Then and Now Part 1
by Dr. Doug Cardell
There's been a lot of discussion lately about how different life is for young people than it was for older generations. The young folks say housing costs were far less a few decades ago, education costs more, healthcare costs more, food costs more, and earnings are much lower, and they say this is true even if you factor in inflation and cost of living. So I've been asked to get to the bottom of this. Let's start by investigating healthcare and higher education. Discussion of these two involves the idea of a middleman. The purpose of the middleman is to bring the consumer and producer together to negotiate prices. In healthcare and education, the federal government has taken actions that, rather than allowing consumers and producers to negotiate, inject a government agenda and disrupt the negotiations. Young people today are correct in their perception that the cost of higher education and the resultant debt are out of control. However, those who blame free-market capitalism point the finger in the wrong direction. This problem was created by the government intervening in the free market in education. Government involvement had two purposes: to get more people graduating from college to ensure national competitiveness in the world market and to provide greater access to lower-income students. While these are both worthy goals, the government's approach worsened the problems. The government's action separated the producer and consumer and all but eliminated their ability to negotiate prices. In the 50s, 60s, and 70s, college was inexpensive enough that a student could work part-time and go to school full-time with little or no help from parents or government-insured loans. Because students were working to pay their way, they carefully chose a major that would lead to a productive career and a university they could afford. As a result, colleges tried to keep costs down to attract more students and to offer programs that would lead to careers. This behavior is what we mean by negotiating prices; the consumer controls the process by careful shopping. In the late 70s, the government expanded the program that had provided some assistance to lower-income students to provide larger loans to all students regardless of need; from 1980 to 2020, federal aid more than tripled in constant dollars. Some of this money went directly to students and some to colleges and universities. Reliance on federal money has the effect of removing the consumer, the student, from the producer, the educational institution. Students, flush with borrowed money, no longer felt the need to enroll in programs that would lead to a career but felt free to choose something more fun or exciting. They also became less concerned about shopping for an affordable institution since money was less of a factor. This lack of wise shopping means consumers are not negotiating the value with the producers. Setting 'fair' value is what free markets do best and what governments do poorly. Separating consumer and producer tends to reduce 'smart shopping' since, in this case, the consumer is not paying the product's full price. This separation of consumers and producers has the inflationary effect of allowing prices to rise without any accompanying increase in product quality. Subsidizing costs incentivizes price increases; in fact, public four-year institutions respond to rising federal student aid by raising tuition by $50 for every $100 gain. Educational institutions have no incentive to cut costs, and the evidence indicates that the cost increases are not devoted to improving instruction. In fact, in the past thirty years, instructional spending has decreased from forty-one percent to twenty-nine percent of institutional budgets. During that same period, tuition increased eight times faster than wages. Therefore, students thirty years ago who could, with a bit of help from their families, work their way through college with a part-time job are now eight times less likely to be able to do so, and many must rely on government aid or debt or both. Furthermore, thirty years ago, those students would have had a more significant percentage of institutional budgets devoted to their educations. This cost of tuition increase is independent of inflation. The best explanation for this increase is that, as described above, the increase in government aid causes the cost of tuition to rise. This explanation is reasonable when one considers that since students and parents are not paying the total value of the cost of education, they are more careless in choosing how best to spend the money they have available. As tuition rises, students and parents adapt to the increased cost rather than seeking lower-cost alternatives. If government aid were not available, students and parents would feel pressure to shop more carefully and ensure that every increase in the cost of education was accompanied by a corresponding increase in the quality of education received. The price increases, measured in 2019 dollars, began accelerating in 1989. In that year, the average cost per year was $3360, by 1999 it had increased to $5020, and $7560 by 2009. By 2019 the average cost of tuition had reached $10230, a three-fold increase. Since these are inflation-adjusted dollars, it is clear that the government injecting money into the education system is driving up costs. In healthcare, as in education, the producer is separated from the consumer, in this case by insurance companies. There is no advertising by healthcare providers seeking customers based on lower costs. The providers understand that the consumer cannot comparison-shop for less expensive alternatives. Keeping the free market from adjusting prices based on value as measured by consumers creates imbalances in the economy that other segments of the economy must correct. But this problem was caused by the government. It happened like this; in 1900, the average American spent about one hundred dollars per year in today's dollars on healthcare. As the quality of medicine increased, the costs rose to about five percent of annual income. Hospitals had a problem maintaining a steady income during the Great Depression, so in 1930 Baylor University Hospital offered a deal to 1250 Dallas public school teachers. The terms of this deal were that the teachers would each pay fifty cents a month and, in return, would get up to twenty-one days of hospital care at no additional charge. This plan quickly caught on with other hospitals and eventually became Blue Cross. It became somewhat readily available but not widely used until the government-imposed wage and price controls in World War II. Then, with a labor shortage and the inability of firms to increase pay to attract workers, they began to offer health insurance based on the Blue Cross model. In 1943, the IRS determined that these benefits should be tax-free, and in 1954, the advantage increased. By 1960, most firms offered health care benefits, and in constant dollars, between 1960 and 2015, medical professional incomes rose three hundred percent. During the same period, the median income for all workers was raised only by less than one-tenth that much. This inflationary behavior was entirely predictable since separating the consumer and producer by intermediaries prevents the consumer from 'shopping' for the best deal, so prices rise. There is apparent competition, but healthcare today is a medical monopoly. The solution to both education and healthcare cost increases is to gradually return both systems to the free market, trust the public to shop wisely, and bring costs back down. In my next article, Then & Now Part 2, I will address the young folks' issues of housing costs a few decades ago, food costs, and the change in earnings.
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