw from Toronto. Sidewalk spaces are being expanded to 2.1m at the costs of restaurant patios to accommodate the disabled. On the TV report I saw, they said it was because 2.1 meters allowed two motorized wheelchairs to pass each other. Again, the PP. It costs a lot for infrastructure to service the small fraction of people who are handicapped. It costs even more to service the rare event of two handicapped trying to pass each other at the same time (I can’t ever remember seeing two motorized wheelchairs at the same time in the wild). And one councilor is demanding even wider sidewalks for more accommodation. That’s a lot of extra cost for both the city for such a rare event.

Apply this one minor story more broadly. Beyond, the disabled, there’s the environmentalists, special interest groups, NIMBY, safety. You have to accommodate more and more people and more and more exceptions.

Now, almost everybody is and always has been housed, so PP doesn’t really apply there. Cost increases are more likely related to the factors I linked to earlier. You’ll also notice that housing costs did not grow at as high a pace as other costs in Scott’s post.

Over time these major services have gotten more inclusive. These new people being included cost significantly more resources than the people who were already included. By the 80/20 rule, ever new 20% we add quadruples costs. Every new 4% we add, almost doubles costs.

For the large majority of people, services haven’t improved at all, even though costs have skyrocketed, because these costs are being eaten by the inclusion of ever smaller but ever-more resource-consuming minorities.

****

Iron Law of Bureaucracy

One commenter linked to the following graph:

The ILB states that there are two types of people in every organization: the first is devoted to the organization’s goals, while the second is devoted to the organization itself. The second will always end up controlling the organization and it resources.

Look at the chart, it is clear the administrators control the organization and hiring and are hiring more of their own. It’s the ILB in action: the teachers directly contribute to the organizational goal of teaching, but the administrators are the one’s profiting themselves.

The ILB is what is a major part of cost disease. Over time any organization becomes more about expanding the organization than about completing its goals. The free market to some degree mitigates this, as organizations suffering too heavily under the iron law are forced to either reform or die out. But the organizations controlling education, health care, and infrastructure are not traditional free market organizations. They are either government organizations or heavily regulated, government-financed organizations.

Unless an organization dies or is forced to reform, it will inevitably become controlled by those devoted to enriching the organization and themselves, rather than to completing its goals.

Infrastructure provides a nice example. Look at the Big Inch pipeline built in 1944 and extending from Texas to New Jersey. At that time, government infrastructure programs were controlled by people dedicated to providing infrastructure. It took 3 years from planning to completion, because they wanted it up.

Comapre to the Keystone XL, controlled by our new iron-lawed infrastructure regulators dedicated to expanding their organization. It was proposed in 2008 and after 7 years in bureaucratic hell, was rejected by Obama. Then was allowed to start again under Trump a couple weeks ago. It has become more about increasing the power of hanger-on organizations than actually getting things done. Placating environmentalists, native activists, NIMBYists, labour organizations, etc. and making sure each gets their turn at looting is more important than actually creating infrastructure.

I don’t really think I have to explain this too deeply, anyone who’s ever worked in a large organization can easily see there is a small minority of people actually physically accomplishing the organization’s goals, then there are hoards of people having meetings, making mission statements, discussing work-life balance, running committees, making HR rules, doing busywork, playing corporate politics, doing pointless revisions to act like their contributing, and otherwise not actually accomplishing anything real, or sometimes even actively preventing the accomplishment of goals.

As people dedicated to expanding the organizations (and their own personal power bases) become more powerful, it becomes more costly to do the same amount of work. All those extra people don’t pay themselves.

****

* I know there’s mathematical and logical flaws and over-simplifications throughout these examples, but they’re just quick calculations for illustrative purposes. I’m dealing with a rule of thumb, not a mathematically precise model. Don’t get lost in the numbers, get the general jist of the message.

Feminism and Housing Costs

Today I read this (h/t: BitterBabe) and this one quote really stood out:

Commentators said yesterday that pressures on women to work and pay mortgages mean that many do not have the same choice over having families that their mothers did.

