The Federal Reserve held a “listening session” in Washington last week, not for members of Congress but for representatives from the community. It was a worthwhile exercise and is an admirable program, but as it turns out their main concerns are beyond the Fed’s ability to address.
Representatives of traditionally price-conscious groups such as retirees and small-business owners reported that they were worried about higher expenses due to tariffs and rising costs of energy, housing and, most of all, health care. There is some polling, of both households and small businesses, that bears out these anecdotal results.
What all four of these concerns have in common is that none of them quite qualifies as inflation — at least as macroeconomists understand it.
Economists distinguish between price increases that are the result of supply-side shocks and the more generalized inflation that results from too-low interest rates. Consider the 1970s: You may think that the era’s higher energy prices caused inflation, but that’s not how economists see it. (In fact, the Fed’s core measure of inflation excludes food and energy costs.) Most economists attribute the high inflation of the 1970s to the Fed’s loose monetary policy of the late 1960s and early 1970s. The energy price spikes came from a combination of embargos and war that led to a drastic decline in the availability of oil.
Now consider the four concerns identified in last week’s Fed meeting. Tariffs are a policy issue over which the Fed has no direct control. Rising energy costs are not currently an issue. That leaves housing and health care. In both cases, the inflation is due to severe supply restrictions — akin to the Middle East oil embargo of the 1970s.
In housing the problem is restrictive land-use regulation, especially in California and New York. Despite the increasing concentration of high-paying jobs in big cities, metropolitan areas on the coasts have been reluctant to approve increases in housing density or major new development. Despite the nation’s highest housing costs, for example, both the Bay Area and Southern California are dominated by single-family homes. Even regulation to mildly increase density around transit has met with opposition.
It may seem odd to suggest that New York is anti-density, but consider that the population of Manhattan is well below its historical peak — reached in 1910, before skyscrapers dominated the island. Even worse, under current regulations, most of the major developments in New York could not be built today.
The damage these regulations do to the overall economy is enormous. One economic analysis suggests that if New York and California had the same land-use policies as Texas, GDP would be 10% higher and the entire post-2000 slowdown in productivity could have been avoided.
Health care faces a different sort of embargo. The U.S. has higher health-care costs than most of the world largely because payments to providers and hospitals are so much higher. That, in turn, is a result of the higher-than-average salaries among health-care professionals.
In a competitive market, these types of price differentials are not sustainable: High U.S. prices would drive increasing imports from abroad. In health care, however, the immigration of skilled professionals into the U.S. is severely limited. Only 140,000 green cards are allotted for employment, and the wait time can be years. Recent proposals have threatened to decrease that number even further.
It’s as if, at the height of the 1970s energy crisis, the U.S. had proposed to restrict oil imports. The results would have been disastrous for the economy.
Fortunately, the U.S. economy today is more dynamic than it was in the 1970s, and generalized inflation is not a problem. That makes it easier for the U.S. to cope with its supply-side restrictions. Those restraints still matter, however — and just as in the 1970s, they cannot be removed by the Fed. To keep housing and health-care costs from rising too much, it will take a sustained effort from governments on the local, state and federal level.
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Karl W. Smith is a former assistant professor of economics at the University of North Carolina’s school of government and founder of the blog Modeled Behavior.
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