The newly released June inflation data for the United States is staggering: 9.1%, the highest annual rate since 1981.
Maybe it’s the highest we’ll have. Oil and other commodity prices are falling, wage growth has turned negative and retail inventories are rising. None of this is fertile ground for persistent inflation. If the only pricing issue we had was what last year’s inflation reports recorded, I would think light was starting to show in the tunnel.
But it’s not. In February 2020, The Atlantic ran an article about the affordability crisis that was souring a seemingly strong economy. “In one of the best decades the American economy has ever recorded, families have been bled by landlords, hospital administrators, university and daycare treasurers,” Annie Lowrey wrote. “For millions of people, a booming economy seemed precarious or downright terrible.” Lowrey’s vision has stuck in my mind for the past two years.
I don’t think you can understand the broader price crisis without it. (I should mention here that Lowrey and I are married, but don’t hold that against her—or her work!). The numbers are staggering. The median house price in 1950 was 2.2 times the median annual income; by 2020, it was six times the average annual income. Childcare costs grew by about 2,000% – yes, you read that right – between 1972 and 2007.
Employer-based family health insurance premiums increased by 47% between 2011 and 2021, and deductible and cash-paid costs soared by nearly 70%. The average price of branded drugs in Medicare Part D increased by 236% between 2009 and 2018. Between 1980 and 2018, the average cost of a basic college education rose by 169%. I could go on…
We covered up the affordability crisis with low consumer goods prices, rising asset values that kept the richest Americans happy, subsidies for some Americans at certain times, and mountains of debt: housing debt, student loans, and medical debt that kept the working class semi-drowned. But none of this addressed the main problem. For a long time, the prices of the things we need most have been rising much faster than inflation.
And so a strange economy emerged, in which a secure middle-class lifestyle receded for many, but the material trappings of middle-class success became accessible to most. In the 1960s, it was possible to attend a 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 some meaning to the last few decades of our economic debates: a housing debt crisis, a huge new program to subsidize health insurance costs, debates about making college free and forgiving student loans, various proposals that the government pay daycare and preschool, a cryptocurrency bubble that attracted so many investors in part because it felt like an elevator to wealth anyone could use.
But now asset prices are plummeting. The cost of borrowing is rising. The price of consumer goods and the energy needed to produce and access them have soared. Congress is getting meaner. Prices remain high, but the policies and palliatives we used to cover them up are crumbling. (Fortunately, the Affordable Care Act remains, and I shudder to think how much worse these years would be without it.)
The pricing issue has been lurking for years, but it has never been at the heart of our policy. Now is. It’s on gas station signs and in the supermarket. It’s in lease agreements and student tuition checks. Even if total inflation drops, I don’t think we’ll stop seeing the high price of middle-class life anytime soon. The political party that will dominate this next era will be the one that shares the public’s fury and puts prices at the center of its agenda.
There are some early glimpses of what this might look like. The New Democratic Coalition, made up of 99 moderate MPs, recently launched a package of policy proposals aimed at fighting inflation. But much of it is focused on the accessibility crisis that precedes rising inflation. It includes legislation that would use federal transportation funds to pressure cities and states to ease housing construction, that would alleviate worker shortages by increasing legal immigration, and that would limit insulin costs and allow Medicare to negotiate higher drug prices.
If liberals look, they won’t find many ideas for lowering prices across the economy. “I’ve been worried about these things for years,” said Dean Baker, one of the founders of the Center for Economic and Policy Research, a liberal institution. “We can’t just accept markets as structured and then use tax and subsidy policy to alleviate the situation. A real big problem with progressives is that we treat market problems as a fait accompli, rather than restructuring those markets.”
Baker’s old argument is that the divide between market and government is now, and always has been, false. “The idea of a free market is absurd,” he said. “I had a lot of fun with libertarians who say they want government out of markets. And I say, ‘Oh, you don’t want to have corporations anymore?’ They are legal entities.”
I have long appreciated Baker’s views for two reasons. First, they apply basic economic principles fairly, which is rarely true in politics. He is relentless in using oft-used arguments against pro-poor government intervention to criticize current interventions that benefit 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 reviews like this and you’ll find a host of bad actors, across all party and professional lines. Housing construction is so difficult in dense cities mainly because governments make construction difficult. These governments are disproportionately run by Democrats. “
Blue seats (Democrats) chose to make their housing supply inelastic – to use economic parlance – and red seats (Republicans) in general allowed housing markets to continue functioning and supply to respond when there is an increase in housing. demand,” said Jenny Schuetz, author of “Fixer-Upper: How to Repair America’s Broken Housing Systems.” [Reformas: Como consertar os sistemas habitacionais defeituosos da América].
But drug prices are high because Republicans support broad patent protections but do not allow the government to use its purchasing power to negotiate prices, which is how almost every other rich country keeps costs down. We are granting monopolies on the one hand and refusing to use purchasing power on the other. The Warp Speed program for vaccine development was an example of how it could be done otherwise: the government became the purchaser of vaccines and distributed them free of charge.
And what about public competition for off-patent products? California Governor Gavin Newsom, a Democrat, has 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 driven, or exacerbated, by our exposure to petrostates. That goes 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, rising fuel prices accounted for more than half of June’s inflation. It will likely go down. But a world where most of America’s energy was generated by wind, solar, nuclear and geothermal plants is a world where we would be 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 will not be good for prices either; the good reasons to decarbonize are endless.)
We have been in a spending policy for decades. The questions were about how much to spend and what to spend it on. We’re entering a policy that looks similar on the surface but is fundamentally different: a pricing policy. How much to spend and where to direct those spending is still important. But it will be subordinated to a greater objective: to reduce prices throughout the economy. And that will be a job for years, maybe decades.
