Inflation has exposed the depths of our affordability crisis
By Ezra Klein© 2022 The New York Times
The inflation data just released in June is surprising. At 9.1%, it’s the highest year-over-year rate we’ve seen since 1981.
This may be the highest we will see. Oil and other commodity prices are falling, real wage growth has turned negative, and retailer inventories are thickening. None of this is fertile ground for continued inflation. If the only price issue we had was the one that last year inflation reports followed, I would think the light was starting to shine in the tunnel.
But it’s not. In February 2020, The Atlantic published an article about the affordability crisis worsening a seemingly strong economy. “In one of the best decades the American economy has ever recorded, families have been bled dry by landlords, hospital administrators, college scholarship holders, and day care centers,” Annie Lowrey wrote. “For millions of people, a booming economy seemed precarious or downright terrible.” Lowrey’s framing has stuck in my mind for the past two years. I don’t think you can understand the larger price crisis without it. (I should mention here that Lowrey and I are married, but don’t blame him – or his job!)
The numbers are surprising. The median house price in 1950 was 2.2 times the average annual income; in 2020, it was six times the average annual income. Child care costs increased by around 2,000% – yes, you read that right – between 1972 and 2007. Family premiums for employer health insurance jumped 47% between 2011 and 2021, and deductibles and out-of-pocket expenses have increased by almost 70 percent. The average price of brand name drugs on Medicare Part D increased by 236% between 2009 and 2018. Between 1980 and 2018, the average cost of an undergraduate education increased by 169%. I could go on.
We covered up the affordability crisis with low prices for consumer goods, skyrocketing asset values that made the wealthiest Americans happy, subsidies for some Americans at certain times, and mountains of debts: housing debt and student loan debt and medical debt that kept the working class semi-afloat. But none of this addressed the central problem. For too long, the prices of the things we need most have risen much faster than inflation.
And so a strange economy has emerged, in which a safe, middle-class way of life has receded for many, but the material trappings of middle-class success have become affordable for most. In the 1960s, it was possible to attend four-year college without debt but impossible to buy a flat-screen television. In the 2020s, the reality was close to the opposite.
The affordability crisis gives meaning to the last decades of our economic debates: a housing debt crisis, a huge new program to subsidize health insurance costs, debates about free college education and the cancellation student loans, proposal after proposal for the government to pay for childcare and preschool, a crypto bubble that attracted so many investors in part because it looked like an elevator to wealth that any the world could borrow.
But now asset prices are falling. The cost of loans is rising. The price of consumer goods and the energy needed to manufacture and access them have skyrocketed. Congress is getting more stingy. The high prices remain, but the policies and palliatives we used to mask them are collapsing. (Thankfully, the Affordable Care Act remains, and I shudder to think how much worse those years would be without it.)
There’s a famous video where you’re told to keep an eye out for a passing basketball, and as you do, you miss an actor in a gorilla costume walking around the scene. But once you’ve seen the gorilla, you never miss it again. Politics works like that too. It’s not just about the problems we have. These are the problems we learn to see.
The problem of prices has been around for years, but it has never been at the heart of our policy. It is now. It’s on signs at gas stations and in the supermarket. It’s in rental contracts and tuition checks. Even if headline inflation drops, I don’t think we’ll soon ignore the high price of middle-class living. The political party that will dominate this next era will be the one that shares the public fury and puts awards at the center of its agenda.
There are some first glimmers of what this could look like. The New Democratic Coalition, made up of 99 moderate Democrats in the House, recently released a set of policy proposals aimed at tackling inflation. But much of it is for the affordability crisis that preceded the rise in inflation. It includes legislation that would use federal transportation dollars to push cities and states to facilitate housing construction, that would reduce worker shortages by increasing legal immigration, and that would cap insulin costs and allow Medicare to negotiate more drug prices.
If the Liberals look, they will find endless ideas to lower prices across the economy. “I’ve been tearing my hair out about this for years,” said Dean Baker, one of the founders of the Liberal Center for Economics and Policy Research. “We can’t just accept markets as structured and then use tax and subsidy policy to make it less bad. A real big problem with progressives is that we treat market problems as data rather than restructure those markets.
Baker’s longstanding argument is that the divide between market and government is now, and always has been, wrong. “The idea of a free market is nonsense,” he said. “I had a lot of fun with libertarians saying they want government out of the markets. And I say, ‘Oh, you don’t want to have any more companies?’ They are legal persons.
I have long liked Baker’s arguments for two reasons. First, they fairly apply basic economic principles, which is rarely true in politics. It is relentless to deploy the arguments that are often used against government intervention on behalf of the poor to criticize ongoing interventions on behalf of the rich. Second, they cut through the ideological quagmire of markets versus governments to ask the more fundamental question: who are our markets structured to serve?
Follow analyzes like that and you’ll find an array of bad actors, crossing partisan and professional lines. Housing is so hard to build in dense cities largely because governments have made it difficult to build. These governments are disproportionately led by Democrats. “The blue places have chosen to make their housing supply inelastic – to use economic parlance – and the red places, on the whole, have allowed housing markets to continue to function and supply to react in the event of a crisis. ‘increase in demand,’ said Jenny Schuetz, author. of “Fixer-Upper: How to Fix America’s Broken Housing Systems.”
But drug prices are high because Republicans support broad patent protections but won’t let the government use its buying power to negotiate prices, which is how virtually every other wealthy nation is cutting costs. We grant monopolies on one side and refuse to use purchasing power on the other. The Warp Speed program for vaccine development was an example of how it could be done another way: the government made itself the buyer of the vaccines and then distributed them freely. And what about public competition for non-patented products? California Governor Gavin Newsom, a Democrat, just announced that the state has set aside $100 million to start manufacturing its own low-cost insulin. If it works, it could become a national model.
Inflation crises in the United States tend to be caused, or severely aggravated, by our exposure to oil states. That’s true for the OPEC embargo of the 1970s and what the Biden administration likes to call “the Putin price hike” of 2022. As Mark Zandi, chief economist at Moody’s Analytics, noted, the Soaring fuel prices accounted for more than half of June’s inflation. It will probably subside. But a world where most of America’s electricity is generated by wind, solar, nuclear and geothermal is a world where we are much less dependent on fluctuations in the global energy market. (And while it seems almost ridiculous to have to say this, a world of runaway climate crisis won’t be good for prices either; there’s no end of good reasons to decarbonize.)
For decades, we have been in a spending policy. The questions focused on how much to spend and what to spend. We are entering into a policy which seems superficially similar but which is fundamentally different: a price policy. How much to spend and where to direct that spending still matters. But this will be subordinated to a broader objective: to lower prices throughout the economy. And it will be the work of years, perhaps decades.