How Government Makes Inflation Worse
This chart may look familiar to regular Hotline readers. This version is updated through June 2023.
Anything the government operates or subsidizes has exploding costs. So health care and education are the components of the economy with the steepest rise in prices over the last 25 years. Education is 75% run by the government and health care is 50% government.Meanwhile, technology, TVs, computers, clothing, electronics, and toys have fallen rapidly in price. These are goods that are highly impacted by international trade. It’s a good reminder that free trade keeps prices low and makes goods and services more affordable for the masses. Competition is a good thing.
In my 40+ year career, I never met an executive – where I worked, or at a client’s company – who actually liked competition. I think that’s because competition makes execs work harder and, in a market economy, competition never goes away. Those execs paid lip service to markets but I thought they actually regarded the inherent competition in markets as a necessary evil.
But customers -us – should prefer a market based economy to any other type, for the same reasons. Because competition inherent in market economies obliges companies to offer lower prices or better products and services, or both. That benefits everyone.
Reminder. A market is where a willing seller meets a willing buyer. Willingness is the key that unlocks the benefits. Thank you, Dr Friedman.
Alex Tabarrok is an economist who helps edit the Marginal Revolution blog. He has written extensively on this issue, asking “Why Are the Prices So G-d-mn High?”
He notes the same divergence between education and health vs. everything else.
He blames it wholly on the Baumol effect –i.e., higher labor costs.
Free trade might indeed lower the prices for consumers….but it also leads to wage cuts and unemployment for the producers. It is definitely a two-edged sword.
Education and health care are and have been perhaps the major source of new high-wage jobs for Americans. This is probably why we tolerate their galloping inflation.