Rising Cost of Essential Items Squeezing Middle Class. Government Spending to Blame?

This past week, Charles Hugh Smith wrote a piece on this topic in which he penned these words, “If we had to choose one ‘big picture’ reason why the vast majority of households are losing ground, it would be: the costs of essentials are spiraling out of control.”

In past blog posts, I have discussed the changes as to how the core inflation rate has been measured over time.  One notable change, food and fuel costs are not included in the core inflation rate calculation.

Mr. Smith notes in his piece that the cost of big-ticket essential items is spiraling upward at a much faster rate than earnings. 

He defines big-ticket essential items as education, housing, and healthcare.

Let’s begin with healthcare costs.

Past RLA radio guest, Karl Denninger, has spoken to the rising cost of healthcare in the past.  Each year, healthcare costs consume a larger share of gross domestic product.  These costs are rising at a trajectory that is unsustainable.

And, Mr. Smith points out in his piece that these costs are rising much faster than earnings as this chart taken from his article illustrates.

Note from the chart that over the ten years ending in 2016, worker’s wages increased at an average rate of 29% while health insurance deductibles increased by 176%.

At the same time, spending on healthcare administration has ballooned. 

The chart below shows the growth of physicians and administrators from 1970 to 2009.

Over that 40-year time frame, the growth of these healthcare professionals has been more than 3000%.  When you consider that, it’s mind-blowing.  For every single physician or administrative position that existed in 1970, there are now 3,000 working in that capacity.

For perspective, consider that the entire population of the United States was 205 million in 1970 and has grown to about 330 million today.

That’s an increase of 61%.

Yet, at the same time, there are 3,000% more physicians and healthcare administrators.

Looking at the chart, it’s important to note that the increase in the number of physicians has approximately kept pace with the population growth while the growth in the number of healthcare administrators has literally been almost off the chart.

Should space permit, it would be easy to demonstrate similar trends in the area of education and in the cost of housing, rents in particular.

So why has this occurred?

Much of the blame lies in government policy and regulation as a recent article in “The Atlantic” points out (Source:  https://www.theatlantic.com/ideas/archive/2019/10/europe-not-america-home-free-market/600859/).  The author of the article, Thomas Philippon, a New York University Professor makes some interesting points, among them that Europe now embraces free markets more than the United States does – a complete reversal from the way things used to be.

Here is a bit from his piece (emphasis added):

When I arrived in the United States from France in 1999, I felt like I was entering the land of free markets. Nearly everything—from laptops to internet service to plane tickets—was cheaper here than in Europe.

Twenty years later, this is no longer the case. Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection costs $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales.

None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents.

This is in part because the rest of the world was inspired by the United States and caught up, and in part because the United States became complacent and fell behind. In the late 1990s, legally incorporating a business in France took 15 administrative steps and 53 days; in 2016, it took only four days. Over the same period, however, the entry delay in the United States went up from four days to six days. In other words, opening a business used to be much faster in the United States than in France, but it is now somewhat slower.

The irony is that the free-market ideas and business models that benefit European consumers today were inspired by American regulations circa 1990. Meanwhile, in industry after industry in the United States—the country that invented antitrust laws—incumbent companies have increased their market power by acquiring nascent competitors, heavily lobbying regulators, and lavishly spending on campaign contributions. Free markets are supposed to punish private companies that take their customers for granted, but today many American companies have grown so dominant that they can get away with offering bad service, charging high prices, and collecting, exploiting, and inadequately guarding their customers’ private data.

In his article, Professor Philippon points out that when the German Sieman’s and France’s Alstrom decided to merge their rail activities in 2017, regulators denied the merger stating that should the merger be approved, consumers would be deprived of a choice of suppliers and products.

Meanwhile, in the United States, antitrust enforcement has become less stringent. 

Those who suggest that monopoly power is brief because the higher prices that come about as a result of monopolies attract new competitors used to have a good point.  The idea is that when a company has a product or service and no real competition, they can raise prices only so much before a competitor enters the space.  Competition is good for consumers.

Since about calendar year 2000, high corporate profits have persisted because of the high barrier to entry from excessive regulation.  This from Professor Philippon’s article (emphasis added):

In some industries, licensing rules directly exclude new competitors; in other cases, regulations are complex enough that only the largest companies can afford to comply.

Instead of debating more regulation versus less—as ideologues on the left and right tend to do—Americans should be asking which regulations protect free markets and which ones raise barriers to entry.

While regulation making the barrier to entry into an industry more difficult is some of the problem, it’s not the only problem.

The other issue is government spending.  As the government spends more in a particular area like healthcare or higher education funding, it often results in the unintended consequence of making those services more expensive.

In the case of healthcare (although the same point could be made for the cost of higher education tuition), the more government has been involved, the more expensive it has become.

According to the government’s own data (Source:  https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical), total government spending for healthcare (Medicare, Medicaid, Department of Defense and Veteran’s) was $279 billion in 1990 and rose to more than $2.1 trillion in 2018.

Go back and look at the chart that shows the growth of healthcare administrators above.  Interesting how the growth of government spending for healthcare tracks the growth of healthcare administrators, isn’t it?

When the government spends on something and creates demand, it causes prices to rise.  That means that those who pay for their own healthcare or their own health insurance end up paying more and end up getting squeezed harder (Go back and look at the other chart above.)

In 1960, prior to the advent of Medicare and Medicaid, healthcare spending consumed 5% of Gross Domestic Product (GDP).  Today according to the government’s own statistics (see source above) healthcare spending consumes 17.7% of GDP.

That is an unsustainable trend.

Especially given that much of the government spending on healthcare is funded by deficit spending.

There will have to be a reset at some future point.  Make sure you’re ready.

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