Noah Millman has a very good post up riffing on the debate over inequality that’s been going on at The Economist’s “Democracy in America” blog. Whereas many non-essential consumer goods have become much cheaper thanks to rapid increases in productivity in certain sectors (think, for example, personal computing), Millman argues that in essential and non-replaceable areas of our daily lives, the inequality gap is increased quite a bit:
“Consider some of the goods whose prices have certainly increased faster than the general rate of inflation:
– Higher education – Health insurance – Real estate (a proxy for safe neighborhoods with good schools)
The thing about goods like these is that there are no good substitutes. If the cost of health insurance rises inexorably, there’s not really anything you can substitute for that. Indeed, even if the quality of health care has improved in many ways – new surgical procedures, better prostheses, less-addictive pain medications, etc. – there’s no way to substitute other goods for health insurance to bring the overall proportion of health insurance expenditures back down. Instead, health care costs inevitably trade off against other goods.
Similarly with higher education – or education generally, using the cost of real estate as a proxy for the cost of public schooling. Any claims to an increase in quality in education will probably be laughed out of the room (houses certainly have gotten bigger on average, which is one crude measure of quality), but even if there were measurable increases in quality, there’s no real way to substitute other goods for education. If the cost of going to college goes up, you’ve got to pay it if you want to go to college – and the debt you take on will reduce your effective income well into the future. If the cost of living in a neighborhood with a good school goes up, putting it out of reach, you’re going to wind up living in a neighborhood with a not-so-good school. That your house in that neighborhood may be a bit larger than it would have been 25 years ago is small consolation: the essential good that you were trying to buy is now out of reach.
Which returns me to a frequent harping-point: inflation is unequally distributed across the basket of goods because productivity gains have been unequal in different sectors. When we see big gains in productivity in one sector and no similar gains in another sector, and individuals can adjust their purchases to take advantage of this, the economy as a whole experiences healthy growth without inflation, and everyone feels wealthier. But when we see no gains in productivity in an essential sector, that sector will chew up more an more of our income without giving us any higher return in terms of quality. And, since there’s always a segment of society wealthy enough not to be troubled by these kinds of changes in prices, what you get is a real increase in inequality.”
I think this is largely true. Increased productivity is a big part of this puzzle. But with healthcare it gets more complicated. You have this horribly byzantine system which essentially demands that healthcare is going to be expensive, productivity be damned. You get insurance through your employer; consumers are almost entirely divorced from the real costs of health services on the front end but pay those costs through higher deductibles, premiums, etc. on the back-end; health insurers are protected regional monopolies with strong lobbying arms – essentially glorified middle-men between employers, workers, and healthcare providers; and the medical supply-side – doctors, drug makers, medical equipment providers, hospitals, etc. – are also highly protected from competitive pressure, highly cartelized, and so forth.
You can’t take a system like ours and wring very much productivity from it, which is one reason I’ve always been dubious of the anti-reform arguments which centered on innovation. Innovation, which is obviously tied to productivity, is important, sure, but our current system isn’t actually that hospitable to real innovation.
Nor am I sure that productivity losses are behind the increase in housing costs and the crowding out of working class people from middle class neighborhoods. The roots of the housing bubble are complicated – and the fixes to our education system even more nebulous than the fixes to health care.
All of this – Noah’s post, and my quibbles with it – point to a crowding out of the middle class in America even if inequality is a poor standard by which to judge all of this. Perhaps saying that the rich are too rich is irrelevant to this conversation, but the fact remains that the middle class is less potent than before. While we may be able to afford entertainment goods and non-essential products we could have only dreamed of thirty years ago, we are being crowded out of the basics of a middle class life: education, housing, and health care. We are using easy credit and mounting debt as a band-aid. Even our retirement prospects have dimmed. Pensions are almost a thing of the past, but the 401(k)’s which we’re relying on now seem a bit terrifying and illusory after this latest crash. I wrote about this previously:
“The only thing the middle class can really count on is that they’ll be working longer before retirement; that in order for a family to compete they’ll need to have two incomes; and that the cost of college will be more prohibitive than ever once its time to pay for their kids to attend.
Sure, the cost of goods and services have come down in many ways. Food and entertainment is cheaper than ever. The internet makes us all a little more connected, a little more powerful. There’s a good deal of really good progress that has been made on many fronts.
But something is missing. Our future still feels foggy. That great middle class dream of a home, a family, a brighter future – these are not necessarily real anymore. The white picket fence has begun to decay. An asterisk of uncertainty is looming over all of us.”
This should worry policy-makers on both sides of the aisle. A dwindling base of families is a grim prospect for America’s future, and that’s just what a shrinking middle class promises to bring about.
