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Why Americans are bummed out about the economy (www.cnn.com)

submitted 5 months ago by [email protected] to c/[email protected]

127 comments fedilink hide all child comments

US consumers remain unimpressed with this progress, however, because they remember what they were paying for things pre-pandemic. Used car prices are 34% higher, food prices are 26% higher and rent prices are 22% higher than in January 2020, according to our calculations using PCE data.

While these are some of the more extreme examples of recent price increases, the average basket of goods and services that most Americans buy in any given month is 17% more expensive than four years ago.

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[–] [email protected] 28 points 5 months ago* (last edited 5 months ago) (3 children)

Disclaimer: I don't have a degree in economics. I read your post and I think I have countering points to make, but if you can rebut my points below specifically I'll try to listen. (Also just want you to know I'm not the one who down-voted you since you seem to be arguing in good faith and I'm all about that. Sometimes I'm wrong.)

You talk about making things more cheaply and that resulting in a cheaper product. If companies agree to all charge the maximum they can get away with, it kills industry price competition (a foundational necessity of functional capitalism) and renders price elasticity a falsehood. If Coke and Pepsi both charge 1.50 for a can of cola, it doesn't matter if increased productivity means Coke can make a can for 20 cents instead of 30 cents - the savings are just converted into extra profit. You can see this in record profits for many sectors as productivity has increased - the savings of needing fewer people to do the same work isn't passed on to customers. As proof, here's an article about how much more things cost today than in the 1970's (adjusted for inflation). Yet we know that people are over 3x as productive per person over the same period, so clearly companies are not passing along savings in the form of cheaper goods. I know more than productivity affects price, but those factors would have to be overwhelmingly more costly to justify the increase and I don't think things like shipping are that much more expensive.
Inelastic demand for necessary products like fuel, utilities, food, health care, etc also means that in many industries increased productivity does not need to translate to savings. Pharmaceutical companies, either as an industry of multiple providers or where they hold exclusive patents, will raise prices of products to whatever they can get away with because people will either pay or die. So again cheaper products and competition is a myth.
Speaking of getting fewer people to do the same work, companies lay off people all the time when individual productivity or automation goes up. You talk about employing 1/5th the Bobcat workers and net lost 4 workers being forced to find other work. This may make economic sense but it's terrible societal sense. It results in financial insecurity and homelessness among educated, capable people with all the associated national problems like mental health, crime, drug addiction, etc.
As US economics function now, companies do not pass along the value of increased productivity to their customers in savings, nor to their employees in increased wages, shorter work weeks, or stable employment (re: layoffs). Instead they maintain or raise prices depending on what they can get away with and employ as few people as possible to maximize profit. This has the societal consequences we're seeing now, such as in OP's article.

[–] Mnemnosyne 18 points 5 months ago* (last edited 5 months ago)

This long explanation supporting capitalism and 'the market' fails to take something crucial into account that all these market promoters forget:

Labor cannot have an undistorted market so long as the option to not sell your labor isn't a valid one.

For any market to be relatively undistorted, a seller must be free to choose not to sell at all if none of the offers are equal or greater than her assessment of the value of her product.

However, as long as labor is needed in order to procure food, shelter, and adequate living conditions, this cannot be the case - people are coerced into selling their labor at values lower than their assessment of its value because to not do so means being denied adequate living conditions.

If people were free to choose not to sell their labor without this coercion, then those seeking to purchase people's labor would find they likely cannot find anywhere near as many people willing to sell at the price they are offering.

Basically, you are making excuses for the fact that due to this market distortion coercing people to sell their labor, the divide between productivity and wages has grown. It is not necessary to lock wages to productivity - if people have the option, and they see massive profits being pocketed off their work with increasingly minimal compensation, they would choose not to sell...except there comes the coercion to ensure they don't do that.

I wonder if the same excuses would be made if we turned it around and told companies they must sell their products, no matter how little the customers are offering....

[+] [email protected] -7 points 5 months ago* (last edited 5 months ago) (1 children)

You talk about making things more cheaply and that resulting in a cheaper product. If companies agree to all charge the maximum they can get away with, it kills industry price competition

Sure, if all companies in a market formed a cartel and engaged in price-fixing, and it wouldn't be a competitive market.

and renders price elasticity a falsehood.

