The second-best school in Cambridge, MA
Among the many economic injustices imposed on middle-class America are the unaffordable costs of health care and higher education. Health care accounts for over 60% of bankruptcies in the US. The average student has a loan balance of $37,000. The costs of health care and higher education are both travesties that are completely the doing of the 1%. I don’t fully understand why people haven’t taken to the streets over either or both of these issues.
There are numerous causes that are trotted out for the rise in costs of health care and higher education, the costs of which have both risen at rates much higher than inflation. For health care, there are administrative costs, increasingly expensive medications and procedures, longer lifespans, and sedentary lifestyles. For higher education there is increased administration, improved student facilities, and decreasing state support.
But there is one factor that is only rarely taken into account, and which accounts for the lion’s share of unaffordability. And that is the productivity-pay gap — which makes up a large part of the trillions of dollars that the 1% have taken from the 99%. There is one important aspect of the health care and higher education fields as regards worker productivity. They are not able to benefit from it. Doctors can't treat 3% more patients year over year (at the same cost). Universities can’t educate 3% more students year over year. The reason why health care and higher education costs grow at a rate higher than inflation is because their costs are a result of inflation and the lack of improved productivity. This would be fine if workers’ wages increase as their productivity increased. Unfortunately, since 1980 (imagine that) wages have not reflected increased productivity.
Let’s look at some numbers.
Inflation
One contributor to the cost of everything, including health care and education, is of course inflation. Since 1980, the cost of everything has risen by a factor of 3.6. Wages grew at about the same rate (median wage in 1980 was 4.44, in 2020 it was 16.36 — a ratio of 3.68). In fact, as we will see in the next chart, wages may have grown a bit more than that (the disparity is probably the difference between mean and median).
The productivity-pay gap
Since 1980, the average wage increased by 117% while worker productivity grew by 162% (see chart below, borrowed from The Economic Policy Institute. Bottom line, if wages had kept up with productivity, they would have grown 162% larger than the rate of inflation, i.e., at a total rate of a factor of almost 6. This difference between cost of living and productivity — a factor of 1.62 (162%) — is why health-care and higher education are so damn expensive.
Gap between wage growth and productivity growth.
Health Care
In 1980, the US spent an average of $1,067 per person on health care. In 2020, that amount grew to $12,530. How did it grow so much? If we account for inflation, $1,067 grows to $3,841 — meaning today’s health care is a factor of 3.26 more than it should be. If we include the productivity gap, the cost would be $6,222 — about half today’s actual costs.
Now let’s add an additional inflicted cost. For every dollar spent on health care, only $.67 goes to actual medical treatment. The rest is overhead. That grows the average cost to $5,761. If we include the productivity gap on top of that, the average costs grow to $9,338. Total costs are still 34% higher than that, but if we consider the factors of improved technology, longer lifespans, better pharmaceuticals (although that is another rip-off), 34% seems within the realm of possibility.
Or looking at it another way, without the huge administrative overheads, today’s costs should be more like $8,357. If workers’ wages kept pace with inflation and with productivity, if a worker could afford $1,067 in 1980, they would be able to afford $6,222 today — a 34% disparity with actual medical costs (costs with administrative overhead removed). However, because wages have not kept pace with productivity, they would only be able to afford $3,841-— a 117% disparity.
Higher education
Let’s look at private education first, since it has one less factor than public education (namely, public funding). In 1980, MIT’s tuition was $7,400. In 2020, it was $53,450, a growth roughly twice the rate of inflation. If we take inflation into account, $7,400 grows to $26,640---only half of the actual tuition. But, if we include the productivity gap, we get $43,156. That is, if a worker could afford MIT tuition of $7,400 in 1980, they would be able to afford $43,156 in 2020. Now, $43k is still 24% short of $53k, but things like increased administration overheads, upgraded student experiences, increased technology, could account for 24%. And a 24% premium, though not insignificant is much more in the realm of affordability than is 100%.
