Sneaky Inflation

By Kevin D. Williamson

Wednesday, September 14, 2016

In American politics, it is always 1933. For Democrats, every economic downturn is the Great Depression, crying out for a New New Deal. For Republicans, every tin-pot dictator thumbing his nose at us is Adolf Hitler. Libertarians like to think of themselves as ahead of the curve: For them, it’s always 1921, with the Weimar hyperinflation ready to take off.

If you’ve got gold coins or freeze-dried apocalypse lasagnas to sell, the specter of hyperinflation is forever lurking on the fringes. (For the record, I think the usual gold-bug advice for investors — putting about 10 percent of their assets into precious metals or a similar hedge against runaway inflation — is perfectly reasonable for high-net-worth individuals and institutions.) But in spite of all that quantitative easing and promiscuous money creation, we have not seen anything like Weimar-style hyperinflation. (No, nor “Zimbabwefication,” as your favorite roving correspondent put it.) Not yet, anyway.

But inflation in the 21st century is a curious phenomenon. “Inflation” technically describes the dilution of the money supply, but what we generally mean by the word is a general rise in prices. Never mind ruinous hyperinflation, we haven’t seen very much ordinary inflation, either. Even if, arguendo, we accept all of the familiar criticism of the way the federal government calculates inflation (and I do not), there still isn’t very much inflation to be seen.

Curious, though, where we do see it.

One persuasive school of analysis holds that the efficiency of modern financial markets and the relatively wide access to them interacts with the ever-tighter integration of the global supply chains behind consumer goods to ensure that the inflation we see is asset inflation rather than rising prices for a pair of flip-flops at Walmart, i.e., that the current run-up in share prices and other financial assets is just another variation on the millennial housing bubble. There’s probably something to that, and asset inflation is the most politically popular form of inflation: Nobody complains when the value of their house or their IRA goes up dramatically, which makes perfectly good sense if you don’t think about the cost side of that ledger, which is a burden on people who are generally younger and poorer and looking to buy a house or begin investing in financial assets. Politicians don’t care very much about them, because the preferences of young poor people aren’t politically consequential.

Stock markets are of interest not only to fat cats and the pinstripes on Wall Street. Because of the heavy pension liabilities of our cities and states, the economic and political stability of state and local governments is tied to long-term asset performance. That’s a pretty ugly story, inasmuch as many public agencies’ books are balanced on optimistic — in truth, fraudulent — expectations about the return on the investments held by their pension funds.

But there is a story that is closer to home, too. Writing at the Financial Times, Matthew C. Klein reports that almost all of the consumer-price inflation we’ve experienced in recent years — 88 percent of it — has come from four heavily regulated, partly government-run sectors: health-care services, housing, education, and prescription drugs. Of the four, health-care services is easily the most significant driver of inflation, followed by (in order) housing, education, and prescription pharmaceuticals. P. J. O’Rourke’s famous prediction about health care — “If you think it’s expensive now, wait until it’s free” — is turning out to be prescient, and the hilariously misnamed Affordable Care Act is expected to drive many medical expenses higher, including (the sums are staggering) the expense of Medicaid fraud.

The perverse fact is that government efforts to make politically important goods such as education and health care less expensive make them more expensive. This is because most government programs are designed as though supply and demand do not actually exist, or as though they are optional. Consider not only Obamacare but all of the other efforts we’ve made over the past several decades to make health care more affordable. None of those programs subtracts from the number of Americans needing or desiring medical services; none of them adds to the number of physicians, dentists, nurses, or pharmacists available to meet that demand, or to the number of hospital beds, clinics, or pharmaceutical factories. Demand is what it is, and supply is what it is, and the government simply dumps money into the equation. A larger quantity of money chasing an unchanged supply of goods is something close to the classical definition of inflation, so it is no surprise to see medical prices increasing far more rapidly than those of other consumer goods.

