Phipps: "Free Stuff" and Inflation

January 8, 2017 03:56 PM

Eric Smassanow from Ballston Spa, New York has an interesting comment on inflation in different sectors:

"Your talk on inflation was interesting. The graph made it clear what areas of the economy are on the rise. The costs are going up to a large degree because we are subsidizing those with less. Health care, education and housing.

HHS, Dept of Ed and HUD. These are a big driver to costs going up. When less of us pay and more of us go, the price of that item goes up to those paying."

Thanks for watching and writing, Eric. The idea of other people getting free stuff from the government is a big complaint, but as far as inflation goes, it's more complicated.

College costs deserve a whole AgSplainer of their own, but in one sense you are correct. One big reason experts think college costs are rising rapidly is the student loan program. This is not exactly free stuff - just a loan guarantee, but student loan debt is now larger that credit card or auto debt.

Also, higher education has very low or even negative productivity growth - professors teach about the same number of students every year, for example. That said, a four-year degree is still a good investment in most cases. I'll talk more about that another time.

Now for medical care government involvement actually holds inflation down. If you count Medicare and Medicaid as free stuff, this chart shows how private insurance health expenditures have long been rising faster than government-paid.

Similarly, housing inflation cannot be blamed entirely or even mostly on government programs. In 2015, the entire HUD budget was about 45 billion dollars. But US housing sales that year were nearly one and a half trillion dollars. Even if all the HUD dollars were simply given away - which they weren't - they would have amounted to a little over 3% of the market - not enough to significantly boost housing inflation. Economists consider factors like tax incentives, low interest rates, and zoning regulations to be major causes of rising housing costs.

Finally, if giving free stuff to poor people is a major cause of inflation, why hasn't the 80-billion-dollar SNAP program caused above average food inflation?

The free stuff argument seems logical until you look at the big picture and do the math. It's just not that simple.

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