I’ve discussed feminism and choice before, and I’ve discussed how feminists are in opposition to the wants of most women before, but now I’m going to focus on something specific: housing.

I’m going to explain exactly where the “pressures on women to pay mortgages” comes from.

****

Housing is the single largest expense most people have (other than possibly taxes), taking up almost 35% of their income. Unlike most goods, which have gotten cheaper over time due to technology improvements, housing costs as a percentage of income has remained stable over time (with the possible exception of fluctuations due to the housing bubble and crash).

Why is that?

The primary reason is that housing is mostly a positional good.* The price of a house has less to do with the actual materials making the house and more with the desirability of the land the house resides on. This is why a house in New York costs so much more than the cost of a similar house in, say, Detroit.

The other reason is that people are using extra income buying larger homes.

For both these reasons, as people’s incomes grow higher they will generally increase their housing costs to match a proportion of their income. You see this all the time, where people will buy bigger and better houses even if their old houses were perfectly livable and they do not require more space for the kids they are not having.

As people buy more housing the price of housing goes up. So, over time, as people’s incomes go up, they will buy more housing, which will increase the price of housing, increasing the absolute amount spent on housing.

Because of this mechanic, the proportion of income spent on housing remains stable even as incomes go up.

****

So, what does this have to do with feminism and choice?

As more women have entered the workforce, they have contributed their income to their households. Because of this household incomes have increased, but, because of the primarily positional nature of housing, the proportion of income spent on housing by households has stayed the same.

So,to now purchase the same amount of housing you could purchase on a single income prior to women entering the workforce en masse you need the equivalent income of a two-income household.

Because of this, families are now in a position, where two incomes are required for sufficient housing space for a family in many areas.

Households wanting to live in certain areas are now required to have the women work rather than stay home simply to afford housing.

As more women enter the workforce, the viability of women choosing to stay home decreases.

Most women desire to stay home with their children, if they could afford it, and the feminist desire to have women be economically independent is removing that choice from them.

****

Of course, I have completely ignored the impacts of divorce on housing costs for former households and the impacts of increased demand. You should be able to figure them out yourselves (hint: they increase housing prices and costs).

****

Combine this with the unfeasible daycare costs I previously pointed, and you being to wonder if women moving into the working world has provided any benefits to most women.

Most women desire to stay home, but many are forced to work because they can’t afford not to.

But their biggest expense is only that big because women are working and one of their next biggest expenses only exists because they are working.

Is this what most women want? To be forced to work for little real benefit.

Question for women: Do you enjoy spending your days at work rather than with your children knowing that most of what you earn is not actually providing any real benefit to your or your children?

If not, maybe you should think about what you support.

****

Now, for budding patriarchs, this doesn’t mean your (future) wife has to work. What it does mean is that it will require sacrifices and good planning.

You will have to limit your desire for a bigger home (even as you need a bigger home than most, because you’re filling your quiver instead of vacationing in Mexico). You may have to commute longer or find a job away from the urban core. You will likely have to forgo other luxuries.

If you and your wife plan on having her be a homemaker, you will have to discuss this with her. You will have much less house than your peers, and this could lead to envy for you and your wife. You will not be able to afford yearly vacations to distant lands. There are numerous luxuries and status symbols you will have to give up.

You have to make this clear to both yourself and her that this lifestyle is a sacrifice and that both are willing to accept it.

In the long-run, which is more important to you though?

Your child being raised by his mother rather than strangers and the educational system. Or the status symbol of a bigger house and your children being forced to share a room.

*****

* It is only primarily a positional good, not totally. Housing does have a certain intrinsic worth and the materials in housing have a certain intrinsic cost, but, by comparing housing prices in high- and low-demand areas we can easily see that the costs of housing are primarily due to the comparative value of the land on which they are built, than the homes themselves. Of course, it can be argued that the value of the land is not exactly positional, in that being in geographic proximity to certain locations has its own intrinsic value, but this does not effect my point. My point only requires that the value of land is due to competition between potential buyers, for whatever reason, rather than for any immediate practical effect the land has on the utility of the home itself.