Why are education, health care and child care so expensive in the United States?

In a recent article on his new substack (which you should check out), Marc Andreessen taunts against soaring prices expensive service industries like colleges, health care and child care. He publishes the following famous graphic from the American Enterprise Institute:

I added the little blue box around “Average Hourly Wage”. Anything above that blue box has become less affordable for the average American earner since the turn of the century. Everything below has become more affordable (even housing, but obviously not in cities like San Francisco). You can see that the things that have become less affordable are all expensive services – things where you pay large sums of human beings to take care of you or your family members. The things that have become more affordable are all physical goods.

Now, I myself have posted versions of this chart a bunch of times in the past, and I absolutely share Marc’s frustration. In a post in decemberI argued that the rising cost of services was one of the main reasons the American middle class still feels stuck, despite the good economy.

But it’s actually not so easy to understand Why It happens. Marc argues that the services are simply over-regulated and over-subsidizedand yes it is a plausible explanation. But the story is probably more nuanced. When Timothy B. Lee looked at service industries as a wholehe found that there are many who actually got a little more affordable:

Why should haircuts, laundry, restaurants and car repairs more affordable over time as lawn care, daycare, college, veterinary care and health care become less affordable? This defies simple explanation.

So when there is no simple explanation, we choose a complex one. In this case, there are at least three major factors that are likely driving up the prices of health care, childcare, and college. Let’s talk about the most fundamental factor first – the tendency for labor-intensive services to become more expensive as the economy grows.