‘Cost Disease Socialism’ and the Crisis of Our Time

It’s no coincidence that the things that have gotten more expensive are also the things the government has heavily subsidized

Image Credit: wsmahar/Getty Images

A useful new idea has just been offered to the world that captures the actual crisis of our current welfare state, helps explain many of the reasons for widespread discontent in a land of plenty, and also throws into sharp relief the failure of policies from both left and right.

This new idea is “cost disease socialism,” explained by Samuel Hammond, Daniel Takash and Steven Teles in a paper from the Niskanen Center and summarized by them in a recent piece in The New York Times. They begin their analysis by looking at the child care subsidy included in the Democrats’ big “welfare spending” bill:

Consider that the current proposal would also dramatically shift the cost structure of child care upward with regulations mandating higher salaries, greater credentials, and compliance with federal “quality standards.” Having made child care more expensive, it then proposes socializing over 90 percent of the cost for a subset of middle- and lower-income households. This won’t reduce rising prices so much as mask them. And with informal child care providers, including religious organizations, at risk of being crowded out, the true availability of low-cost child care could even contract.

This is an extreme example of what we call “Cost Disease Socialism”—addressing the increasing costs of supply-constrained goods and services by spreading the price among American taxpayers while leaving the cause of the underlying costs unaddressed. The Niskanen Center is a formerly libertarian think tank that has tacked to the center-left. So the authors of the report are not trying to make an argument against the welfare state as such. But even old-fashioned center-left liberals can occasionally get mugged by reality. And while they may not press charges, they can at least attempt to grapple with the difficulties posed by the welfare state. So this analysis has been getting some traction as a rejoinder to the utopianism of the more radical “progressive” faction of the left.

That’s why it is worth trying to understand the concept of cost disease socialism and to consider the solution it suggests to us—which turns out to be a platform “liberals” of many different stripes can rally behind.

The Paradox of Subsidies

 The big phenomenon this idea seeks to explain is also the main root of our current discontent. While the cost of many ordinary goods has remained steady or gone down over a period of decades, prices have increased dramatically in three crucial areas. Here’s how Hammond, Takash and Teles explain it:

Things like clothing, appliances, and consumer electronics feature plunging costs even as quality improves.

This contrasts with big-ticket items like housing, higher education, health care, and child care—the sorts of goods most households need or will need. These staples of middle-class life have put a squeeze on family budgets and will continue to dominate the public debate over the coming decade. This is why so many people still feel like they can’t get ahead in one of the wealthiest societies in the world. You could say this is a First World problem that we have the luxury of contemplating because instead of spending 40% of our income on food, we spend less than 7%. But it’s natural, I suppose, to take those other forms of progress for granted and focus on the expenses that are still large and increasing.

Yet notice that the expenses that are relentlessly rising are in areas that have been the object of decades of government efforts to make them more affordable. How did that happen? I call this the “paradox of subsidies,” in which the very same government subsidies that are supposed to make a good or service more affordable just drive prices higher and make it less affordable.

The most notorious example is college education, where federal grants and particularly student loans just provided extra money to be sucked up by bloated college bureaucracies, which have returned the favor by continuing to raise tuition costs at rates much higher than inflation. Others have called this the “revenue theory of costs—the idea that colleges and universities exploit all sources of revenue made available to them, and bump up spending to match whatever funds they can raise.”

Something similar happens with health care, where the main effect of Obamacare has been to keep driving costs up while subsidizing them heavily for parts of the middle class, and also with housing, where government subsidies (particularly in the form of government-guaranteed mortgages) merely help buyers bid up the price of scarce housing stock in highly regulated cities.

The idea of cost disease socialism adds a further element to this. The paradox of subsidies helps explain the cost disease—the upward spiraling prices. The socialism aspect is the socialization of those higher prices through increased government spending that hides the cost from consumers.

As Hammond and company put it, “the current vogue for ‘socialism’ on the left is, on closer examination, almost always about socializing these common household expenditures. The traditional socialist call to ‘seize the means of production’ has thus been updated to something closer to ‘subsidize my cost of living.’”

But this only hides the cost; it doesn’t make these things less expensive. And by pouring federal money into them, it further feeds price escalation. Spiraling consumer prices are hidden by folding them into a spiraling federal budget—which eventually becomes spiraling federal debt or spiraling taxes or spiraling inflation, or all of the above.