In a situation like that, you'd still have price elasticity of demand working the same way -- that's on the consumer -- but supply could be artificially-constrained by the cartel to be lower than would normally be the case.

If Coke and Pepsi both charge 1.50 for a can of cola, it doesn’t matter if increased productivity means Coke can make a can for 20 cents instead of 30 cents - the savings are just converted into extra profit.

Sure, if they form a cartel, you don't have a competitive market. Note that I would guess that the soft drink world is probably not an easy one to create a cartel in, because it's probably not that hard for a competitor to enter -- there are a number of store brand colas -- but there will be products where it'd probably be easier -- say, airliners or something like that.

You can see this in record profits for many sectors as productivity has increased - the savings of needing fewer people to do the same work isn’t passed on to customers. As proof, here’s an article about how much more things cost today than in the 1970’s (adjusted for inflation).

I don't think that the article is saying that all things do -- they're giving examples of some things that do. They give four examples:

The first is homes. Homes do cost more, but I would be surprised if that is due to formation of a cartel of homebuilders -- there are a lot of homebuilding companies, and cartel formation is harder the more companies are in a market.

googles

Here's a list of hundreds.

So, okay. Why do houses cost more?

That one I have looked at before.

They actually don't, or at least not much.

House prices are higher. But they aren't for the same houses -- new homes have gotten substantially bigger. If you want an apples-to-apples, you want to look at how the same home changes. The Case-Shiller index tracks repeat sales to eliminate this as a factor. Someone's graphed this (the red line) since 1974 and put CPI up, to account for inflation (the black line).

The long run trend since the 1970s is to follow inflation fairly-closely. What you see there are instead two large "surges" -- and we are in the middle of the latter. The first was during the runup to the financial crisis, when a lot of money was lent out and drove a bubble. After that popped, about 80% of the increase in house prices since 1974 was due to inflation.

There's been a new surge since then, which started with the COVID pandemic. The Federal Reserve held interest rates down during the pandemic to avoid a recession. That made it cheaper to borrow money, so a lot of people borrowed more and more and bid up house prices. But that's a short-term thing, not a since-the-1970s trend.

Here's an article from the Fed back when the surge started talking about it.

The second is college tuition.

Similarly, I think that it's pretty safe to say that all the universities and colleges out there have not formed a cartel, as they're a lot of them out there, and it'd be pretty difficult to do.

I haven't looked at this one before, a quick google makes it look like this is may be something of the fact that they're measuring "sticker price", not what people actually pay.

The way universities work, there's an advertised price, which is the highest price that anyone pays. Then there are various forms of financial aid, which reduce the actual amount that an individual pays; typically, this is need-based aid, where poorer students pay less.

Looking at this, it looks like what's happened is that government subsidy directly to universities has fallen off...but aid to students has risen. The former doesn't contribute to the advertised tuition price (the university gets money directly, doesn't need tuition money) but the latter does (the student pays tuition but then gets financial aid).

googles

Yeah. Apparently that was part of a shift from state-level subsidy to federal-level subsidy:

https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/10/two-decades-of-change-in-federal-and-state-higher-education-funding

States and the federal government have long provided substantial financial support for higher education, but in recent years, their respective levels of contribution have shifted significantly.[1] Historically, states provided a far greater share of assistance to postsecondary institutions and students than the federal government did: In 1990 state per student funding was almost 140 percent more than that of the federal government. However, over the past two decades and particularly since the Great Recession, spending across levels of government converged as state investments declined, particularly in general purpose support for institutions, and federal ones grew, largely driven by increases in the need-based Pell Grant financial aid program. As a result, the gap has narrowed considerably, and state funding per student in 2015 was only 12 percent above federal levels.[2]

This swing in federal and state funding has altered the level of public support directed to students and institutions and how higher education dollars flow. Although federal and state governments have overlapping policy goals, such as increasing access to postsecondary education and supporting research, they channel their resources into the higher education system in different ways. The federal government mainly provides financial assistance to individual students and specific research projects, while states primarily pay for the general operations of public institutions. Federal and state funding, together, continue to make up a substantial share of public college and university budgets, at 34 percent of public schools’ total revenue in 2017.

Hmm. That's probably advantageous; one of the few things that I think that the US has probably done wrong from a policy standpoint is having a good deal of educational subsidy still be local rather than federal, as it creates problems if people are educated in one place and then move to work in another. That's a very serious problem in the European Union, and while the US has more-centralized subsidy, still a lot was non-federal.

