The Inequality We Aren’t Talking About

Much has been written about our widening wealth and income gaps. Despite meaningful gains in the last few years for the lowest earners, most of society's sense is falling further behind continues to grow. Surely seeing Jeff Bezos hit $100 billion in wealth during a time of great despair for many adds to the sense of an underlying unfairness in our economy.

But focusing solely on income ignores the other side of the equation - purchasing power. If your income is growing, but your essential expenses are growing even faster, your sense of security will drop dramatically. This fact is a major contributor to the sense of insecurity facing so many Americans. We simply are ignoring the runaway costs that are eroding the American dream.

Take a look at how prices have changed over the last 20 years.

Notice the essential things we need to live and prosper - healthcare, housing, and education - are rising fast. Everything else, mostly driven by technology, is dropping. This data also vastly understates housing as prices in markets where economic opportunity is best have been rising radically. So if you want to get a good job, you have to pay up big time.

How about retirement planning? Well in 1998, the 10-Year Treasury yield was 5.5%. The T-Bill is the risk-free baseline asset to guarantee income for retirees. To put it in perspective, you needed about $450k in savings to guarantee $25k in annual income. Today, the yield is about you need about $3.5 million! Now that’s inflation.

Our most common indicator of inflation, the Consumer Price Index, hides these basic facts behind a blended average. But, the reality of rising essential costs hits the lowest income segments of our society hardest and creates a fundamental sense of insecurity. Without basic housing, education, and health, there is no foundation to realize the American dream. No wonder there is broad societal dissatisfaction.

Now, the problem is no one is talking about really solving the essentials cost problem. How do we make the basics more affordable so any American can flourish?

The left has done a much better job identifying the affordability headwind. Their solutions are more of what we have done all along - regulate supply and subsidize demand. It is impossible to deny those essential good industries are the most regulated in our economy: NIMBYism and overzealous environmentalism limit housing. Our top educational institutions never increase capacity despite huge endowment and now global demand. Strict licensing keeps the medical profession limited - and highly paid. So, what to do? Pay for it - from free college to medicare for all to housing vouchers to universal basic income. We got you covered, the left promises. The problem is that the cost spiral will get worse - more demand for the same supply can only result in even higher prices. We will eventually run out of other people’s money to pay for it. Keep in mind that 100% of Joe Biden’s tax plan will only raise $240 billion a year - just 1/10th the price of this year's COVID stimulus, forget all those freebies.

The right downplays the problem arguing economic growth will drive opportunity and income gains to close the gap. Limit immigration to slow labor supply, cut taxes, and pump money into the economy with loose monetary policy to increase wages. Again, they are working more on subsidizing demand. Their policies direct dollars into already high-priced assets owned by the wealthy, which drives not only income inequality but also the inflation dynamics around essentials (expensive housing = high rent). They also have proposed no meaningful philosophy on lowering healthcare costs - sticking only to oppose coverage expansion.

How do we get the deflationary aspects of technology into these core goods? Imagine if the chart above was flipped - essentials getting cheaper and luxuries more expensive. Do you think we would be facing the same social instability?

We need an innovation war to drive lower costs for these essential goods. The truth is better ideas have been the only real driver of human progress. We need to see how we get some here. And, despite little focus on it, we must start with much more supply of all of them. More housing - small houses, taller buildings, new building concepts, and construction technologies. New education formats and alternative certifications. Healthcare pricing and outcome transparency, massive deregulation (telehealth to tort reform), and antitrust enforcement of local hospital monopolies. We need to incent hundreds of similar ideas and iterate and test them despite the massive resistance from entrenched players in each industry.

While not on the docket this election, lowering the cost of living will be a crucial topic in the years ahead. The party that finds a path to real progress on the topic will be able to paint an optimistic vision of the future.

We’ll be waiting.

Good Reads - October 2020

  1. I call it the Prius Problem but turns out there is a real name for a policy solution that actually makes things worse: The Cobra Effect. I worry we will get a lot of Cobras in the years ahead as good intent has become more important than positive outcomes.

  2. Real-world progress using CRISPR to edit genes and cure several blood diseases. After decades of hype, gene technology will surely make waves in the coming decade. Complications are sure to ensue.

  3. Who has the highest marginal tax rates? The working poor as they lose benefits with rising income. The social safety net is needed but complicated - and incentives are powerful.

  4. The most important policy book I have read in the last few years: The Bitcoin Standard. It really should be called the history of money and central banking. All the issues discussed will become top of mind in the years ahead as we print more dollars.

  5. Want a dose of optimism, humor, and hope? Ted Lasso is the cultural rebuke to the nastiness of the Trump era without an ounce of politics.