Market Herald logo

Subscribe to Art of the Essay

Be the first with the news that moves the market

June’s just-released inflation data is startling. At 9.1 per cent, it’s the highest year-on-year rate we’ve seen since 1981.

Maybe it’s the highest we will see. Oil and other commodity prices are falling, real wage growth has turned negative, and retail inventories are thickening. None of that is fertile soil for continued inflation. If the only prices problem we had was the one that the past year of inflation reports tracked, I’d think the light was beginning to glint into the tunnel.

But it’s not. In February 2020, The Atlantic published a piece on the affordability crisis that was souring a seemingly strong economy. “In one of the best decades the American economy has ever recorded, families were bled dry by landlords, hospital administrators, university bursars and child-care centres,” Annie Lowrey wrote. “For millions, a roaring economy felt precarious or downright terrible.” Lowrey’s framing has stuck in my mind over the last couple 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 startling. The median home price in 1950 was 2.2 times the average annual income; by 2020, it was six times average annual income. Child care costs grew by about 2000 per cent — yes, you read that right — between 1972 and 2007. Family premiums for employer-based health insurance jumped by 47 per cent between 2011 and 2021, and deductibles and out-of-pocket costs shot up by almost 70 per cent. The average price for brand-name drugs on Medicare Part D rose by 236 per cent between 2009 and 2018. Between 1980 and 2018, the average cost of an undergraduate education rose by 169 per cent. I could keep going.

We papered over the affordability crisis with low prices for consumer goods, soaring asset values that kept richer Americans happy, subsidies for some Americans at certain times and mountains of debt: housing debt and student-loan debt and medical debt that kept the working class semi-afloat. But none of this addressed the core problem. For far too long, the prices of the things we need most have been growing far faster than inflation.

And so a weird economy emerged, in which a secure, middle-class lifestyle receded for many, but the material trappings of middle-class success became affordable to most. In the 1960s, it was possible to attend a four-year college debt-free but impossible to purchase a flat-screen television. By the 2020s, the reality was close to the reverse.

The affordability crisis makes some sense of the last few decades of our economic debates: a crisis of housing debt, a huge new program to subsidise health insurance costs, debates about making college free and forgiving student loans, proposal after proposal for the government to pay for child care and preschool, a bubble in crypto that attracted so many investors in part because it seemed like an elevator into wealth that anyone could ride.

But now asset prices are plummeting. The cost of loans is rising. The price of consumer goods and the energy needed to make and access them has shot up. Congress is getting stingier. The high prices remain, but the policies and palliatives we used to obscure them are crumbling. (Thankfully, the Affordable Care Act remains, and I shudder to think how much worse these years would be in its absence.)

There’s a famous video in which you’re told to keep your eye on a basketball being passed around, and, as you do, you miss an actor in a gorilla suit ambling across 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. It’s about the problems we learn to see.

The prices problem has been lurking for years, but it’s never been the core of our politics. Now it is. It’s on gas station signs and at the supermarket. It’s in rental contracts and tuition checks. Even if headline inflation falls, I don’t think we’re going to unsee the high price of a middle-class life anytime soon. The political party that dominates this next era will be the one that shares the public’s fury and puts prices at the centre of its agenda.

There are some early glimmers of what that might look like. The New Democrat Coalition, which is made up of 99 moderate-ish House Democrats, recently released a package of policy proposals meant to address inflation. But much of it is aimed at the affordability crisis that predates the rise in inflation. It includes legislation that would use federal transportation dollars to push cities and states to make it easier to build housing, that would ease worker shortages by raising legal immigration and that would cap insulin costs and allow Medicare to negotiate more drug prices.

If liberals look, they’ll find no end of ideas for bringing down prices across the economy. “I’ve been pulling my hair out about this stuff for years,” said Dean Baker, a founder of the liberal Center for Economic 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 we treat the market problems as givens rather than restructure those markets.”

Baker’s long-running argument is that the division between market and government is now, and always has been, false. “The idea of a free market is nonsense,” he said. “I’ve had a lot of fun with libertarians who say they want the government out of markets. And I say, ‘Oh, you don’t want to have corporations anymore?’ Those are legal entities.”

Or take drug pricing. For years, liberals have sought legislation to let Medicare bargain down drug prices. Conservatives counter that government can’t set prices; the market should be left to its own devices. Baker has long thought liberals mad to accept this framing of the debate.

