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Cost of living/affordability concept art - Getty Images
Under the broad heading of “Affordability,” voters describe the price squeeze of the essentials of modern life including categories like food, gas, childcare, insurance, transportation, education and, of course, “the rent is too damned high.” These are economics problems with regulated market approaches. Too often however loose talk about “socialism” distracts, so this might be a good time to review how markets can work to ease affordability problems.
Following a 250-year tradition, economists describe the economy as having private and public sectors—complementary components of a hybrid system. Private markets allocate most goods and services, a complex process coordinated by prices, competition and tradable ownership rights. A well-functioning public sector, guided by representative government, is essential for the private sector to function well in the public interest. The division of responsibility between these sectors determines the cost of living.
Market System’s Public Sector
The public sector supplies the indispensable infrastructure of a functioning market economy: streets and roads, water systems, schools, harbors, police and fire protection, military defense. The public sector supports markets, regulating monopoly power, providing essential public goods, and stabilizing markets through regulatory agencies such as the FDIC, the SEC and the EPA when unregulated markets cannot deliver affordability or efficiency. It is also the basis for investing in the nation’s most important resource: its people.
Young People in the Economy
Two key investments in people—education and family formation—are best made early in life, precisely when incomes are lowest. Their high-earning years arrive decades later. When borrowing is possible, those higher earnings can be achieved earlier, but private sector lenders require the pledging of assets, i.e., “loan collateral.” While established families can borrow intergenerationally, most young people don't have that option. If such investments—in childcare, education and training, health insurance—are to be made (especially if our society expects to compete in a world where other advanced societies routinely make such investments), they must be a public responsibility.
The Financial Tentacles of Climate Change.
The affordability pressures of climate change are arriving before the full force of rising temperatures, floods, fires, droughts and storms. Markets anticipate those direct harms, and those expectations are cascading through the financial system. Insurers raise premiums or withdraw entirely from high‑risk areas, including in coastal areas of California and Florida and tornado alleys and wildfire zones in the Midwest. Higher costs ripple outward into mortgage markets, regional bank lending, property insurance, municipal budgets, and ultimately to the economic future of Americans of all ages.
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Economists have urged for decades that carbon-emitting industries pay a carbon tax, both to induce emission reductions and to promote cleaner energy alternatives. If we want to harness market forces, all those finance costs should be added to the carbon tax.
Market Approaches to Health Insurance and Schools
Health insurance: All insurance works by pooling risk: people of similar risk of illness or injury paying similar premium. Applying that risk-pooling principle to health insurance would require that sick and elderly either pay higher premiums or opt out of coverage altogether, precisely the perversity that the Affordable Care Act was designed to solve. The ACA plan includes premium subsidies, but those have been reduced recently, causing premiums to rise and forcing some people to drop coverage. One market-based proposal to reverse this trend is to force insurance companies to compete with a “public option,” Medicare for those who want to buy into it.
Schools: Through taxpayer financing of parental selection of schools, voucher programs—aka Parental Choice—are intended to foster a semblance of competition among schools. The hope is that competitive pressure would cause low-performing schools to improve, resulting in greater educational value per dollar spent. The results are mixed: the plan works well for some but the math and English proficiency gaps persist between the haves and the have-little. Still, the voucher program has a lot of support, is not going to end, so it's probably time for a new round of innovation through expansion of AI-based tutoring and teacher assistance. This breakthrough technology would reward teachers and students, and target especially those students left behind by the proficiency gap.
Each of these examples show a public sector responsibility in conjunction with private sector economic activity. An especially useful distraction during election season, is to beware of labeling public sector activity as “socialism”—Roads are socialist? Social insurance is socialist? Sports stadiums? It’s a lazy assertion that deepens polarization. By contrast, centrist economics demonstrates that the public and private sectors are complements within a market system.
