Productivity And Cost-of-Living

The Atlantic (h/t Ritholtz):

Here's a theory. In the last 30 years, productivity grew, but it didn't make you rich because all the benefits went to make stuff cheaper. You can see this in Walmart and on your computer screen. Food and clothes have never been more affordable. Information has never been so easily accessible. Electronics have never been so advanced. Consumer products have never been so diverse, effective, and cheap.

If everything is getting cheaper and better, why don't you feel richer? Because the basic necessities -- homes, gasoline, health care, and education -- are not getting cheaper. Real housing prices slowly increased for 30 years before the housing boom. Real gas prices are the same today as in the 1930s. The cost of health care is growing faster than wages. Higher education costs are growing even faster.

Houses, gasoline, health care and education make up the core of our day-to-day life. The typical American family spends half its money on housing and transportation. The economy spends one out of four dollars on health care ($2.6 trillion) and education ($1 trillion).

The reason these things aren't getting cheaper also goes back to productivity. Productivity is growing fastest where we work -- information, technology, manufacturing, wholesale, services. It is growing slowest around many necessities: health care, education, construction, and government.

I have the feeling gasoline will only get cheaper as the economy slows, then will spike up when things pick up, dragging things back down.  Housing prices were driven up by falling interest rates and a bubble mentality, and now they can't readjust enough because of the overhanging debt.  Clothing is cheaper because the work is outsourced, putting people here out of work and depressing wages throughout the economy.

Health care and educational costs reflect a number of factors, including distortions brought about by poorly implemented government involvement in the markets.  Health care cost is influenced by the mishmash setup we have involving private insurance companies, employer-provided insurance, a governmental safety net underlying this system and overinvestment by competing hospitals in each market requiring excessive treatment to cover underutilized equipment.  Education costs reflect a belief that everyone should get a college education, and that taking on debt is a good investment because future wage gains will be forthcoming.

Finally, productivity is growing fastest in the private sector, because that's where decision-making stakeholders can glean the most benefit from it.  Executives and shareholders see material gain from squeezing more productivity from workers without compensating them additionally for their effort, or outsourcing their jobs.  Investments in productivity-enhancing technology earn returns on investment much more quickly, leading to even more investment.  If more of this return went to labor, we would see more economic growth.  In education, health care and government, the executives and managers don't see nearly as much of the returns, so they don't push for as many changes, and taxpayers and customers have little leverage to push for it.