Mark Perry recently updated a fabulous chart:
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a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:
Blue lines = prices subject to free-market forces. Red lines = prices subject to regulatory capture by government. Food and beverages are debatable either way. Conclusion: remind me why socialism is so great again.
b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).
c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.
d. From Twitter comments this week (2022).
*Thank goodness the government doesn’t subsidize TVs or toys, or toy TVs.
*Almost every line that went up, has had some type of government involvement, while the lines going down have more to do with capitalism.
*And as always, the more regulated, the more expensive things become.
There is a big distributional impact here. Less well off people buy more blue stuff, rich people more red stuff.
The implications for greater protection, less immigration, industrial policy, and subsidies are pretty clear.
Update:
I have been sloppy, about one of my own pet peeves. This graph is about relative prices, not about inflation.
The favorite policy mix of the US government is to restrict supply and when the restricted supply results in demand destroying price increases subsidize demand.
ReplyDeleteThis is especially evident in education, medical care and housing. My favorite is housing where local governments do the heavy lifting on supply restrictions (The U.S. Is Running Short of Land for Housing By Konrad Putzier Sep 26, 2022 https://www.realtor.com/news/trends/the-u-s-is-running-short-of-land-for-housing/) and the Federal government subsidizes demand by extending mortgage credit on terms and to people who would not get them in a free market.
Similar stories can be told in education and medical care.
Of course, knowing what the problem is and being able to fix it are two entirely different things. How can we get local governments to allow denser uses of land. A majority of adults owns their own homes they are a lobby for restricting supply. How can we slow the medical juggernaut down. Most of the best jobs in the country are in that sector. Will those people accept policies that would constrain their incomes?
Only an economic catastrophe or a world war can provide an opening to change. And nobody wants those.
At least this conclusively disproves Baumol's Cost Disease.
ReplyDeleteI think this graph quite literally proves Baumol's Cost Disease
DeleteI would imagine that the Samuelson-Balassa effect has greater explanatory power than regulations with respect to these price changes.
ReplyDeleteSamuelson-Balassa doesn't explain the blue items
DeleteThe money supply of a country is a major contributor to whether inflation occurs. As a government evaluates economic conditions, price stability goals, and public unemployment, it enacts specific monetary and fiscal policies to promote the long-term well-being of its citizens. These monetary and fiscal policies may change the money supply, and changes to the money supply may cause inflation.
ReplyDeleteInflation occurs when the money supply of a country grows more rapidly than the economic output of a country.
The Federal Reserve changes the money supply by buying short-term securities from banks, injecting capital into the economy.
The quantity theory believes that the value of money, and the resulting inflation, is caused by the supply and demand of the currency.
There are situations where increases in the money supply do not cause inflation, and other economic conditions like hyperinflation or deflation may occur instead.
During COVID-19, the Federal Reserve materially increased the nation's money supply. As a result, the nation experienced higher-than-usual inflation.
Basically, the economy is being run in reverse. It now has a credit/investment imbalance. S ≠ I with the payment of interest on interbank demand deposits.
ReplyDeleteThere’s a lack of investment opportunities (secular stagnation or chronically deficient AD). I.e., it's stock vs. flow. All bank-held savings have a zero payment's velocity. Banks don't lend deposits. Deposits are the result of lending.
George Bailey’s “It's a Wonderful Life” was derived by putting savings back to work, where velocity was 2/3 and money was 1/3. The banksters seeking to gain a larger portion of the loan pie, drove up Reg. Q ceilings, inducing nonbank disintermediation (decelerating the velocity of circulation). The nonbanks in the Golden Age in Capitalism, as opposed to the banks, necessarily, quickly invested their funds.
The suppression of interest rates (decline in real rates of interest) boosts asset prices (the opposite of "trickle-down economics")
We have Karl Marx’s rentier capitalism. Why do you think murder rates are rising? Social behavior is pre-programmed.
John, what do you think of Alex Tabarrok's contention that this chart just largely reflects the Baumol Effect (Baumol's Cost Disease)?
