Can the Government Fix Anything?
"I'm from the government and I'm here to help."
Ronald Reagan said they were the nine most terrifying words in the English language. And of course, I'm sure we can come up with infinite examples of government screw-ups. I came across a chart the other day that sums it up pretty well...
The blue lines represent the things government has tried to "fix." Health care is a big one. It's done nothing but get more expensive. In 2016, health care plans made historic jumps, with the cost of an average plan cresting $18,000 a year. Medicare and Medicaid cost about $1 trillion a year, too. Add it all up, and health care costs were $3.2 trillion in 2016.
Of course, it's not just insurance. Hospital care costs were up 5.6%. And physician and clinical services rose 6.3%. Everybody's getting theirs...
This chart should have college tuitions listed as something the government tried to fix and instead drove higher. Because that's what government student loan guarantees have done.
College tuitions have quadrupled in 25 years. 40 million Americans now have student loan debt totaling at least $1.4 trillion. And student loan debt is growing $2,276 with every second that passes.
This college loan debt is so bad that it's probably weighing on economic growth. Indebted college grads aren't starting families and buying homes as quickly these days.
If you look around for reasons behind the rapid rise in college tuitions, you'll see some experts saying that cuts in public funding are to blame. The logic goes that colleges have to raise tuitions in order to make ends meet. But the fact is, on a per-student basis, state spending on colleges is higher now than it was in the 1970s.
The New York Times says, "The astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000."
The real reason tuitions have grown so fast is pretty simple: a college education has never been more important, and more kids are going. Tuitions rise because they can. They rise because there is an endless stream of cash that colleges and universities can tap into because of federal student loan guarantees.
Supply and Demand
I'm not sure why our elected leaders can't figure this out. I'm pretty sure the majority of them have taken Economics 101. Because if we look at tuitions and health care costs in simple economic terms — supply and demand — we can get to the root of the problem pretty quickly.
Supply and demand affect prices in pretty obvious ways. When there is more supply than demand, prices fall. Likewise, when demand is greater than supply, prices rise. People tend to understand this when it comes to commodities like oil. When Saudi Arabia added 2 million barrels of oil a day to its output, there was too much oil supply, and prices fell. When they cut production, prices rose.
So why is it so hard to see how supply of money has impacted college tuitions?
Clearly, if you want to go to college, there is room. Colleges can add students basically at will. If class size goes from 15 to 18, it doesn't really matter. It might seem like, in terms of supply, there is an endless supply of college diplomas. But that's actually missing the point. The supply issue we should be looking at here is money.
More students can access more money than ever. And with all that ready cash available, it's no surprise that tuitions are rising. And they will continue to rise until there is a balance, until potential students stop going to college because of cost. Clearly, we are not at that point just yet.
Supply and demand helps explain the problems with health care, too. Obamacare mandates that everybody has to have health insurance. But how many options do people have? In some areas of the country, there might only be two health insurance providers. That is not competition. That is a monopoly, or duopoly if you want to get technical. So, again, not a shocker that insurance costs are rising quickly...
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Increase Competition, Lower Prices
Cable companies like Comcast enjoy near monopolies. Their networks are totally protected in the same way that AT&T's long-distance networks were protected for decades. And so Comcast can charge you basically whatever it wants because it is the only game in town.
And don't miss what happened when AT&T was suddenly forced into competition over long-distance networks. It has been about 20 years since those long-distance networks were opened for competition. The pace of Internet innovation has been amazingly fast.
This is what market forces do. You get a lot of competition, innovation increases, and price comes down.
Surprisingly, the government has managed to be on the right side of that a time or two. Look what's happened with renewable energy.
There should be no doubt that federal subsidies have helped individuals put solar panels on their homes. And you might think those subsidies would drive prices higher, but the opposite has happened. Prices for solar panels have plummeted over the last decade.
Here again, it's because of competition. The capacity to make solar panels, and the ability to make them more efficient, means consumers always have choices. Manufacturers have to compete on pricing. And prices fall.
If you look at the chart above again, you can easily see that the things that have been left to free market competition have fallen in price. Clothing, computers, cell phone service plans — these are all getting cheaper because the government has stayed out of the way and let the market do its job.
Fixing Health Care
So how do we let the market fix health insurance? There are two answers: You either get the government completely out of health insurance, or you deem health care a quasi-utility and have the government completely regulate it, top to bottom.
One thing's for sure: if Congress keeps health insurance the way it is, with the government shoveling money at insurance companies without fostering competition, prices will continue to rise.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.