Why healthcare, housing and college tuition are now so expensive
The United States by any money-based standard is a wealthy country. Yet much of its population struggles financiallyâand this struggling subset extends well beyond the demographic groups that are traditionally dependent on handouts. Around 50 million people in the US use food banks, implying that they couldnât feed themselves otherwise. A third of citizens and legal residents earn so little that they pay no federal income tax. A thirdâperhaps the same thirdâlive paycheck-to-paycheck without savings. Meanwhile about nine million Americans work more than one job, presumably in a desperate attempt to make ends meet.
I could go on citing stats, but everyone knows that the âstruggling classâ is very large now, and struggles not so much because they canât find work but because the prices for important things in their lives keep rising, while their wages fail to keep up.
Why their wages have failed to keep up is not hard to grasp. Mass immigrationâincluding the legal immigration of skilled and semi-skilled foreignersâhas put downward pressure on wages, as has the weakening of labor unions, DEI-based preferences (especially in years past) for blacks and browns over whites, offshoring, and automation/AI.
Why prices for important items keep going upâand up and upâalso should not be hard to grasp, though it has been a remarkably under-covered story, as if the beneficiaries of those prices donât want consumers to understand what has been happening.
What has been happening is that, mainly over the last century, American markets for healthcare goods and services, for housing, for college tuition and other big-ticket items have been modified from their traditional forms, financialized, in order to boost demand.
Financed Purchasing
Expanding credit has been the main form of financialization. Consumers like to think of expanding credit as a development that benefits themâempowers them to buy more stuff. But in an easy-credit society, it is really the business owners who are empowered. The business owners have no downsideâthey simply get more customers into their stores. The customers, on the other hand, while they can âbuyâ more stuff, are apt to be burdened increasingly by debt. More importantly, the advantage that customers think they have, in terms of buying power, is largely fleeting.
More customers means more demand, and we all know from Econ 101 that more demand, all else being equal, means higher prices. Conceivably in the long-term higher prices invite an increase in supply, which then brings prices down again. What they donât teach in Econ 101, or at least donât emphasize enough, is that the ramp in prices from expanded credit and other demand-boosting measures is not necessarily temporary.
Suppliers of goods and services donât like to lower prices once they have raised them. Public companies tend to be punished in capital markets if their revenue ever drops. But even privately held companies in a given industry tend to adhere to their own industry culture or set of standard practices, and those practices, including pricing, can be very âstickyâ once they are widely adopted. (Most American industries are effectively cartels in this loose sense.)
There are also technical, structural, and/or legal factors that can make it harder for producers to create enough supply to meet excess demand, even when they want to do so. Real estate is an obvious example: For decades now, there has been a finite and probably dwindling supply of real property in the vicinity of desirable places with good jobs and good schools. Even when there has been undeveloped land available for new home-building, states often have blocked such constructionâor, worse, have devoted it to âlow-incomeâ or âmulti-familyâ construction that dooms the quality of local schools and jobs. Moreover, corporations can and often do buy up much of the scarce stock of available housing, forcing would-be home buyers to rent from them instead. Meanwhile, mass immigration, the rise of two-earner families, and ultra-low mortage rates during 2009-2022 have helped keep demand on the boil.
The story of the American housing market and its levitation away from affordability thus illustrates that financialization in the form of expanded credit can, over time, paradoxically weaken consumers by reducing their buying power and burdening them with increasing debt. On the positive side of the ledger, businesses and their investors are enriched, overall economic activity (GDP) is expanded, and the stock market goes up and upâall of which tends to discourage any talk of harmful side effects.
There is another, more intuitive way of looking at this issue, which focuses on the actual payments made by the consumer. Actual payments are, after all, what the consumer is considering as he or she mulls over a potential purchase. When the price is a simple cash price and there is no credit in the picture, the buyer considers whether that full cash amount will excessively draw down (or exceed) his or her savings, whether the purchase represents good value in that context, and so on. When the price is, instead, not a lump sum but a string of much smaller payments including interestâletâs assume monthly paymentsâthe buyer starts to consider how the size of each monthly payment relates to his or her monthly disposable income. The net price, in other words, stops being the principal basis for the buyerâs decision, which means that the buyer no longer exerts direct and downward pressure on that price, which in turn means that, ceteris paribus, the cash price can float upwards. Only when the size of each monthly payment becomes unmanageable in the context of monthly income, other credit sources, liquid savings, etc., does the buyer’s resistance start to intensify meaningfully.
