A Reply To Professor Cowen On The Cost Disease

John Overstreet profile picture
John Overstreet


  • Social, political, and economic systems are under strain due to rising social costs and deindustrialization, a kind of slow-motion stagflation.
  • Ever-expanding social costs - or the "cost disease" - is a phenomenon that began shortly after the establishment of the Federal Reserve system in the 1910s.
  • "Cost disease" continues to transform the farm-and-factory economy into a service economy.
  • As the basket of goods produced (GDP) and consumed (CPI) becomes dominated by expenditures on services, this raises the underlying level of inflation, thus creating the "price stability illusion".
  • "Price stability" and "cost disease" are two sides of the same coin, a coin minted by the Federal Reserve.

In a Bloomberg View column on January 18, Professor Tyler Cowen wrote an article entitled, "This Economic Phenomenon is Making Government Sick." It is one of the best articles on the relationship between economics and government I have read in a long time, but it only describes half of the problem. This economic phenomenon is indeed making not only the government but the entire body politic sick, yet it was the government that caused the economic phenomenon in the first place. Professor Cowen does, in fact, note that the government contributes to the malady, but the particular effect he identifies merely exacerbates the illness. In this article, I intend to show that the government has created this problem virtually out of thin air, and that problem is "price stability."

The economic phenomenon Professor Cowen is referring to, however, is "cost disease," the tendency for costs in labor-intensive sectors (e.g. services like education and medical care) to rise faster than costs in capital-intensive sectors (e.g. in the production of goods like cars, computers, and commodities).

Why is this making government sick? It is simple math.

First, since prices for the service sector have persistently risen faster than prices for goods, this has transformed the very nature of the global economy. Services now comprise about 80% of the American economy, whether measured by employment or GDP. At the same time, the old agricultural and manufacturing jobs are being replaced by automation or shifted to workers in peripheral economies (either by importing immigrants or exporting factories).

This puts a strain on the domestic labor force (which, coincidentally, largely overlaps with the electorate). On the one hand, jobs are disappearing; on the other, medical care and education are becoming more expensive. This not only tests individuals and families, but it can undermine communities, cities, and entire regions. Somewhat ironically, these are often places that may have initially

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John Overstreet profile picture
I study markets from a long-term historical view, especially the interaction between yields and inflation across all major asset classes. I have a bachelor's degree in political science, history, and intelligence analysis, and a master's in political theory. My Seeking Alpha articles have been mentioned in Marketwatch and Real Clear Markets. I have lived in Asia for twenty years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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