I often hear people on the right suggest that the New York Times is a lousy newspaper. This is not true, as they are confusing quality and bias. The NYT is an excellent newspaper that is marred by an unfortunate bias toward left wing views.
Someone once joked that they were not a libertarian because of “roads”. I suppose I might reply that I am a libertarian because of “elevators”. Or more specifically, elevators times a thousand.
A recent NYT piece does an outstanding job exposing the gross inefficiency of the US elevator industry. Because of a highly complex web of counterproductive government regulations, elevators in America cost several times more than in Europe. Not surprisingly, America has far fewer elevators, even for buildings of a given type. (Thus it’s not merely due to our preference for single-family homes—even our apartment buildings have far fewer elevators.)
The lesson here is not that the US is worse than Europe; it would be easy to find hundreds of examples where US efficiency was higher than in Europe. Instead, the lesson here is that elevators are merely one of thousands of examples of where government overregulation leads to inefficiency.
When most people go through their daily lives, they don’t think about the ways in which government regulations are making their lives more difficult. In almost every case I come across with systematic inefficiency, the root cause is counterproductive regulations. Free market firms do screw up on occasion, but systematic problems are almost always due to bad incentives created by regulation.
The inability of most Americans to understand the role of regulations leads to a widespread misunderstanding of issues such as stagnant living standards. Ask most Americans why growth in real wages has slowed since 1973, and they’ll cite factors like “inflation”, “the decline of unions”, “neoliberalism”, “monopoly profits”, “the China shock” and numerous other factors.
In fact, the impact of all of these factors is trivial compared to inefficiency caused by government regulation and subsidies.
1. Health care regulation and subsidy has pushed medical spending in the US to 18% of GDP, vs. 5% in Singapore (or perhaps 9% given US demographics).
2. Government subsidies and regulations have led to vastly bloated expenditures on education, which do not lead to any improvement in learning.
3. Regulations have dramatically boosted the cost of new homes, especially in big cities and coastal states.
And yet, I doubt that one American in a hundred would cite health care regulation has a major factor reducing real wages.
I could cite many other such examples, but let’s focus on housing, because it’s so important. In manufacturing industries that are less heavily regulated, such as apparel, consumer electronics and home appliances, prices have tended to rise much more slowly than incomes. Housing is an exception, and given its share of consumer budgets, it’s an important exception.
To its credit, the NYT piece suggests that the problems in construction go far beyond elevators:
Beyond the elevator itself, you’ll find a byzantine mess of absurdities and contradictions behind the U.S. construction industry’s slowness, inefficiency and expense. For example, Americans cannot use the latest heat pumps — a critical tool for fighting climate change by electrifying heating systems — due to the same sorts of barriers imposed by U.S. regulators. Instead, Americans instead rely on obsolete heat pumps that don’t have a market abroad. And plumbing codes in America require an entire network of ventilation piping that has been deemed largely unnecessary in much of the world.
They also discuss the problem of residential zoning, and then note that zoning reform is not enough. Regulatory barriers are especially significant for the construction of larger multifamily buildings:
Construction costs for detached single-family houses average about $153 per square foot. In America’s most in-demand coastal cities, multifamily construction costs have exploded. Even subsidized multifamily housing in California can cost $500 per square foot (or more).
A generation of young, would-be homeowners locked out by skyrocketing housing costs has taken notice. Their first target was a century of tightening land-use regulation, in which existing homeowners enriched themselves by blocking development through restrictive zoning measures. In recent years, the rise of so-called YIMBY — or “yes in my backyard” — movement has succeeded in all but abolishing single-family zoning on the West Coast.
But as zoning codes were liberalized, architects and developers soon began ringing alarm bells about the hurdles buried in the finer points of building codes and standards, and other more technical rules.
Here’s what most progressives don’t understand. Stagnant real incomes are not about incomes; they are about “real”. Ultimately, our living standards depend on our ability to produce real output. In the short run, you can help workers a little bit by redistributing money from capital to labor. But in the long run this will reduce capital formation and make workers worse off. The overwhelmingly dominant factor driving real wages is productivity. Swiss workers don’t earn far more than Bangladeshi workers because of strong unions, they earn more due to dramatically higher productivity.