But I'll say that I haven't looked to dig into college costs changes over time before, the way I have housing, so this is an off-the-cuff take. But if it is an artifact of a shift to federal subsidy, I'd probably say that it's a good thing, fixing a problem that was present in the past.

Let me continue going through your comment in a child comment, so this doesn't get too long.

[–] [email protected] -4 points 5 months ago* (last edited 5 months ago) (1 children)

@[email protected]

Okay, the next one is healthcare costs, which they say have risen by about 50% by their metric since 1972. So, I haven't dug into that, but there I could believe that you might legitimately have the sort of cartel you're worried about. Well, okay, not a cartel, but regulatory capture. A doctor can only practice in a state if the medical board approves, and doctors can influence the standards set by the medical board -- that is, block out competition, something that most industries can't do. Doctors do make pretty high salaries in the US, much higher than in many other countries, and I've read articles before that are pretty critical of the role that the regulatory system places in creating the barriers to entry.

https://www.economist.com/united-states/2023/10/31/why-doctors-in-america-earn-so-much

Why doctors in America earn so much

According to the Association of American Medical Colleges (AAMC), in a decade America will have a shortage of up to 124,000 doctors. This makes no sense. The profession is lavishly paid: $350,000 is the average salary according to a recent paper by Joshua Gottlieb, an economist at the University of Chicago, and colleagues. Lots of people want to train as doctors: over 85,000 people take the medical-college admission test each year, and more than half of all medical-school applicants are rejected. And yet there is a shortage of doctors. What is going on?

Yet there is another explanation for the doctor shortage, which has to do with the pipeline into the profession, and which the American Medical Association has played a part in creating. It takes longer to train a doctor in America than in most rich countries, and many give up along the way. Future physicians must first graduate from university, which typically takes four years. Then they must attend medical school for another four years. (In most other rich countries, doctors need around six years of schooling.) After post-secondary education, American doctors must complete a residency programme, which can last from three to seven years. Further specialist training may follow. In all, it takes 10-15 years after arriving at university to become a doctor in America.

If the expense and length of the training were not off-putting enough, the number of places in the profession has also been artificially held down. In September 1980 the Department of Health and Human Services released a report warning of a troubling surplus of 70,000 physicians by 1990 in most specialties. It recommended reducing the numbers entering medical school and suggested that foreign medical-school graduates be restricted from entering the country. Despite the shortage, doctors trained abroad must still sit exams and complete a residency in most states regardless of their years of experience.

Medical colleges listened, and matriculation flatlined for 25 years, despite applications rising and the population growing by 70m over the same period (see chart). In 1997 federal funding for residencies was capped, forcing hospitals to either limit programmes or shoulder some of the financial burden of training their doctors. Some spots have been added back, but not nearly enough. Many potential doctors are being shut out of the profession. “Not everyone who would be willing to go through that training and could do it successfully is being allowed to,” says Professor Gottlieb, the economist.

Nurse practitioners and physician assistants have been given responsibilities typically reserved for doctors, such as writing prescriptions. Foreign-trained doctors have filled some of the gap too. Yet the shortage persists. This looks a lot like a labour market that has been rigged in favour of the insiders.

So I'll grant that in that case, we may legitimately have a non-competitive market producing an increase in prices.

Next one is the price of a car.

1972: $26,100

2022: $48,200

So, I think that there are a couple factors that you can look at here. The first -- and here, the article specifically talks about it -- is that this isn't a like-for-like comparison, kind of like what I mentioned with housing. If people want to spend more on a car, that can mean that there are more people buying fancy, luxury cars, not that the car has become unaffordable. They do mention the Corolla as a baseline, which is more-or-less what I would have done, and adjusted for inflation. They do say that it's about 30% higher, but also point out that the 1972 vehicle is not really equivalent to the 2022 vehicle, as the 2022 vehicle has a lot more hardware and features.

They don't mention it, but I'd also point out that they were measuring this in 2022; during the COVID-19 crisis, there was a severe shortage of chips to automakers, which dramatically constrained supply and idled a lot of production, and while I wasn't paying attention to the prices of new cars, I assume that they spiked then. I do know that the price of used cars spiked as a result.