ReplyDeleteI think it is also noteworthy that most of the fields where prices are escalating fastest are the ones that require the most human work-hours (medical care, education, child care). Teachers have about the same number of students as they did in the past, doctors can't see any more patients in a day than they used to, child care facilities can only have so many kids in them, and so on. Meanwhile, the ones that are showing declines in price are precisely the ones that are most easily automated to dramatically increase the productivity of the people working in them. I believe what you are actually showing is a classic example of the results of "Baumol's Cost Disease", where one set of jobs has wages increase due to technological improvements raising their productivity, and this drives up the wages of workers in areas where technology can't increase their productivity.
ReplyDeleteGood point. We also have in the current environment is the cost-push effects on inflation because of a shortage of workers. I am an investor in many middle-market businesses...commercial bakery is one...and our wages are up because of acute worker shortages and competition for those scare resources.
DeleteIt is hard for me to see what is the connection of the price of some of those services, of average hourly wages, of food and beverages, and of housing with socialism. Automation and tradability seem to me far more plausible causes. But maybe this is because I am an aging European academic with a soft heart.
ReplyDeleteIn the case of wages there have been government intervention in the form of increased minimum wage laws as well as pro-union attitudes leading to artificially inflated cost of labor. The red items are more labor intensive so in order to pay for an increase cost of production the prices need to come up. The wage gains have been outpaced by inflation leaving the working man with less purchasing power which is the argument against soft hearted policy.
DeleteIt is hard for me to see what is the connection of the price of some of those services, of average hourly wages, of food and beverages, and of housing with socialism. Automation and tradability seem to me far more plausible causes. But maybe this is because I am an aging European academic with a soft heart.
ReplyDeleteIt is hard for me to see what is the connection between most items in red and socialism. But maybe this is because I am an aging European academic with a soft heart.
ReplyDeleteThe comment about government involvement is one dimensional - much happier to outsource TV manufacturing to lower common denominator, not sure about healthcare services. This said, would be interesting to compare healthcare cost inflation in other countries where government involvement is much higher and costs/patient outcomes likely much better. Chart is interesting, conclusion about government / regulation seems totally off the mark … for example, i expect that over time that technological progress may mean that less of my disposable income goes to a TV but i am quiet happy to spend proportionally same or increasing amount for healthcare and education. For healthcare there is a general tendency to increase from ageing and wealthier population ? Education … lots of dynamics, but probably because US (and UK) education is a global market benefiting from rising global wealth and mobility and recognition of the institutions
ReplyDeleteA very overlooked factor in the United States healthcare equation is that they subsidize a lot of the research and development of innovative procedures, medicines, ect
DeleteThere is clearly reverse causality going on here. Government pressure to intervene in a market increase with the rate of price increases in a market
ReplyDeleteWould be interested to dive deeper in to the interventions for the worst causes. Toys and cars are quite regulated to my non trained eye
ReplyDeletePlease add a line for Social Security.
ReplyDeleteResponse to the reminder as to why socialism is so great: it's all about dogma and ego and is largely driven by academic intellectuals (not at UC!) who ignore the natural experiments & empirical data from West-East Germany, from North-South Korea, from pre-Castro/post-Castro Cuba etc.
ReplyDeleteTo be fair, outside of housing, the left could argue that those goods with the highest inflation are service goods with high degrees of demand inelasticity. I would agree that's absolutely a contributing factor in addition to the beau tactic meddling.
ReplyDeleteA critique from the Brownstone Inst. concerning silence of the economists over the costs of lock-downs and the surge in the inflation rate resulting from stimulus provided by governments during the lock-downs and subsequent actions. https://brownstone.org/articles/the-economists-self-censored-and-inflation-is-a-result/
ReplyDeleteAs I recall, you were one of those economists who consistently and vocally warned about the economic cost of the lock-downs. This short article is a vindication of your principled stance during that period.
I like bashing on over-regulation as much as the next guy, but I'm not sure this is a regulation story. If you would include banking, another highly regulated sector, I'm fairly sure you would find costs going down between 2000-2022 because of automation.
ReplyDeleteTo me this seems more of a story of automation: capital-intensive sectors have lower prices, labor-intensive sectors have higher prices.
