The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time

See Chart of the day…. or century? by Mark Perry. Excerpts:

"Based on today’s BLS report on CPI price data through June 2021, I’ve updated the chart above with price changes through the end of last year. During the most recent 21.5-year period from January 2000 to June 2021, the CPI for All Items increased by 60.1% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly wages. Seven of those goods and services have increased more than average inflation of 60.1%, led by huge increases in hospital services (+207.5%), college tuition (+172%), and college textbooks (+153%), followed by increases in medical care services (+119%), child care (+107.5%), housing (+68%) and food and beverages (66%). Average wages have also increased more than average inflation since January 2000 — by almost 87% — indicating that hourly wages have increased 27% more over the last two decades than the average increase in consumer prices.

The other seven price series have been flat or have declined since January 2000, led by TVs (-97%), toys (-73%), computer software (-70.5%), and cell phone services (-40%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.), and clothing have remained relatively flat for the last 21.5 years. Because average consumer prices increased by 60% and wages by 87% since 2000, the real prices of all seven of those consumer goods and services in blue above have fallen significantly and have gotten increasingly more affordable over time.

Various observations that have been made about the huge divergence in price patterns over the last several decades displayed in the chart include:

1. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free-market forces. Red lines = prices subject to regulatory capture by government. Food and beverages are debatable either way. Conclusion: remind me why socialism is so great again.

2. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

3. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, new cares, etc.

What’s New?

4. The price series that has shown the greatest change in recent years is the CPI for Educational Books (mostly college textbooks). Textbook prices rose an average of nearly 6% annually between January 2000 and December 2016, nearly three times average annual inflation during that period of just over 2%. But starting in early 2017, the CPI for Educational Books flattened for the first time ever and has now been generally trending downward (see chart above). On an average annual basis, the CPI for Educational Books declined in both 2019 (-1.5%) and 2020 (-1.1%) following small increases in 2017 (1.6%) and 2018 (1.0%). Those small positive increases followed by two consecutive annual decreases have been an unprecedented departure from a half-century of increases in educational book prices that averaged 6.3% between 1968 and 2016. The flattening of the CPI for Educational Books over the last 5.5 years is truly unprecedented and remarkable.

We can expect future declines in the prices of college textbooks, as the traditional textbook market faces increasingly tough and disruptive competition from alternative options including hundreds of “open textbooks” that have been funded, published, and licensed to be freely used, adapted, and distributed. The University of Minnesota’s Center for Open Education maintains an “Open Textbook Library” website that lists hundreds of textbooks in more than 40 academic subjects that are available for free online or as a PDF file, or as a print copy at a low-cost ($33.50 for print copies from OpenStax). Just in the field of economics, there are 27 free open textbooks for Economics courses including Principles of Microeconomics, Principles of Macroeconomics, International Economics, Money and Banking, Economic Analysis, and Principles of Political Economy.

Based on the evidence in the chart above showing stagnating and now falling college textbook prices following half a century of rising prices, Hurricane Joseph (Schumpeter) appears to be hitting the college textbook market with a very large, tsunami of creative destruction called “The Open Textbook Effect.”

5. The annual increase in college tuition and fees of only 0.78% in 2020 was the smallest annual increase in the history of the CPI for college tuition and fees going back to 1978, and the only annual increase ever below 1%. In each of the last six months this year the annual increases in college tuition have been less than 0.50%, which like the declines in college textbook prices is unprecedented and remarkable. The recent unprecedented small increases in college tuition are way far below the average annual increase in college tuition of nearly 7% over the last 42 years. So perhaps the “higher education bubble” is finally starting to show signs of deflating? And we can expect that bubble to continue to deflate as a result of the new pressure from the coronavirus pandemic on higher education that has accelerated the downward trend in college enrollment that has been ongoing for the last decade.

6. The recent annual increases through June in new car prices (5.3%), clothing prices (4.9%), and prices for household furnishings (4.1%) have all set multi-decade highs, although partly because of unusually low price indexes for some goods a year ago during the pandemic. But those increases also might be a cause for concern, voiced by many economists, about rising inflation in the future. Alleviating those inflationary concerns somewhat is the relatively modest inflationary expectations in the bond market, currently at only about 2.5% over the next five years based on the 5-year breakeven inflation rate for indexed vs. regular Treasury securities.