United States inflation fact of the day

…just as the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy…

How did you guess it was health care, higher education, real estate, and prescription drugs?

…In January 1990, those four product categories only accounted for 30 per cent of the money spent on consumption by the average American. (Housing was about half that.) Even after more than a quarter-century in which prices of these goods and services rose significantly faster than everything else, these four sectors still account for less than 40 per cent of total consumer spending.

Within health care, dentistry has seen the highest rate of price inflation.  Televisions, however, have been falling in price at the rate of about 12 percent a year since 1990.  Luggage, “dishes and flatware,” and household linens are all down in price dramatically, as are telephone and communication services.  Durable goods are down in price by about a third.

That is from Matthew C. Klein at FT Alphaville.


Funny how all four sectors rely heavily on government subsidies.

What is the Voxsplain response to your comment?

I think the most obvious rejoinder is that those 4 aren't subject to intense foreign competition. On the other hand, neither is the US agricultural sector.

Also, I'd separate real estate from the other three. Real estate is subject to physical scarcity to a higher degree than the other three items are. And furthermore it's odd that you would break health care and prescription drugs up separately.

I think there's some fundamental issues with the original framing with this topic. Not in a biased way, but more in a muddled fashion.

Agriculture is the counter example, huge subsidies, low prices.

I think the thread in the four is not subsidy, it is restricted quantity supplied, for a variety of reasons.

Agreed. If regulation were the root cause, it seems odd that dentistry, the least regulated health care sector, sees the largest increases.

Probably the increases in health care are more in the past. As dentistry becomes more regulated, prices increase faster towards the healthcare average. All dentists want to be doctors.

Given that real estate is a leveraged good, you would expect to see its price rise as interest rates fall. I'm not sure that factor should count as inflation. It certainly does muddle the explanation.

Dentistry gets more government subsidies than any other sector of health care?

This is not a post from Prof. Tabarrok, so mocking its lack of actual thinking before writing isn't as easy.

Or to put it another way, dentists are the least likely to be worried that about every aspect of commercial life be governed by a gun. Which might just explain this recent incident involving a dentist - 'NEWARK, N.J. (AP) — The state has suspended a dentist whose practice has been linked to more than a dozen infections that caused one death and required patients to undergo follow-up heart surgeries.

John Vecchione signed an agreement this week to suspend his practice until a hearing is held in early October.

A report released last month by the state Department of Health uncovered 15 patients who developed enterococcal endocarditis after undergoing oral surgery using intravenous sedation at Vecchione's practice from December 2012 to August 2014.

Twelve patients required heart surgery, and one patient died from complications.

Vecchione agreed to improve his procedures after inspectors visited his practice in late 2014 and early 2015, but inspectors who visited his office in Budd Lake, Morris County, last month said the problems persist.

"The deficiencies still present in Respondent's practice after multiple prior inspections and the issuance of a Department of Health report demonstrates a lack of judgment and insight into the affect that breaches can have on the safety of the treatment environment," the interim consent order filed Wednesday said.' https://www.yahoo.com/news/state-suspends-dentist-over-reports-infections-1-fatal-154242404.html

What portion of the dentistry increase is due to orthodontics? The US has an obsession with cosmetic dentistry and orthodontists are more important than heart surgeons. Nobody wants their kid to have even slightly less than perfect teeth and are willing to pay whatever it costs to make them look like movie stars.

Exaggerate much?

The overweight plumber who fixed my shower said he was thinking of getting braces.

Government imposed barriers to entry, absolutely. The ADA makes the AMA look like the Bar Association. It's virtually impossible to accredit a new dental school. There's been no net increase in dental graduates since 1980. Despite the population growing 40%.

I had a business idea a while back. Dental cruises. Put cheap Russian, Indian and Israeli dentists on major cruise lines taking off from US ports. Once you reach international waters have them do procedure. For a US patient getting major dental work, it easily pays for the cost of the trip.

http://www.columbia.edu/itc/hs/dental/d7104/lecture15.pdf has dentists per 100,000 of population from 1950 to 2020. I'm not seeing any massive decrease since 1980. BLS (http://www.bls.gov/ooh/healthcare/dentists.htm#tab-6) says there's about 151K dentists at the moment and that's expected to grow by 18% by 2020. Doesn't seem like we are suffering from a fixed cap of dentists at all.

Aren't health care and education classic examples of Baumol's cost disease?

There Is No Inflation. Also, it doesn't matter if there is. Also, chocolate rations are up.

Ah yes, the news from Venezuela.

Yeah, we will finally get the hyperinflation we have been promised non-stop since before 2007. Anytime now.

San Fransisco Real Estate?