It could also be a story of demand: As we become richer we buy less stuff and instead spend money on healthcare and education.
Red lines refer mostly to services, blue lines to products. This graph is not an issue of public versus prívate, but just the well known service vs product gap in price- growth pointed out by Baumol!
ReplyDeleteThis chart reflects the results of a lack of capitalism, the lack of open markets and the effects of socialism (socializing costs). In a free market economy, the market has buyers and sellers both strongly acting in their own self interest.The red line, the buyers are not using their personal check book. The products and services are paid by “third parties”. Socialized! Give every citizen a free food card paid for by the government (or an insurance company that socializes the cost into a standard premium) like Medicare or BCBS and no one buys hamburger, just T Bone and never even sees the price label. Mixing capitalist sellers with unlimited social spending is recipe for the red line.
ReplyDeleteRegulated and non-regulated categories are confounded with tradables and non-tradables. Interesting plot but need to think more about it.
ReplyDeleteThe series that seems to have the largest break is college textbooks that became essentially flat about five years ago. Could this be due to increased digital delivery?
ReplyDelete"c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc."
ReplyDeleteThis is principal cause underlying the difference in pricing trajectories. As the Biden Administration's efforts to on-shore overseas production intensifies, the pricing trajectories for the items in blue will rise at rates comparable to the items in red.
In Asia you have a large population having living standards below those in the West, but educational standards that have caught up to and in certain instances have surpassed those in the West. The work ethic is higher, and the unfunded liabilities of governments are lower. The trends in Western education will only decline from here, while those in Asia can only improve.
As was seen in the case of the Trump administration, trade tariffs merely raise prices of imported factors and serve to reduce supply. This is not new. It follows the traditional experience garnered over many decades in the past, confirmed by economic theory.
Free trade is superior to managed trade. But it is politically inconvenient for politicians.
There is no happy future for the West on current trajectory, and no cause to believe that the West will deviate from the current trajectory short of a major existential shock.
The health-care numbers are probably pretty distorted. See randomcriticalanalysis for a searching critique of the usual numbers (five years old, but the methods issues haven't changed):
ReplyDeletehttps://randomcriticalanalysis.com/2020/02/13/its-still-not-the-health-care-prices-2017-edition/
“We’re seeing evidence of inventories rising and a bit of a slowdown in demand,” he said. “And there’s a sense in corporate America that we’re heading into a weaker period and pricing power isn’t as robust as it had been.” --Reported in The Wall Street Journal, October 13, 2022.
ReplyDeleteThe rate of change of CPI is moderating, but the rate of change of core-CPI continues to increase, on a month-to-month comparison basis, according to the article.
It has always been an un-asked question--what inflation rate does the FOMC benchmark to? The CPI-, PCE-, or core-CPI-, inflation rate? The answer determines the path of the Fed-Funds rate.
Pierre Poilievre is the new conservative party leader in the Canadian House of Commons, he is also the leader of His Majesty's loyal opposition to the Liberal Party government headed by Justin Trudeau. Mr. Poilievre is a right-libertarian in conviction and he has a very highly tuned antenna for the weaknesses in the government benchers.
ReplyDeleteIn his article published in the National Post (Toronto, ON) he argues, quite elegantly, the case for the fiscal theory of the price level determining the rapid development of concerning levels of inflation in the Canadian economy. Navigate to
https://nationalpost.com/opinion/pierre-poilievre-spending-must-be-capped-to-end-liberal-induced-inflation
for his take on the fiscal theory of the price level. He puts the case forward succinctly, based on empirical evidence he cites, in the course of making the arguments against the incompetency of the Trudeau-Freeland fiscal policy of the past two years. Poilievre is not an econonmist, but a politician to the exclusion of all else career-wise. His solutions to the challenge of 'climate change' which he outlines in the article, provide incentives rather than taxes, and would repeal regulations to open up opportunity for free-enterprise solutions. All theoretical at present, but of interest to those who are looking for Adam Smith's Invisible Hand to show the way forward in fiscal conservatism and laissez-faire, laissez-passer, in business and industry, Poilievre may have the answers when the Canadian House of Commons dissolves.