So, I won't run the numbers there, but I think that I'd want a stronger argument with some numbers for a cartel, if that's the concern. I'll grant that automakers are few enough that I could legitimately believe creation of a cartel (and you can definitely point at cases where cartel behavior has shown up, as with Dieselgate in the European Union, where automakers colluded not to offer large urea tanks).

Oh, and it looks like I counted incorrectly -- there's a fifth one:

Vacation (admission to Disney World) 1972: $1,170 for a three-night/four-day stay at Disney World for two adults and two kids 2022: $2,670 for the same

Ehhh. Okay. This is not something that I've looked at before, but I'm not sure that Disney World -- a single business -- is representative of vacationing in general. I've watched video from Disney World, and my vague impression is that Disney World, at least today, is somewhat-upscale. They didn't have all the resorts and stuff that they have today.

googles

Yeah, it sounds like they're offering a more-elaborate experience than in the 1970s:

https://mickeyblog.com/2021/02/05/looking-back-at-walt-disney-world-during-the-1970s-part-ii/

As a reminder, it only consisted of one theme park, one mediocre water park, Discovery Island, and an outlet mall at the time [1979].

I'd think that maybe something like...hmm...airfare plus hotel fees plus restaurant meal costs at popular vacation spots might be a better metric, maybe?

Yet we know that people are over 3x as productive per person over the same period, so clearly companies are not passing along savings in the form of cheaper goods.

So, you're thinking "well, if productivity rose, labor costs are an input, and there's a competitive market, then we would expect to see price drops"?

Well, some things have also dropped; I mean, you're looking at a list of things that's cherry-picked to find increases. A personal computer, a flight on an airplane. I'd guess that energy prices are probably down since the 1970s:

googles

Yeah, in inflation-adjusted terms:

https://www.usinflationcalculator.com/inflation/electricity-prices-adjusted-for-inflation/

Productivity increases aren't evenly spread across all sectors. You wouldn't expect to see a productivity increase in one field directly translate into a price decrease, even in a competitive market, in another.

Let's see if we can find something talking about productivity on a sector basis.

https://www.mckinsey.com/mgi/our-research/rekindling-us-productivity-for-a-new-era

So, this has a graph measuring 2005-2019 productivity growth by sector. The worst-ranked sector was construction, where productivity dropped at a compound annual growth rate of -0.9%. In information technology, productivity rose at a compound annual growth rate of 5.5%.

And to just grab those two as an example, I think that that's probably not wildly out-of-line with what we've seen. Housing prices have risen a bit, based on the data I covered in my parent comment. Software's generally cheaper than it has been in the past.

The author claims that there's a fair bit of correlation with the degree to which a given sector was impacted by the advent of computers. I could believe that; Moore's Law dictated that, for much of the 20th century, we saw exponential growth in transistor density, and any field that could benefit from more computing power had a factor that was exponential affecting it. That tailed off in about 2003, though, and performance improvements in computing since then have in significant part been in parallel computation, which isn't exactly a drop-in improvement for everything the way serial computation is.

Inelastic demand for necessary products like fuel, utilities, food, health care, etc also means that in many industries increased productivity does not need to translate to savings.

Inelastic demand for something (and I assume that you're not talking about the labor market, as I was, but rather what the industry produces) doesn't entail that an increase in productivity doesn't cause the price to drop. It'll mean that as the price falls, no more of the thing is sold, but as long as the market is competitive, one would expect to see a price fall off.

I'll continue in the child comment.

[–] [email protected] -2 points 5 months ago

@[email protected]

Pharmaceutical companies, either as an industry of multiple providers or where they hold exclusive patents, will raise prices of products to whatever they can get away with because people will either pay or die.

So, you're correct that a patent grants a (limited-term) monopoly, and in the presence of a monopoly, you don't have a competitive market. Generic drugs are competitive, but ones still under patent protection -- I believe that a pharmaceutical patent lasts as long as an ordinary utility patent, 20 years -- aren't. Is that good or bad? Well, the concept of having a limited period of monopoly to fund the fixed R&D costs of producing new things has been a pretty long-running convention. The funds are going to have to come from somewhere. That model has drug users pay the price for the first 20 years, at which point you have a competitive market that drops down towards cost of production. Is that a good model? Well, it means that one has to wait 20 years for competitive prices. On the other hand, it has funded the creation of drugs, and the money will need to come from somewhere (or else the users will die). Should there be a different model? I mean, there could be. But one way or the other, the money would still have to be coming from somewhere. The government could tax and provide subsidies to pharmaceuticals. Sometimes that has happened -- with the COVID-19 vaccine, for example, everyone paid for it and the government paid for everyone to take it, since it impacted everyone else.

