As my fellow “Show Me” State native Sam Clemens once said, “Everybody talks about it but nobody does anything about it.” In his case it was the weather; in mine high prices. A lot of people are complaining about how high prices have become and that President Trump ran on lowering prices but in many cases has accomplished the opposite.
So I’m going to put the question on the floor: how do you bring down prices? Or at least stabilize them? This is something of a digression but allowing prices to rise by 2%, 3%, 5%, or 10% a years is not in the charter of the Federal Reserve. Its empowering legislation gives it a dual mandate: stabilize prices and maintain low unemployment. I recognize that under the circumstances it’s a lot easier to allow prices to rise slowly (however you define “slowly”) but that’s not the Fed’s mandate. The Fed has succeeded nicely in controlling the rate of increase in prices (until the Biden Administration) but has failed miserably at stabilizing prices.
Back to the subject. I can only come up with a handful of ways to stabilize (or even lower) prices. The first and most obvious would be to reduce or eliminate tariffs and/or import quotas. Probably the most effective thing that President Trump (at least says he) is doing is raising the import quota on Argentinian beef. That would, indeed, decrease the price of beef but it’s not a move that will be popular with the struggling ranchers of beef cattle.
The two other things that would have an economy-wide impact would be reducing the prices of healthcare and/or energy.
By my back-of-the-envelope calculation healthcare prices account for something between half and a full percentage point of the present annualized 3% inflation when you reckon on both direct and indirect effects. That’s a sizeable chunk but, unfortunately, stabilizing let alone trimming healthcare prices is a devilishly difficult task. Increasing productivity has been elusive; increasing production of healthcare takes longer and costs more than raising more beef cattle does.
A lot of the emphasis has been on increasing healthcare subsidies—at least that’s what the Senate Democrats have been emphasizing. That only reduces the price of healthcare under certain specific circumstances. Those circumstances include increasing revenue to pay for the increased subsidies, i.e. more taxes, and measures are taken to ensure that consumers capture the effects of those subsidies. Lately none of those have been accomplished. I should mention that increasing taxes for healthcare subsidies only reduces prices if you actually increase effective taxation (not just nominal which is what higher rates does) without reducing employment or investment. Sounds like a tall order to me.
That leaves cheaper energy. That is something that might be accomplished in the relatively short term including by executive order by reducing the regulations that limit frakking, just to cite one example.
So what else? Does anyone have any ideas for reducing prices in the near term that I haven’t mentioned?
Raise taxes, cut government spending, and raise interest rates.
Macroeconomics truths still hold. The less “money” that is in the hands of entities for consumption, producers have less leverage to raise prices.
Of course, those three steps are likely to induce a slowdown or recession in growth which the government is loathe to do.
Regulatory reform could lower prices; i.e. permitting and other regulatory or legal restraints on competition or production are significant costs for goods and services beyond health care.
I suspect the US is reaching the limits of lowering prices via the paradigm of outsourcing and globalization. Any benefit from lower prices in outsourcing is outweighted by the costs (security of supply chains, jobs).
I think you are missing the main issue. Whatever the Fed’s mandates are, and they are mutually exclusive, its age old policy is to maintain an inflation of about 2%. Supposedly, this policy, in good Keynesian theory, will maintain a steady growth rate and full employment (only 5%, or so, unemployed).
Falling prices, on the other hand, are the ultimate horror show. They are deflation, disinflation, and they are fixed in the the Feds’ minds as the Great Depression.
The great source of falling prices today are China’s super-automated, super-efficient, super-optimized factories, vertically integrated manufacturing companies, and optimized, high-speed transportation networks, all fed by the cheapest by far, and still falling, energy costs. That is what Trump’s tariffs and embargoes are intended to defeat.
Falling prices would play into Chinese hands, and eliminate what industry is left in Europe and North America. Trump’s donors will insist on a fully protectionist, actually autarkical economy to protect their own wealth.
To place that in some perspective, according to the Chinese Ministry of Industry and Information Technology, fewer than 1% of China’s factories meet the standards you’re describing.
Yes, China is moving aggressively in the direction of greater automation and necessarily so as a glance at its population pyramid clearly shows. The bump in population produced during the “Great Leap Forward” are getting old now.
But that’s the future not the present. Today China still owes today’s manufacturing dominance to an enormous amount of hand work.
Meh. We have never actually tried to lower prices. If you want to lower health care spending you could try universal Medicare. It would cut provider incomes so hospitals would be unhappy. Targeted reduction and elimination of regulations could in theory work, maybe especially in the housing sector. In reality it would mostly go to favored donors but maybe it’s worth a try.
Steve
I don’t believe that any healthcare reform that fails to alter incentives will reduce healthcare spending.
For one thing higher costs are built right into the structure of the practice of medicine. Specialists are paid more so more of those seeking to become physicians want to be specialists. In 1969 there were 19 specialties; now there are 38. In 50 years there will probably be 100. All of this evolution without much regard to improvement in outcomes.
Now you can make a sort of parlor game of referring people to different medical specialists. It’s hard to keep costs down that way.
I have my hobbyhorses too so I guess we can honor this one a bit. Yes, the US has, in percentages, fewer PCPs and more specialists than almost any other country. We pay specialists more than PCPs. However, Medicare pays specialists less than private insurers pay. PCPs for that matter. So if your goal is to reduce total health care spending universal Medicare has that possibility. In reality the politics would kick in so who knows what would really happen. (The other advantage is that all pay rates would be in one entity so if you wanted to have better control of costs you could do that, at least on the personnel side.)
If you want to address the PCP/specialist imbalance it’s going to be difficult as it’s partly cultural. I think you could take a stab at it by slowing/stopping the increase of pay of specialists while continuing to increase the pay of PCPs. You could also look at increasing the scope of practice of mid-levels but the literature on this is mixed. You can pay them less by the hour but you end up paying OT if they work over 40 who you largely dont do with docs. More importantly mid-levels are mostly controlled by the networks and they specialize in finding more creative ways to use them and oil for more. So they cost less per hour but the networks have them do a lot more.
Universal Medicare will only bring down healthcare costs if Congress commits to reducing spending which they have been very reluctant to do. Eliminating SGR was a sign that they’d given up. That’s why I think that a major structural change is necessary.