Silly me, I thought hyperinflation (supposedly caused by monetary policy) would have a much more comprehensive effect, I mean, all those Proles spending those ubiquitous worthless fractionary reserves banking-originated digital dollars we all have been warned about--over and over again. For all its nefarious efforts, the FED seems indistinguishable from Chinese investors. https://www.theguardian.com/business/2016/may/16/chinese-pour-110bn-into-us-real-estate-says-study

If you can avoid those four, you are golden.

Luckily of the four, I only need a new tv.

If I'd asked you what are the four most regulated (private) industries in the United States, what would you say?

Maybe not exactly the above four, but not far off either...

Anecdote warning! An acquaintance of my wife married to a K-12 textbook sales guy, they live in The Woodlands in Texas. If by regulation you mean "keep the children away from sexual education"....yes, it's heavily regulated.

.....Com'on now--- just think how expensive healthcare/dentalcare/prescription-drugs would be now if the government had not massively intervened in these markets to make them all very affordable.

When President Hillary gets government single-payer in place --- it will all be free (if one survives the wait times and rationing).

If we deny people healthcare they need, prices will fall until they become affordable. This rationing never fails, a fact the Ferraris in my garage and the Fabergé eggs in my cupboard bear witness of.

Probably not the "most regulated" but they might be four where both public AND private interests want to restrict supply.

Where does food rank on this list?

The last I heard groceries were getting cheaper as a percentage of income still, but actual food consumption as a percentage of income was coming up, because people were eating more in restaurants.

I expected food costs to be up also. Some things in the grocery seem much more expensive to me, but perhaps it's just what I buy. I do miss less expensive beef.

Seems like food costs are subject to substitution effects. If X gets more expensive, buy Y. There are very few things in a grocery store for which there isn't *some* decent substitute.

The problem is that food is adjusted for substitutes. They don't care about culture at all. Chicken, pork, beef are all substitute for each other by the way inflation is calculated. Also, the basket of goods are calculated with the east coast white people's data, so it does not fully represents the entire country.

1) Health care - employer and individual mandate, tax preference for insurance, professional licensing

2) Higher education - Federal tax credits and student loans, tenure

3) Real estate - Mortgage interest deduction, zoning

4) Prescription drugs - employer and individual mandate, tax preference for insurance, patent protection

So in each case, a government subsidy and restriction on supply. Also note that doctors and teachers are very high status and their compensation isn't likely to be reduced anytime soon.

1) Health care – employer and individual mandate, tax preference for insurance, professional licensing
- How does this generate inflation versus simply a higher price than would otherwise have prevailed?
2) Higher education – Federal tax credits and student loans, tenure
- What's the go to market conservative policy for education HS and below? School vouchers. But wait, tax credits and student loans are *even better* than vouchers. After all, with credits and loans you are still spending your own money! whereas with vouchers you're spending someone else's money. So you should be seeing higher inflation in primary and high school than college.
3) Real estate – Mortgage interest deduction, zoning
- Once again this may create a higher price than otherwise prevailed but how does that actually generate inflation. Did we have a massive repeal of zoning laws in 2008 when real estate prices fell?
4) Prescription drugs – employer and individual mandate, tax preference for insurance, patent protection
- Errr yea except dentistry had more inflation than any other part of the health care sector. Except dentistry gets the least of all of those beneficial policies. You aren't mandated to have dental insurance, even good dental insurance usually only covers a portion of cost, and while there are some new patent protected dental innovations out there, most of the technology is stuff off patent and made by plenty of suppliers....needless to say there's lots of dentists competing against each other so plenty of competition on the provider front.

Also look at energy and food. Are you telling us seriously there aren't major gov't imposed restrictions on supply in both of those sectors? Agriculture is one of the last industries to enjoy major protectionism in most developed nations. Last time I checked, there's a gov't approved multi-state cartel to keep milk prices high. Agriculture enjoys all types of subsidies, price floors and other gov't regulation (not to mention other kickbacks like special tax rates, low grazing fees on gov't land and so on).

Likewise energy....how easy is it to open an oil rig or build a new power plant?

Yet despite massive gov't regulation both of these sectors seem absent from inflation in recent years.

2) Higher education. Tenured faculty constitute a decreasing proportion of all faculty as universities rely ever more on adjuncts. Universities are not-for-profit (in the conventional sense), so they are more like bureaucracies, which get bloated. Note that spending on faculty has remained relatively constant but spending on administrators has increased substantially. The mantra that everyone should go to college (false) means that lower quality students are now attending (and doing essentially remedial work for the first couple of years) and college in general has become more like an all-inclusive resort with a proliferation of amenities. Higher education is partly a positional good, so even though the best universities might be able to scale up more than they have, they do not want to tarnish their brand in the rankings (e.g., a lower acceptance rate means a higher ranking), which increases prices (and it is difficult to create a new, prestigious university to compete).