So again cheaper products and competition is a myth.

I mean, they aren't going to be seeing competition for 20 years after invention, sure, but they do after that. If you want to say "competition takes some time to show up after invention", I'd agree with that, but I think that saying that it's a myth is kind of over-broad.

Speaking of getting fewer people to do the same work, companies lay off people all the time when individual productivity or automation goes up. You talk about employing 1/5th the Bobcat workers and net lost 4 workers being forced to find other work. This may make economic sense but it’s terrible societal sense. It results in financial insecurity and homelessness among educated, capable people with all the associated national problems like mental health, crime, drug addiction, etc.

Yeah, any economic change -- technological, changes in trade, changes in education, etc -- is going to tend to produce disruption, shift workers around. But what's the alternative? I mean, this is broader than just questions of wage and productivity. Let's say that you legitimately don't need, oh, a bunch of farriers any more, because now people are using cars instead of horses and don't need their horses shoed. I mean, one can't just freeze the economy, or the world would look like it did whenever one froze the economy. Photography impacted portrait painters, television impacted theater actors, electronic computers impacted human computers, farm machinery impacted fieldworkers, telecommunications impacted postal workers. But...that impact has to happen if one is to realize the benefits of those technologies.

Should wages should be used as the mechanism to allocate workers? Well, the benefit there is that the people who most want to stay are the ones who do. You can have a command economy, and you have that oil boom in North Dakota, and oilfield workers are needed, and you could have the government say "you ten people go to work in North Dakota or you go to jail". If you use wages as the mechanism to determine who goes, then it winds up being the individual workers deciding for themselves who wants to enter or leave an industry; that will filter based on how those people actually feel about the industry.

There are things that maybe we could do to improve re-entry into the workforce, even given labor reallocation. We have tried government-subsidized retraining programs, and my impression is that we haven't had phenomenal success. Maybe it's possible to have more-effective retraining.

Some of it is labor mobility, the ability of someone to move from an area with low demand to an area with high demand.

It might be that homeownership is a negative for labor mobility; it's harder to move if one also has to sell and buy a home. Some countries, like Germany, have a much higher rate of renters. That could provide some other benefits; people who work in an area seeing population outflow tend to get hit both by layoffs and declining house values. But I think that many people like owning their house, and that seems like a pretty substantial shift.

It's harder to move if you have a multigenerational household, but we've generally already moved away from those.

Remote work might help, for some fields. Not every field can do that.

As US economics function now, companies do not pass along the value of increased productivity to their customers in savings,

I don't think I agree with that as a broad statement. I think that you can find areas -- and you've mentioned some, like drugs that are still under patent where there are not competitive markets, and there, sure, that won't happen. But in a competitive market, decreases in input costs -- labor or any other -- will tend to translate into reduced prices. I don't think that it's reasonable to say "the economy as a whole consists of cartels".

nor to their employees in increased wages, shorter work weeks, or stable employment (re: layoffs).

Sure, I'd agree with that -- there's no direct link between productivity and wages, work time, or avoiding layoffs.

Instead they maintain or raise prices depending on what they can get away with and employ as few people as possible to maximize profit.

So, I don't think that it's realistic to freeze the economy in place. When the environment changes, for technological or other reasons, one is going to have to reallocate workers. You can maybe argue that we could provide greater retraining subsidy or something like that, maybe in some cases slow the rate of change, but I don't think that just not changing is a realistic solution. In a world where the environment changes, there are going to be people who are gonna have to stop doing what they were previously doing. No matter how your economy is structured, that's gonna be a constraint.

And sure, the way that gets expressed is via profit -- that is, if the company down the road is using one guy in a Bobcat and our company is using five guys with shovels, in a competitive market, that company is gonna undercut our prices and take our business. Competition means our profit drops off, we start losing money, need to take the Bobcat route ourselves or go out of business. But I don't see as how it changes all that much. If there were a command economy, you'd still have to either have someone say "okay, no more shoveling, now it's Bobcats", and the same disruption happens or you have to freeze the economy.