What sort of things would boost the living standards of workers? Cutting health care from 18% to 9% of GDP. Dramatically reducing expenditures on education. Deregulating housing to sharply reduce house prices. And there are thousands of other small bore reforms that could boost productivity all across the economy.
Elevators may seem like a small deal, but problems in the elevator industry are emblematic of why real wage growth slowed after the early 1970s.
I often get frustrated by the NYT, which has a strong left wing bias. But in fairness they have done many excellent stories over the years. I’d love to see someone dig up 30 or 40 NYT stories similar to the elevator story I linked to in this post. Then collect the stories in book form. Entitle the book:
The New York Times Case for Libertarianism
READER COMMENTS
Andrew_FL
Jul 9 2024 at 5:00pm
This would actually rather dramatically lower their living standards, as is common sense. Arbitrarily capping healthcare consumption is no different from arbitrarily capping any other form of consumption.
Scott Sumner
Jul 10 2024 at 12:40pm
I don’t propose “arbitrarily capping” expenditures, I propose doing so through more reliance on market forces.
Andrew_FL
Jul 10 2024 at 1:10pm
There is no way “relying on market forces” is going to cut the amount of healthcare consumed in half.
Walter Boggs
Jul 10 2024 at 10:34pm
When I spend a dollar on healthcare, I’m paying for many things other than healthcare, largely due to regulation that impairs the efficiency of the market. Reforms might not cut the total spending as much as we’d like, but reforms would be beneficial nevertheless.
Scott Sumner
Jul 11 2024 at 1:19am
It would cut expenditure dramatically in two ways. People would consume far less health care, and the health care they did consume would be far cheaper.
Floccina
Jul 11 2024 at 6:14pm
Have you though through all the possibilities? I once had a very minor operation in Honduras.
TMC
Jul 9 2024 at 5:23pm
I agree with your positions here except for the fact that the NYT does stink. The first two links they had in their story don’t support their positions. The first is about heat pumps, like the one I have one. Mine is seemingly even better than theirs as it will not leak anywhere close to 12 lbs of refrigerant over its lifetime. The story is about using alternative refrigerants to help with climate change, not that we can’t have an efficient system available to us. Frankly it’s likely that the new refrigerant is making their systems less energy efficient.
The second link is about drain ventilation. They describe what is largely the way we do it in the US today. We tend to have more bathrooms ad fixtures than the Europeans do, so will have a slightly more complex ventilation system, but it is necessary and pretty trivial. If I built a house similar to the average EU house, the ventilation system would look the same.
Scott Sumner
Jul 10 2024 at 12:48pm
Thanks for that info. The main problem in the US seems to be apartments, not single family homes.
Mark Brophy
Jul 9 2024 at 6:50pm
The Times publishes many great stories like the elevator story. The comments are even better.
Dale
Jul 9 2024 at 7:49pm
I would like to see the term “regulations” distinguished between, what I would call, “standards” and “mandates”. I suspect liberals underestimate the harms of mandates and libertarians underestimate the benefits of standards. Standardization probably boosts productivity through network effects, including much of the wireless and software technology of the last 30 years. Mandates are how we end up with overly expensive elevators.
Matthias
Jul 9 2024 at 9:01pm
Given the trouble the other Scott had with the NYT doxxing him, I’m not quite convinced that left-wing bias is the only thing holding them back from excellence.
Scott, apropos strong unions and high real incomes: you might like https://pseudoerasmus.com/2017/10/02/ijd/
Michael Sandifer
Jul 9 2024 at 9:53pm
Yes, I refer to these problems as “cost diseases”, and they are caused by government policies. I would include the cost of car ownership here, which rose sharply in recent years due not only to the pandemic, but also aggressive new regulations to address safety and climate change concerns, along with car insurance regulations in some states that have driven up the price of insurance.
