In housing, similarly, we restrict supply by making it harder and harder to build new units, especially in city centres where demand is the highest. Meanwhile, we subsidise demand by providing government-guaranteed mortgages and by offering huge tax breaks for anyone who purchases real estate, especially investors.
And in K-12 education, school districts around the country are trying to stamp out charter schools, which increase supply, while at the same time arguing for higher and higher per-pupil spending. The cost to educate one child for one year has increased 173% (adjusted for inflation) since 1970, and half the kids still can’t read.
The pathologies of these sectors all follow similar patterns. Politicians proclaim their desire to “protect” quality and “help” consumers. Industry lobbyists step up to write bills that restrict supply and subsidise demand. Prices go up. Providers become more and more reliant on the government for their profits. Consumers become more and more reliant on the government to afford homes, healthcare, and schools. Instead of investing in innovation, providers spend their money on political donations and lobbyists. Politicians become dependent on those donations. Consumers demand more and more help because prices are going up, and they’re getting ripped off. And the beat goes on. “It really is a self-reinforcing process,” says Kling. “People don’t understand that the subsidies drive up prices, so they keep demanding more.”
In a 2020 book, I called this phenomenon the Bleeding Heart & the Robber Baron, because it represents a political alliance between the compassionate and the greedy. It goes a long way toward explaining so much of what is wrong with American public policy and the economy. It also explains what Bloomberg has called the “chart of the century”. Below is economist Mark Perry’s infamous inflation chart, showing that certain sectors of the economy have seen dramatic inflation in recent decades, even while other sectors have seen prices decline.
The top seven components of CPI — all of them in the Bleeding Heart sectors of education, health, and housing — have seen inflation of 56-210% over the last 25 years. Meanwhile, almost all of the other sectors have seen prices remain flat or even decline by up to 90%.
Using Kling’s insights, the tech investor Marc Andreessen has labelled these Bleeding Heart sectors as the “slow” sectors. According to Andreessen, the reliance on government largesse leads to “slower productivity growth, slow adoption of new technologies… and then as a consequence of all of that, rising prices”.
Tragically, neither party wants to talk about this. Both Democrats and Republicans have participated in — and benefitted from — this new age of Robber Barons. Democrats fight new housing in the cities; they forgive student debt; they subsidise the consumption of health insurance and healthcare. Republicans, meanwhile, support big tax breaks for real=estate investors; they pass huge entitlement programmes that subsidise the purchase of subscription drugs; they back the privatisation of giant lending companies that enjoy de facto government guarantees and therefore dominate the mortgage market.
The biggest barrier to change will be those who benefit from the current policies, as many of us are addicted to one or more of these revenue streams. Providers, the modern-day Robber Barons, will resist any efforts to shut off the spigot of public subsidies. They will also fight any efforts to allow their competitors onto a level playing field. And understandably, the average American will be reluctant to give up his or her subsidies until the prices start to return to a normal level. “I wouldn’t describe the economy as addicted to it,” says Kling. “The economy would be fine if all of it went away. But I think the political system is addicted to it.” It’s not going to be easy, but the first step for any addict is admitting that you have a problem. And Arnold Kling is telling us the truth about our problem.
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