New drugs can be as expensive as they are only because the government grants lengthy patents covering both the formulas and the production processes behind those drugs (which are, in many cases, built on publicly funded research). The market for prescription drugs is shaped by government-granted-and-enforced monopolies, and the result is exactly what any Econ 101 class would predict: high prices.

“You can argue on behalf of the policy,” Baker said. “Maybe it’s good for research and development. But we can’t debate whether the government is structuring that market.”

I’ve long liked Baker’s arguments for two reasons. First, they apply basic economic principles fairly, which is rarely true in politics. He’s relentless about deploying the arguments that are often used against government intervention on behalf of the poor to criticise ongoing interventions on behalf of the rich. Second, they slice through the ideological morass of markets versus governments to ask the more fundamental question: Who are our markets structured to serve?

Follow analyses like that and you’ll find an array of bad actors, cutting across partisan and professional lines. Housing is so hard to build in dense cities in large part because governments have made it hard to build. Those governments are disproportionately run by Democrats. “Blue places have chosen to make their housing supply inelastic — to use econ speak — and red places, by and large, have allowed housing markets to continue functioning and for supply to respond when there’s an increase in demand,” said Jenny Schuetz, author of “Fixer-Upper: How to Repair America’s Broken Housing Systems.”

But drug prices are high because Republicans support expansive patent protections but won’t let the government use its purchasing power to bargain down prices, which is how virtually every other rich nation holds down costs. We’re granting monopolies on one end 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 made itself the buyer for vaccines and then distributed them freely. And what about public competition for off-patent products? California Gov. Gavin Newsom, a Democrat, just announced the state has put aside $100 million to begin making its own low-cost insulin. If it works, it could become a national model.

Elsewhere, it’s professional lobbies that are the culprit. America has too few doctors, particularly primary care doctors, leading to higher prices and longer waits. A big part of the reason is that trade groups representing doctors have lobbied to restrict the supply, capping the number that we train, erecting barriers to letting nurse practitioners take over more primary care duties, and blocking efforts to allow doctors trained in high-performing systems abroad from being able to practice here.

This, too, has been a longtime bugaboo of Baker. We could ease physician shortages quickly by allowing doctors from Europe to come here freely and practice easily. Over the longer term, we could open more medical schools, make telehealth easier and expand the freedom of nurse practitioners to practice autonomously.

There are also an array of tariffs that the Biden administration could lift if it wanted to quickly reduce at least some prices. Some of these tariffs — like those on Canadian lumber — are meant to protect American industries. Others, like the tariffs that Donald Trump slapped on China, and that President Joe Biden has done nothing to reverse, are foreign policy tools. But if high prices are the problem, then perhaps new priorities should be set. An analysis by the Peterson Institute for International Economics found that a large but plausible trade liberalisation package could cut costs by $797 per household, per year.

Inflation crises in the United States tend to be driven, or badly worsened, by our exposure to petrostates. That’s true for the OPEC embargo of the ’70s 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 spike in fuel prices accounted for more than half of June’s inflation. That will probably ease. But a world where the bulk of America’s power was generated by wind and solar and nuclear and geothermal is a world where we’d be far less reliant on the fluctuations of the global energy market. (And while it seems almost ridiculous to have to say this, a world of unchecked climate crisis won’t be good for prices, either; there are no end of good reasons to decarbonise.)

For decades now, we’ve been in a politics of spending. The questions were about how much to spend and what to spend on. We’re moving into a politics that looks superficially similar but is fundamentally different: a politics of prices. How much to spend, and where to direct that spending, still matters. But it’ll be subordinate to a larger goal: bringing down prices across the economy. And that’ll be the work of years, perhaps decades.

This article originally appeared in The New York Times.

Ezra Klein joined The New York Times Opinion in 2021. Previously, he was the founder, editor in chief and then editor-at-large of Vox; the host of the podcast, “The Ezra Klein Show”; and the author of “Why We’re Polarized.” Before that, he was a columnist and editor at The Washington Post, where he founded and led the Wonkblog vertical.

More From The Market Herald

" Australia, China and the judgment of the Solomons

If you wanted to nominate a country in the world with zero strategic significance, the Solomon Islands might sound like a good shout.

" How do we fix mainstream political journalism?

There is a crisis in mainstream political reporting and it is damaging our democracy.

" Blockchains, what are they good for?

A year ago bitcoin and other cryptocurrencies were selling at record prices, with a combined market value of around $3 trillion; glossy ads

" Banana peels for Xi Jinping

There’s a Soviet joke that has long circulated in China, about a man who is arrested for protesting in Moscow’s Red Square by