There Ain’t No Such Thing as a Free Lunch

It is also clear that neither the left nor the right has any real solution to this problem. On the left, the solution is for the government merely to tax and spend and tax and spend, in an ever-ascending spiral. On the rising nationalist right, the main solution offered for the middle class is a regime of massive protectionism and intrusive “industrial policy” that will supposedly provide us all with well-paying factory jobs—but will probably only just raise prices further, particularly in areas where they have historically been falling.

More than that, these alleged solutions have been pursued for decades with clearly unsuccessful results. When politicians pursue cost disease socialism for 30 or 50 or 70 years and then lament that health care, education and housing just keep getting less affordable, at some point you’re entitled to wonder whether they really want to solve the problem.

Hammond, Takash and Teles attribute this to a kind of magical thinking, an emotionally appealing fantasy of getting something for nothing. But, “enigmatic macroeconomic theories notwithstanding, the maxim ‘there is no such thing as a free lunch’ still holds true.” (A small quibble: The preferred elocution is, “There ain’t no such thing as a free lunch.”)

The favorite solutions to these problems do follow a consistent pattern. They may not produce results, but they fit with each side’s preferred mythology about who is to blame for every problem. If you’re on the anti-capitalist left, you will tend to blame everything on the “millionaires and billionaires” who are the favorite targets of Bernie Sanders. (Well, maybe just the billionaires these days, now that Sen. Sanders is less inclined to criticize his fellow millionaires.)

So soaking the rich with taxes and making a show of handing out federal largesse will seem like an emotionally rewarding solution. Similarly, for the nationalist right, blaming everything on foreigners who are taking advantage of us and slapping them with punitive tariffs will feel emotionally rewarding. But what if instead of pandering to these ideological prejudices, we actually wanted to address the underlying problem and eliminate the conditions for cost disease socialism in the first place?

The New Locofocos

 Government subsidies work from the demand side to drive the increase in prices for these key expenses. But the cost spiral also happens because the supply of these goods is restricted by government regulations.

The most notorious example is housing. The original paper on cost disease socialism features a map of San Francisco that shows how the construction of multiunit apartment buildings has been banned in most of the city by zoning laws that favor single-family homes. When you artificially restrict the supply of housing, you shouldn’t wonder when well-off tech workers price everyone else out of the market.

In higher education, subsidies and loans have fueled lavish spending on campus facilities other than classrooms—the kind of things that appeal to upper-middle-class kids who want the “college experience”—while making that experience prohibitively expensive for the poor kids to whom college is a vital stepping stone to the middle class.

Many of us who would disagree with each other on the proper role of government or the size and value of the welfare state can nevertheless agree that the government should never do anything that makes the ordinary expenses of life more burdensome for the vast majority of the public. Yet that’s precisely what we’ve been doing. Stopping it is an agenda that could be broadly popular if supporters could find a distinct voice and convince a broad coalition that their other disagreements are less important. Here’s how Hammond, Takash and Teles put it:

Our economic policy needs a new grand narrative. A full-scale attack on the regulatory drivers of the costs of living will not be easy, but it has the benefit of addressing the right problem, and in a way that both liberals and conservatives, in their own way, can contribute to solving.

The model I would draw on for this new grand narrative is a now-obscure 19th century political movement that represents a missed direction in American politics. In the 1830s and ‘40s, the Locofocos were the laissez-faire wing of the Jacksonian Democrats. What is interesting about them, from today’s perspective, is that they weren’t the Chamber of Commerce types you might expect for whom “small government” begins and all too often ends with low marginal tax rates. Instead, the Locofocos were a coalition of “workingmen and reformers” who fought for the interests of the common man by doing precisely what we need today: opposing government interventions that benefit entrenched interests and drive up costs for everyone else.

The Locofocos was their nickname; their formal name was the Equal Rights Party. They viewed government interventions as anti-democratic, conferring special privileges on the wealthy and politically connected at the expense of everyone else’s rights.

What we can take from the Locofocos is the idea of drawing new ideological coalitions that will break through the current left-vs.-right dogmas and construct a new (or perhaps very old) “liberalism” built around an agenda of reforms that would address our real and fundamental problems. The diagnosis of cost disease socialism is a good first step toward this reconception of our politics.