Tuesday, August 24, 2010
The Root Problem
What do homes, college tuition, and health care have in common? They have all had massive price increases in recent years. These increases were not funded by increased personal income. Instead they were funded by a combination of increased risky borrowing capacity, and redistributing the costs through government programs or private insurance. In the case of homes there is a current explicit debate about whether government price supports (like farm price supports!) would be a good thing. In the case of tuition and health care the "price support" effect is less understood. For all three there is little recognition that government subsidies are not free, partly due to current magical thinking around deficit spending (as discussed earlier). And because of this there is very slow movement toward the necessary final state: one in which prices are lower, so that individuals can make payments out of regular income, without the need for risky loans or deficit-funded government subsidies.