Now let’s look at public education. In 1980, tuition at Ohio State University was $370/quarter, or $1,111/year (assuming as is usually the case, students only take three quarters per year). If tuition rose at the rate of inflation, the cost would have risen to $3,996. The actual cost in 2020 was $11,500---more than three times the rate of inflation, putting MIT’s cost increases to shame. Where did those increases come from? One, again, is the productivity-wage gap. If worker productivity had risen at the rate of inflation, $1,111/year in 1980 would feel like $6,479 today, still 77% short. However, in the period from 1980 to 2020, total public support of higher education in Ohio decreased by 27%, while enrollment at Ohio State increased by 15%---meaning tuition had to increase by at least 58% to make up the shortfall. If state support had remained constant, tuition would have only been $7,278. That is about 12% more than the adjusted rate from $1,111 in 1980. But since workers have not benefited from productivity increases, what was affordable at $1,111 in 1980 is only affordable at $3,996 today---82% short of what tuition would be if higher ed were funded at 1980 rates, and 187% short of actual tuition.
Another travesty
As an aside, another travesty in the inflated cost of higher education due to the wage productivity gap (which should be called what it is — wage theft) is that the 1% who took the workers’ money then lend it back to their children, who then have to pay that back, with interest, inflicting an enormous penalty on them as they are trying to get started in life. Quite the scam. They steal our money, then charge us to (temporarily) use it. The 1% need to pay ALOT more in taxes. Not just “their fair share” (a phrase I have always considered to be weak and unnecessarily apologetic). They need to have their ill-gotten gains returned to those who actually earned it.
For those who are interested
Between 1985 and 2005 (the only range for which I have numbers), the number of BA degrees granted in the US grew by 47% and student enrollments grew by 56%, while the number of faculty grew by 50%. In that same time, the number of administrators grew by 85% and the number of staff grew by 240%. (Source: The Fall of the Faculty by Benjamin Ginsburg. Ginsburg places many problems in current higher education firmly at the feet of the rise of the administrative university. As a former tenured full professor, I do not disagree with him.)
SUMMARY
I know that was a lot of numbers (and I hope I did all the crunching correctly — I am sure they will be corrected in the comments if not). But even if a few details are not quite right, the bottom line is this. Workers have systematically had their wages stolen since 1980 in the form of the wage productivity gap, with the differences between wages and productivity going to the 1%. The effect of this has been to make goods and service that have not benefitted from economies of productivity growth -— in particular, health care and higher education — 62% more expensive than they should be. And that is on top of other unjust factors such as hugely inflated administrative overheads in health care and significant cuts in public funding of higher education. But, while these other factors are not insignificant, that 62% is the largest factor. And it has made the difference between affordability and unaffordability for these essential aspects of our lives for millions of workers.
Conclusion
Above I advocated for taxing the 1% at a rate that would rectify the wage productivity gap. Of course, any politician that suggested such an idea would be immediately crucified for being a communist bent on destroying America. The message from the right that is repeated ad infinitum is “I deserve to keep my hard-earned money.” Fine. Let’s start there. The right has done a masterful job of blaming the government for taking workers’ hard-earned money (and giving it to “those people”). What we need to do is flip the narrative (before ever mentioning taxes as a solution). Yes, someone is taking your hard-earned money, and has been for a long time, but it isn’t who you think it is. “If you are making $50,000 today, wouldn’t you rather be making $81,000? You should be, but the reason you aren’t is because your employers have been taking the benefits of your hard work for themselves.” (“Keep your hard-earned money” sounds much better than “Workers of the world, unite.”)
The wage producivity gap is so clearly theft by the 1% and the politicians they paid for that, again, I don’t know why we haven’t taken to the streets.
Addendum
At the risk of mission creep, I should have perhaps mentioned one more number of interest. Minimum wage in 1980 was $3.10. If that were adjusted for inflation it would be $11.16 today. If productivity were taken into account, it would be $18. Fighting for $15 is hard enough — and undershoots the mark (IMO). Today’s $7.25 is obscenely low.
CODA
I did some googling and found Drivers of the Rising Price of a College Education. The report covers many of the points alluded to in this diary, in much more detail. The report uses the term “cost disease” to describe the increases due to lagging productivity. The report also references the highly mathematical paper by Jones and Yang Skill-Biased Technical Change and the Cost of Higher Education, that finds strong support for cost disease in higher education. Though some authors did not agree, the report concludes that “the evidence for the existence of cost disease is quite strong.” (I know this is somewhat argumentum ab auctoritate, but you can evaluate the references.)