There are so many articles asking why Americans don’t feel like the economy is good. Cyclically, the economy is not in bad shape, but these cost diseases have made many miserable. Also, as the drift of blue collar union members away from the Democratic Party illustrates, much of the misery is due to cultural issues.
Mactoul
Jul 9 2024 at 11:27pm
Interesting article. However, the multiplicity of codes and authorities is a likely consequence of a jealous federalism, otherwise a good thing to have.
Scott Sumner
Jul 10 2024 at 12:43pm
I think it’s more than that. Places like California, Texas and New York are as big as some European nations.
Thomas L Hutcheson
Jul 10 2024 at 8:23am
You are entirely right about “Progressives” overestimating the benefits of re-distributions relative to growth (although it’s odd they don’t seem to invest a lot of energy in advocation for tax reforms like a progressive consumption tax that could do redistribution with lower dead weight loss).
But I don’t really see the land use restrictions and mis-regulation of elevators and of building codes, and zero-CO2 power generation, and the grid, and occupational licensing etc., as arising from overzealous income redistribution. My guess is that that they are all just attempts to deal with externalities and (sometimes imagined and sometimes not) market failures without doing cost benefit analysis of the regulations chosen.
MarkW
Jul 10 2024 at 8:37am
In general, I agree with all of this. But with respect to single-family residential construction, it seems that the most of the spike in cost has come in the last couple of decades (and especially during the most recent decade). Given that timing, it doesn’t seem that the change can have been driven by an increase on regulations during that time — have building regulations even gotten more restrictive during the last 20 years? Wasn’t everything pretty much in place before then?
Scott Sumner
Jul 10 2024 at 12:47pm
“have building regulations even gotten more restrictive during the last 20 years?”
Here in California, I believe regulations are becoming far more restrictive. For instance, many projects are now forced to use union labor. Or X number of units must be set aside as “affordable”. In addition, regulation prevents the sort of technological progress you see in other industries. For instance, regulation largely prevents the development of manufactured homes.
Dylan
Jul 10 2024 at 10:07am
Excellent piece. In one of your recent posts, I linked to the Construction Physics Substack on what makes housing so expensive. I didn’t intend to push back on the importance of zoning, but I thought it was pretty interesting to see how it wasn’t close to the whole story. Productivity in construction has been incredibly stagnant. One of the regulars here who has worked in construction for something like 4 decades has commented on how little has changed in that time in terms of building a new house. Building codes are likely part of the answer.
I think it was Megan McArdle who was the one that reminded me years ago that the 18% of GDP we spend on healthcare is pretty much entirely made up of people’s salaries…and those people’s living standards are unlikely to be boosted if we cut healthcare spending in half. That doesn’t mean we shouldn’t figure out a way to do it, but it does make it a little more understandable why we haven’t managed to do anything so far.
Scott Sumner
Jul 10 2024 at 12:53pm
We would have far fewer people working in health care. They could so something more useful, boosting overall living standards.
But yes, some individual people would be hurt by reform, which is why it probably won’t happen.
David Seltzer
Jul 10 2024 at 11:00am
Scott: Good stuff. Long term effects of Medicare on our healthcare system are dire. Medicare pays physicians less than private health insurance. Providers shift costs to those with private insurance. We subsidize Medicare recipients through higher premiums and higher taxes. I’m sure you are aware of this. The incentive for physicians is to leave the system. Fewer docs will accept new Medicare patients. The problem will get worse going forward. Obamacare further reduces provider reimbursement, forcing more physicians out of the program. Hospitals and other health facilities will continue to lose money, resulting in to widespread closures. I suspect will occur in the next 15 years if there isn’t a dramatic change.
Scott Sumner
Jul 10 2024 at 12:51pm
“Medicare pays physicians less than private health insurance.”
True, and yet the system is so inefficient (and hence expensive) that we still spend more than other countries on government provided health insurance for the elderly.
Larry
Jul 13 2024 at 6:53pm
Another way to cut the cost of living is to make transport more productive. Not talking about gas prices, but rather distances and alternatives to driving. Imagine getting around easily while needing only 1 car/family.
Comments are closed.