The Affordability Conundrum
The fixes people want won't help and those that will help, people don't want.
The Atlantic‘s Annie Lowrie offers a “The Three-Step Guide to Fixing Affordability.” After noting that,
By the most straightforward, objective measures, Trump has a pretty good argument that the affordability crisis does not exist. Real disposable income is near its highest point in history, and Americans are buying more stuff than ever. Yet voters want prices to come down to where they were a few years ago, a shift that would likely never occur outside the context of a devastating recession.
she observes,
Many policies that would bring down prices in a durable fashion (such as a huge home-building push) would do nothing in the next few years. Many of the policies that would bring down prices in the short term (such as rent freezes) would generate shortages and lift costs over time. “We call it the affordability conundrum,” Neale Mahoney, an economist at Stanford, told me, referring to work he did with the policy adviser Bharat Ramamurti. “People want affordability now, and the tools we have don’t work on an immediate or short-term basis.” Even worse, many of the policies that sound good to voters (such as stimulus checks) would spike inflation, and many of the policies that would do a lot of good (getting rid of the tax exclusion for employer-sponsored health coverage, for instance) would be challenging to pass and challenging to implement.
Before getting to the titular advice:
What’s a policy maker to do? Three things, I learned by speaking with campaign operatives, pollsters, economists, think-tank types, and a lot of teed-off voters from across the political spectrum. Stop making things worse. Provide immediate relief. Then do the hard work of getting the most important prices down.
Which, alas, runs right smack into the aforementioned conundrum.
[U]ndoing the bad choices and refraining from making new ones won’t be enough, for people or their bank accounts. Voters want radical policies that deliver instant relief. They want prices to go down. In polls, they say they want bans on price gouging, freezes on rental costs and utility bills, tax cuts, stimulus checks, and price controls.
The standard economic argument is that the voters shouldn’t get what they want, because a lot of those proposals would raise inflation or worsen the country’s affordability crisis in the long term. Take Mamdani’s promise to freeze the rent on roughly 1 million New York City apartments. The residents of eligible units would benefit. But people paying market rates or looking to buy a home would not, and the policy could fuel gentrification and dampen construction, pushing up real-estate costs in the long term. But what if the rent freeze were only temporary and lasted just long enough to give the city time to build more housing units? Maybe that’s not a bad trade.
Nothing spurs investment in new construction like preventing those who own property from charging market rates. And, while we wait for that to happen, we drive up prices for everyone else, since we’ve artificially limited supply.
Capping prescription-drug costs—perhaps the single most popular policy idea out there, embraced by voters of both parties—seems to be a reasonable quick fix for the health-care-cost crisis. But it wouldn’t do much, Altman said. Prescriptions account for less than 10 percent of overall health expenditures. Nevertheless, caps might still be worth implementing, helping the sickest Americans and delivering immediate relief to consumers.
Given that Americans already pay more than just about anyone for prescription drugs (albeit most of us just pay a relatively small deductible), I’m not opposed in principle to a cap. But, as Altman notes, it’s really a drop in the bucket. And those who would most benefit are those without insurance and likely can’t afford even the capped price.
Rate freezes on utility bills, similarly, aren’t much more than a Band-Aid. The average monthly energy bill has gone up 35 percent since 2022, and 12 percent in the past year alone. “There’s this disconnect between the private companies that are profiting off of energy markets and people’s struggles to keep the lights on,” Mike Pierce, the executive director of the advocacy group Protect Borrowers, told me. Climate change, the AI buildout, and the aging of the country’s utility systems threaten to hike costs in the future too. The country needs green-power plants, grid improvements, and public control over utility systems. But for now, the answer might be “stopping these companies” from raising rates, Julie Margetta Morgan, the president of the Century Foundation, told me.
I don’t pretend to have any expertise in utility pricing. Most everywhere I’ve lived, though, they’re a regulated monopoly whose prices are set by, well, regulators. (In my current house, we depend on a co-op for electricity, a propane tank filled by a private company we contract with for heating, and our own well and septic systems for water and sewer; I don’t see how any of that would be regulated.)
Oh, it gets worse.
The United States isn’t going to become affordable again unless Washington and the statehouses tackle three broken markets: housing, health care, and child care.
Oddly, there wasn’t a crisis five years ago, when we were doing very little about those markets. Regardless,
The country is short an estimated 5 million housing units, thanks to excessive zoning regulations, excessive community input, rising financing costs, and rising input costs. Washington doesn’t have a ready way to fill the gulf. State and local governments have control over nearly all of the relevant land-use rules, with the federal government working almost exclusively through mortgage and rental subsidies.
As Lowrey’s husband, Ezra Klein, has documented for years, a lot of well-meaning regulation makes it really hard to build. And the incentives are to build the most expensive housing possible, since it maximizes profits per unit.
As for health costs, well, “there has never been a meaningful, national effort” to hold them down, Altman said. (The Affordable Care Act expanded coverage but didn’t do much on prices.) As a result, health care pushes half a million Americans into bankruptcy a year, and excess spending acts as a miserable tax on every family’s budget.