We have seen this phenomenon at work not only in the housing market but also in the credit-goosed market for college tuition. Both of these markets are, of course, notorious for their price inflation in excess of CPI. The market for automobiles is well on its way to the same destination, though cars are not yet as badly overpriced because the switch to a credit-based norm for buying cars has begun relatively recently, and the used-car market is still largely cash-based.
This idea or hypothesis that financialization drives prices higher we can test with a simple thought-experiment: What would happen to real estate, college tuition and car prices if loan-based purchasing were suddenly outlawed? Obviously, prices in all three of those markets would have to come down dramatically, and stay down, due to the disappearance of a large subset of buyers. It should also be obvious that regaining and sustaining the previous levels of per-capita sales would require these industries to redesign their products and services so that selling them would be profitable at much lower prices.
Leasingization and Insurancization
Credit-based purchasing is not the only form of financialization. Another is to replace purchasing altogether with âleasingâ or âsubscribing,â as has been occurring, for example, in the markets for cars and higher-priced software. Both leasing and subscription replace lump-sum cash-on-the-barrel payments with long-term streams of monthly, quarterly or annual payments, and in that sense have the same magical effect as credit-based financialization: expanding the pool of buyers while raising effective prices.
Nowhere in the American economy is the malignancy of financialization more evident than in the market for healthcare goods and services. Here, of course, the old-fashioned practice of simply paying cash for doctors, hospital procedures, pharmaceuticals, etc. has been replaced by a system of âinsuranceââwhich deserves to be in scare-quotes because it increasingly resembles a leasing or subscription-based system rather than a true insurance system.
The modern American health-insurance disaster originated, of course, from the understandable desire to insure people against medical costs that their savings could not cover. Health insurance in that sense was compellingly analogous to home insurance against a catastrophic fire or flood. Over time, of course, the insurancization of healthcare has come to cover not just catastrophic medical costs but virtually all medical costs. âWhat insurance do you have?â is the first question any American medical receptionist or pharmacist will ask a customer these days, even for small things like checkups or generic pills. And as I know all too well from my own profession, academic discussions of how to fix the American healthcare system universally assume that healthcare must be insurance-basedâit is never an object of debate, other than in the context of advocacy for 100% socialized medicine.
Insurancization lifts costs principally in the way that other forms of financialization do: by replacing traditional cash prices with a stream of usually monthly payments. It also interposes a large industry between buyer (patient) and seller, even for small transactions—indeed, in the eyes of the care provider the insurer becomes the true “customer.” There is also the insurance-related phenomenon called “moral hazard,” which, after deductibles and co-pays are exhausted, manifests as greater risk-taking and less sensitivity to expenditure (“someone else is paying for it”). Other price-inflating factors include the law that mandates effectively “free” ER care for those who won’t pay, rules that force health “insurance” policies to cover pre-existing conditions, the cartel-like practices of the doctors’ lobby, and the rules and traditions by which corporations help hide costs by covering employees’ healthcare insurance premiums. (A 2009 piece in the Atlantic by David Goldhill does a decent job covering all these factors, even though it was written before the ruinous Obamacare law took effect.) Not all of these factors fit into the category I call “financialization,” but I think it’s fair to say that when you disrupt a market with financialization, it becomes easier to disrupt it in other ways too. I think it’s also obviously true that the American healthcare fiasco serves as the ultimate cautionary tale of how well-meaning “tweaks” to markets can end up inflating prices, hurting consumers and widening economic inequality.
And speaking of inequality, the impacts of financialization clearly extend beyond the economic realm. When a modern society stratifies into rich and poor, it becomes inherently less stable politically and fertile ground for radicalism. When young people canât afford to buy a house or pay for healthcare (including pregnancy/childbirth care) they are less likely to marry and have children, and ultimately this can cause a society literally to die out. When citizens are overburdened with long-term financial obligations (mortgage payments, car loan payments, college loan payments, health insurance premiums) they are made much weaker relative to corporations and the state. In that sense, of course, corporations and the state have a strong interest in continuing and expanding financialization, and in discouraging discussions such as this one. Still, it is not hard to imagine that the vicious chain-reactions set in motion by financialization must eventually reach a point of crisis.
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