Tuesday, September 7, 2010

Who says there's no inflation?

Courtesy of The Economist comes this fantastic chart, which shows the runaway growth in costs of college tuition and related expenses over the last 40 years.

The Economist remarks further that cost increases at public schools have actually outpaced those at private schools, nearing a 15-fold increase over 40 years. Recall from this infographic (mentioned in this previous post) that 1978, the base year for this chart, was the year in which the federal government began placing restrictions on the dischargeability of student loan debt. Further restrictions were passed in 1990 and 1998 (in which year Congress completely eliminated the ability to discharge student loan debt in bankruptcy proceedings), both of which represent inflection points in the top line of the graph. These inflection points lend credence to Jess Bachman's thesis that the government's treatment of student loan debt is in fact to blame for increased costs at our nation's universities.

But I think there is more to this chart than simply a student loan story. Over the past 20 years or so, government-produced "core" inflation data has been modest at best, showing only slight inflation in consumer prices (hence the "Consumer prices" line tracking with the "Average hourly wage" line on the chart above).

But the sectors in which prices have risen the most steadily--education and health care (health care is unfortunately not included in the Economist's chart)--are those in which the United States is unable to outsource production or directly purchase goods from abroad. In other words, they are the service sectors.

Those industries which are the most US-centric (and least impacted by foreign trade) have in fact experienced runaway inflation, significantly outpacing wage growth and destroying the US wage-earner's purchasing power. The fact that "core" inflation has remained subdued, then, seems to be a function of lower labor costs abroad, and American firms' ability to take advantage of those lower costs.

I think this is a troubling trend for multiple reasons. If the US economy continues to struggle, or at least does not meet the pace of economic growth in traditionally low-cost labor areas (such as China and India), what will happen as wage rates among the nations equilibrate? If our (foreign) input costs on consumer goods increase, what will we then lean on to keep down our domestic rate of inflation? Will it be a decrease in our own wage rate? Will we see 1970s-style inflation, or worse, hyperinflation? None of these options seem particularly palatable.

In the near-term, widespread concerns about possible deflation are valid, but the Fed's insistence on flooding the market with money via historically low interest rates could prove an incredibly dangerous response. It would not take much of a change in the global economy for the "Consumer prices" line on the above chart to start behaving like the "College tuition & fees" line. That is an outcome that almost nobody in our country can afford.

[The Economist]

No comments:

Post a Comment