Higher Education

1960's to 1970's - GI Bill

1980's to 1990's - Financial Aid

2000's and beyond - Federal Loans

NB: It says "higher education" not K-12. Professor is high status... teacher is not.

Good point. But note that much of the real estate multiplier is due to school districts (i.e. K-12.)

I only see two real factors here (health and education.) I think Eliz Warren gave a talk on this topic a decade or so ago.

Professors Professes their love for their Profession.

Profess -
1. claim openly but often falsely that one has (a quality or feeling).
3. teach (a subject) as a professor.
4. have or claim knowledge or skill in (a subject or accomplishment).

Note, "claim" knowledge or skills, not necessary have knowledge or skills.

It's a good thing that virtually no one owns or rents real estate, nor uses health care, prescription drugs or higher education.

Otherwise, inflation might be a concern.

Any time now, any time now.

Inflation: More inconsequential symptom surfing.
Problem is deeper, more fundamental.
We're in Anthropocene. That means human cultural selection increasingly drives natural selection.
That means we're increasingly doing natural selection with monetary code.
FAIL. Exhibit A: Sky. Exhibit B: Ocean.
Economists don't place / consider code, including monetary code, in a physics / evolution / complexity context.
This omission cripples their arguments.
Culture, Complexity & Code; an Abstract of Sorts: http://ow.ly/Zny2a
The Price Is Wrong: http://ow.ly/5DlX303zDDQ

Goods can be imported. Most services cannot. We need to weight inflation measures to services.

Great point. Next time the President is a Republican, I bet the NYT will recommend doing the same thing.

We should keep (re)defining inflation such that so long as USD is the reserve currency, there can be no inflation. What could.go wrong?

"[T]hese four sectors still account for less than 40 per cent of total consumer spending". That's the main finding here. Of course, many if not most people don't have any expenses in any of the four categories (I'm not sure what falls under "real estate"). Baby boomers, the largest cohort, are too old to have children in higher education and too young to have lots of health care and pharmaceutical expense. And many have owned the same home for years. Their time, however, is about to arrive, when their grandchildren go off to college and the boomers start consuming lots of health care and pharmaceuticals. That 40% figure is likely to go up. Baby boomers have been enjoying their middle years, but they are about to come to an end. Ugh.

If baby boomers try to downsize their housing prices should fall.

Newer homes are more expensive. Even the smaller ones. Thus, downsized is not an option.

Televisions, however, have been falling in price at the rate of about 12 percent a year since 1990.
So TVs are, or have been for a while now, free. Who knew?

I'm pretty sure you could get a 1990 TV at a garage sale for under $5.

Of course this gives the lie to the whole inflation calculation - economists look at a 1990 20" TV, and a 60" high def 2016 TV, and say ZOMG this is at least 15x better! But of course it is not. The 1990 family was just as happy with its TV as the 2016 family is, because in both cases their expectations were met.

Says your crystal ball?

> The 1990 family was just as happy with its TV as the 2016 family is, because in both cases their expectations were met.

This doesn't seem borne out by the evidence. Americans today watch much more TV than they did in 1990. Not only that, but time spent on close TV substitutes, most notably movie attendance, has fallen precipitously.

Interesting point - although I'd be more likely to attribute that to the broader choice that's available on TV these days. Especially the growth of on-demand services, which means you no longer have to watch "whatever's on." Still leaves open the broader question of whether that's a good thing - people are watching more TV; does that make them happier?

"Still leaves open the broader question of whether that’s a good thing – people are watching more TV; does that make them happier?"

Probably not, what else should we eliminate from GDP and inflation statistics ('cause they don't fill my souk's void, I didn't even know they were supposed to)?

You're correct; GDP does not, and is not intended to, measure a country's well being. On that I agree with you 100%

"people are watching more TV; does that make them happier?'

A: No


For real-estate, let people subdivide and build.
For medical care the feds subsidize demand while the states restrict supply. Stop that.
For education admit that increases in spend seem not to make students learn significantly more, so target spending reduction rather than PISA and similar test and if you cannot get the students to learn more focus on finding what is most valuable for them to learn. (Also admit most education is now free respected credentials are why people are paying the big money to get, thus more private schooling is not productive.) Youtube, Tutors and PBS educate, schools mostly test.

Oh and legalize drugs, you should only need a prescription for antibiotics.

I'm seeing a lot of "XYZ has more inflation because of all these gov't regulations/subsidies/supply restrictions etc.". This argument doesn't work.

Suppose I told you TV's happened to have a huge inflation rate. Well it would be easy to come up with all sorts of regulations about TV's. For example, in the 90's the FCC imposed a schedule for TV's to switch over to being able to receive HD signals. Making TV's requires all sorts of chemicals and generates all types of waste that has regulations on disposal. Manufacturing is subject to all sorts of zoning regulations and if you take it overseas you have all the complexity of customs, tariffs, international trade treaties, etc. Needless to say there's plenty of patents around TV's and making them so you have your 'gov't restriction of supply' going on too.

