"The Chart of the Century"

Illuminating concerns about the American Dream

Above, is a chart of how prices have changed across industries between 1997 and 2017. This chart is absolutely fascinating, and it shows us something that general statistics of wages and inflation don’t capture.

Notice how products in lesser regulated industries—such as software, toys, TVs, cars, and clothing, became cheaper since 1997. Given the wage increases shown, this makes these products more affordable than before. These sectors are more competitive, globalized, and, in general, less regulated sectors than the sectors higher up the chart.

Healthcare and the costs of college top the list, with prices for hospital services rising an astonishing 250% in just 20 years. Both healthcare and higher education are industries that involve more government intervention and cartel-style governance.

Marc Andreessen brought up this correlation during his recent Econtalk episode with Russ Roberts. Andreessen correctly points out that government policies have, in part, led to these wild price run-ups. Andreessen explains how in many of these industries the government restricts supply, leading to price increases. These are followed up by subsidizing demand, further exacerbating the price rise. Some econ-101 style graphs show this change below:

The first image is before, and the second is after. In the second image, the supply curve as moved to the left (supply restriction) and the demand curve has moved to the right (demand subsidy), leading to an inevitable price increase.

In the healthcare system, there are a myriad of regulations on hospital construction via Certificate of Need laws. In many states, these laws allow incumbent hospitals to deny entry of additional hospitals in the market, keeping the prices of hospital services artificially high. On the demand side, the government subsidies healthcare in the form of tax breaks for companies that buy health insurance for employees, Medicare, and Medicaid.

This problem also exists in higher education. To be eligible for federal funding, a university needs to be approved by an accreditation agency. The problem is that the accreditation agencies are run by existing universities, meaning that federal dollars subsidize the incumbents, making innovation difficult for alternative forms of education looking to disrupt higher education. As was discussed in my previous post about competition, the threat of entry forces incumbents to charge relatively competitive prices in many industries. In an industry where the incumbents can vote out entrepreneurs from competing, it is no surprise that supply is restricted and prices (in the form of tuition) run high. On the demand side, the federal government offers subsidized loans with low interest rates, boosting demand in the face of government-sanctioned supply restriction.

Interestingly, the costs of housing have risen at the same rate as overall inflation. This is because the graph is showing housing expenses for all people all over the country. Housing is relatively cheap in many places in the US, particularly the south and rust belt. Additionally, the graph goes to 2017, so it misses the massive run-up in housing prices over the past five years. The worst run-ups in housing costs are in concentrated metro areas where, once again, supply is artificially restricted while demand is subsidized. Communities who fight new development in their neighborhood restrict the housing supply in their city, content to preserve their wishful mirages of what their city should look like, even if it means ratcheting up rents on all, and particularly the poor. A most egregious case happened recently in Berkeley, where a NIMBY (not in my backyard) activist sued UC Berkeley for ‘environmental damage’ forcing the school to slash their incoming freshman class by a third, and denying a top-tier educational experience to thousands of young people. On the demand side, housing vouchers and subsidies inflate demand, further increasing upward price pressures.

“If you ran a political experiment [where you price out the American Dream] the response would be populism”

-Marc Andreessen

Life in America is getting better overall, but it is unsurprising that populist forces have taken hold when the three key pillars of the American Dream—a home, an education, and good healthcare—have all faced enormous price run ups. The fact that these sectors are such large portions of the economy further reinforces how important it is for us to get public policy for these sectors right. As Andreessen states in the interview, “If you ran a political experiment [where you price out the American Dream] the response would be populism.” Alleviating the artificial supply restrictions that have been imposed is the first step towards making the American Dream more affordable, and relaxing the political tension of the current moment.