During the last several years, we have experienced a general rise in the price of many goods (especially food) thanks to an increase in the price of oil. Oil, of course, affects the price of many other items because oil ratchets up the cost of transportation, which is built into so many things that have to come to market.
But the price of oil is a tiny, little, marginal thing compared with the influence of another force.
One might have noticed that in real terms, most consumer goods are much cheaper (adjusted for inflation) than they were many years ago. This trend is most notable when we consider how innovation has reduced the cost of manufacture and has given us gigantic value for the dollar spent on electronics, for example.
But prices have gone up radically in a couple of areas. Health care has become far more expensive during the past three decades. The same is true of higher education. The rise in cost in both areas has been shocking.
How do we explain the increase in prices in these sectors as real prices have gone down in many others? The answer is simple: government subsidies. The government injects gigantic dollars into health care through Medicare, Medicaid, and a variety of state and local programs. Governments also provide tremendous subsidies to higher education via various forms of financial aid. Those subsidies drive large numbers of additional bidders for goods and services into those markets where they push prices upward. Only now are the market participants beginning to feel the bite. The reason is that prices have gone up enough to counteract the effect of subsidies.
Let’s note that there are no really significant subsidies in an area like computers, televisions, cars, or even clothing. Now, you can get more value than you could two decades ago for the same money. The difference is substantial.
But in health care and higher education, you are paying more and more for the goods being sought. We should note that there is an important exception. What medical procedures have been getting cheaper? Plastic surgeries and laser eye surgeries. Both of them are largely unsubsidized. No government aid or insurance, really.
All of this suggests that we have made a mistake by bringing so many government dollars into higher education and health care. We don’t know what the market may have given us in the meantime. But it may well have been more innovation and better service at a superior price.