And yet TV's have gone down in price thereby offsetting inflation in other sectors. Whatever sector happens to have inflation will have plenty of gov't actions that will come to the top of one's mind while deflating sectors it is easy to forget just how much gov't interference there is (think carefully about agriculture, food, energy and transportation for example.)

This also represents a misunderstanding of what inflation is, a sustained increase in price for like goods. A law restricting who can be a dentist, for example, will increase the price dentists charge. But once that price increase is accounted for, there's no particular reason to expect inflation in that sector. Unless it's harder to become a dentist in 2016 than 2015, the inflation rate due to gov't interference is probably 0%!

"A law restricting who can be a dentist, for example, will increase the price dentists charge. But once that price increase is accounted for, there’s no particular reason to expect inflation in that sector. Unless it’s harder to become a dentist in 2016 than 2015, the inflation rate due to gov’t interference is probably 0%!"

A regime that fixes the supply of dentists, while the general population grows would (and does) look exactly like this. It's not harder to become a dentist in 2016 than 2015, but it is harder to see one. There's the same number of dentists, but every year their potential customer base gets slightly larger.

What you're describing would fit NYC yellow cabs (there's a fixed number of medallions and they don't increase them with population changes). The # of dentists is not fixed by some quota, the education and testing required is a barrier to entry in the market. As the population increases so does the # of people who jump the hurdles to become dentists.

Everybody's mentioning government regulation, and I by and large agree with the sentiment. But I'll point out another common underlying theme between the four: Signaling. A large proportion of education is clearly signaling. It's pretty clear that relative to masses of people studying these subjects, hardly anyone uses Spanish, calculus or art history on the job. As for medicine, Robin Hanson's pretty convincing on the subject. The vast majority of healthcare spending has virtually no effect on health. But we still seek it anyway, because showing sick loved ones that they're cared for is important.

Real estate obviously at its most basic, serves the basic need of shelter. But I doubt that much of the increase in real estate cost has been driven by the cost of building dwellings. As far as I can tell housing in West Texas, Alabama, and upstate New York are still pretty cheap. I would strongly suspect that nearly all the real estate inflation has been concentrated in a small proportion of "prestige" zip codes. Manhattan, South Beach and San Francisco obviously. But even in mid-market suburbs, it seems that the "hip" core areas have gotten much more expensive, while the boring tract housing developments have barely budged. Charles Murray seems pretty instructive here. In 1980 most white Americans pretty much viewed each other as equals. Now upper-class educated whites want to insulate themselves from blue-collar whites and are willing to pay a sizable premium for the privilege.

Suburbs and cities have always had income segregation in housing, it only in small towns that the rich and poor lived together and even in them there was the wrong side of the tracks.

Many of the hip areas are also quite walkable, while zoning often makes it illegal to build in manner that creates walkable neighborhoods.

Since the cost of living is measured by what we spend on market basket of goods+services , when the price of goods falls because technological innovations then math tells us the the ratio services/(good+services) will be greater than 1. This has going on since the industrial revolution.
Also if you include the imputed rents for owner occupied homes, the housing share of consumption is about 30% which is what it has been for since food got cheap.

Correction: it should be the "change. In the ratio "

Two of the four -- higher education, real estate -- are crucial in determining class status and ability to form families on favorable terms.

I'd say the other two, healthcare and prescriptions are pretty as well. Just not as visibly so. Particularly in the US where health insurance is historically tied to employment status. People who work for high-status firms like Goldman or Google, even if they're just starting out and aren't paid very highly, typically have very good medical plans. Among rich people, going to the "best doctors" and getting red carpet treatment at top hospitals like Lennox Hill is a frequent back-handed boast.

I'm wary of any article about inflation which gives real estate a prominent place. Just wait until the next crash. Similarly, energy prices and precious metals will from time to time be the sources of the highest price increases -- until they eventually crash. (Julian Simon's long-run prognostications have a lot of value, but any finite price series might find itself starting from a trough and ending near a peak.)

And yes, trying to connect these four markets to government interference is weak; there are dozens of other markets that have as much or more government intervention, but have not experienced such high price increases. (Banking, airlines, law, agriculture, and automobile manufacture to name just a few.)

Instead, as other comments have said, factors such as Baumol's cost disease and the relative lack of foreign competition are more likely the key similarity behind those four markets.

I wish I could edit that to +0.75

There is a real problem of real estate demand exceeding supply that local zoning often leads/adds to. For example, San Francisco ""housing prices have been appreciating at a steady 6.6 percent pace for the last 60 years. In real terms—that is, adjusting for inflation—they’ve been appreciating at about 2.5 percent annually." http://cityobservatory.org/the-long-road-to-san-francisco/

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