A similar dynamic is at work in higher education. The University of Texas, to take one example, has x number of undergraduate slots available, and nothing changes that. The federal government’s answer to that is to make free money available to consumers in the form of loans with no underwriting standards and concessionary interest rates. The University of Texas is run by clever people — some years ago, the then-chancellor caused a furor by inadvisedly confessing in public what everybody already knew, that the UT system has no financial need to charge tuition at all but simply uses the fee as a population-control measure. Throw more money at the universities and the clever men in Austin will discover new and exciting ways to soak it up. For Hillary Rodham Clinton, the answer to that problem is — surprise — yet more free money, and loans with even lower credit standards and more deeply discounted interest rates. You know what the universities will do in response? They’ll raise prices.

The interaction between competition and innovation has two parts: Competition is a spur to innovation that produces gains in productivity, and it also is the mechanism by which those gains are passed along to consumers rather than kept by producers in the form of higher profits. Contrary to what you might assume, there is a fair amount of innovation in non-competitive sectors, though a great deal of it consists of simply adapting advances in more competitive sectors to less competitive ones, for example the spread of information technology to university offices. Because higher education is not very competitive (it is dominated by government schools that will lose little if any revenue if a dissatisfied student — which is to say, a customer — decides to go elsewhere), you would expect to see gains in productivity consumed by university administration (in the form of higher salaries, bigger staffs, and larger budgets) rather than passed on to students in the form of lower tuition or to taxpayers in the form of lower subsidies.

The pattern repeats itself with housing, albeit in a more complicated, Rube Goldbergian fashion: The federal government has for decades been ensuring “liquidity” in the mortgage business by buying up securitized mortgages through government-sponsored enterprises such as Fannie Mae and Freddie Mac, indirectly subsidizing mortgage lenders to keep down interest rates, and using a splendid variety of carrots and sticks to keep credit standards as wobbly as Hillary Rodham Clinton on a 77-degree day. That’s the oldest used-car-dealer trick in the book: Don’t let the customer think about the total cost of the purchase, but keep the mark focused on the monthly payment. I once knew a used-car dealer who estimated that he’d made more than $50,000 on one ten-year-old 280Z he’d sold to a dozen different bums and repossessed a dozen times. That’s a fine way to run a used-car dealership, but perhaps not the world’s largest national economy.

Notice: While highly regulated industries such as health care and those with a very large government footprint such as education have seen prices skyrocket, the price of a computer has declined by an average of 18 percent a year since 1990, while the price of a television has dropped by 12 percent a year.

But that’s just technological innovation, right? We say that as though technological innovation were a force of nature, as though it were something that just happened. But that isn’t the case. Without robust competition — meaning real consumer choice, something that is largely absent from education and health care — there is less incentive for innovation, and still less incentive to pass along any savings to consumers.

Pouring an extra $1 trillion into health-care subsidies will not make medical care less expensive; it probably will end up making it more expensive. If you really wanted to bring down the cost of medical care, there are more-direct ways: You could increase the supply of providers by allowing non-physician specialists such as nurses to provide a wider array of services; you could lower taxes on medical devices rather than raising them, as Obama does; you could use immigration law and, if necessary, expedited licensure to add 5 million doctors to the market in a very short period of time. Similar approaches could provide savings in education and housing. We don’t do that, in part because very influential people have a financial stake in high prices for medicine, education, and housing. The National Rifle Association, which is widely regarded as a one of the capital’s most fearsome advocacy organizations, doesn’t spend a tenth of what the National Association of Realtors spends on lobbying.

What this is, in reality, is a very large wealth-transfer program. Government-school employees are the single most important Democratic interest group, and university employees are up there near the top, too. That is why every attempt to “make college affordable for American families” consists of transferring vast sums of money from American families to college administrators. Driving up housing prices transfers wealth from younger, poorer people looking to buy homes to older, wealthier people who own them. The same principle is at work in health care and health insurance.

You see the same economics at work across all government activity. As Andrew Flowers reports at FiveThirtyEight, in 1998 about 60 percent of TANF (Temporary Assistance for Needy Families) spending went directly to poor people; today, that figure is only about 25 percent, with the rest of the money being diverted to other programs, many of which benefit important political constituencies rather than actual poor people. Medicaid isn’t a program for poor people, but a program for large, profitable, politically connected firms bidding on contracts worth hundreds of millions or billions of dollars.

The strange fact is that we are not seeing very much inflation at all except in those areas in which the government is trying to make things more affordable. We could probably get the inflation rate down to practically 0.00 percent — if only Washington would stop helping.