The problem is structural. “Most people get health benefits through their employer—they’re exempt from payroll taxes, they’re exempt from income taxes, and employers can deduct them as a cost of doing business,” Meredith Rosenthal of the Harvard T.H. Chan School of Public Health explained. The situation “drives unaffordability,” she told me. Employers have a reduced incentive and little leverage to demand low-cost plans. Employees can’t effectively shop around. She and Altman also pointed to hospital consolidation and a lack of price controls as core issues.
Here, those making the most money off the system have managed to dominate the politics. The ACA was, in many ways, the worst of all possible fixes, further bolstering the insurance-based system that adds an expensive, inefficient middleman into the system while actually legislating away measures that held costs down. It expanded coverage, which was of course a good thing, but was unaffordable without massive subsidies.
Last, there’s child care, a ruinous, if temporary, expense. Parents pay the equivalent of a second mortgage. Day-care centers offer poverty wages to workers. Far too few families get affordable, high-quality care, pushing millions of women out of the labor market. Connecticut and New Mexico are setting up publicly financed universal-child-care systems, and the federal government should consider doing the same on a national level. “These things would be expensive,” Lena Bilik of the Roosevelt Institute told me. “But think of all the foregone wages and the lost economic security when people have to step back from work for any kind of unpaid caregiving.”
Many if not most other wealthy countries heavily subsidize childcare. Our cultural conservatism makes that harder here, as there’s something rather perverse in having society incentivize having small children raised by strangers rather than their parents. But, as it is, it makes little sense for those (usually mothers) without the ability to earn rather large salaries work outside the home, since the costs of childcare, commuting, and the outsourcing of other labor will usually offset take-home pay.
Of the three markets Lowrey identifies as needing fixing, healthcare is the easiest. It is, in most real senses, not a market at all. People with life-threatening injuries or illnesses really can’t shop around for the best prices or substitute less expensive goods. Most other OECD countries have some sort of universal system, often with insurance supplementing for extraordinary care.
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And all of this made worse by a president who blatantly lied (and not just the spin kind of lie, but the direct kind) about his willingness and ability to fix prices, and who continues to lie in office.
It makes a large percentage of the population further and more deeply believe there are quick and easy fixes if only their guy could be allowed to do his magic. The failure of said magic means either a deepening cynicism about politicians as a general matter or the belief that it is the other side blocking the magic and therefore exacerbates support for authoritarianism,
Meanwhile, the Democrats are either tempted to lie themselves or are punished if they tell the honest, complex truth for not delivering the magic/for being a bunch of academic-sounding pinheads.
There is no model anywhere in the world that has first world quality medicine that does not use insurance or just provide health care. In the few places that have experimented with more market oriented health care, like Singapore, they had costs increase. I have yet to see a proposal for health care coverage absent insurance that looks like it might work.
The primary goal of the ACA was to expand coverage but there were some cost cutting/control measures built into it. Not all of them look to have been effective but it is notable that when you look at US health care spending (as a percentage of GDP) it consistently grew faster than GDP ie inflation. Since the ACA passed our spending has stayed essentially flat and that includes the ACA subsidies. May just be a correlation and not a cause but it’s hard to overlook. Anyway, the intention was a second round of health care reform that would address prices after people got coverage.
As an aside after 50 years in health care I am a bit skeptical about people shopping around. It would take a major cultural change. There is lots of literature on attempts at using prices to influence care that people choose and i have personally been involved in many attempts at marketing based upon offering lower prices. When you see effects they are usually pretty small. People will pay some attention to the insurance they choose, thought they often choose poorly, but when it comes to the kinds of care that actually cost a lot (chronic care and acute care like cancer and surgery) people are unwilling to shop. Sometimes they cant.
Steve
@steve222: Oh, we agree. It seems obvious that Medicare for All plus supplemental insurance for those who can afford it/whose jobs provide it is the way to go. Where I depart from Bernie Sanders is that he wants to eliminate all private insurance. But my mom would have gone broke if she didn’t have TRICARE paying what Medicare wouldn’t.
What if we’re looking at the issue all wrong? What if the problem is inequality?
Then tax the wealthy, ban stock buy backs, tax accumulated wealth, raise the minimum wage to like $25 an hour, and subsidize things like child care, healthcare, and housing.
As I recall from a recent post here, the top 10% of the population accounts for half the spending.
My general point: as income inequality widens, aggregate measures become more misleading.
Even aside from that, these measurements do not support Lowrie’s claim. They may be the best we can do to mathematically describe complex phenomena, but they are deeply flawed. But those flaws get laundered as individual measures are combined into other metrics.
@Kurtz: You just saved me a lot of time. I was set to go looking for a headline about the top 10% doing half the spending, and it turns out the last comment, and @Kathy:, already covered it. Yes, the issue isn’t averages, it’s massive and growing inequality.
I’ve noted before that the focus on affordability worries me. Trump just flat lies about it, but, as noted in the OP, Ds don’t have any credible plan either. Removing tariffs would produce a short term hit, but long term, prices aren’t coming down without a recession. Lowering inflation is the best we can realistically do.
Focussing on inequality and making the techbro billionaire oligarchs the enemy seems a more promising strategy. But hard to do when our own D party is also dependent on billionaire donations. But the creatives are on our side. We should be able to make a distinction between the bad, greedy billionaires and the good, public spirited billionaires. In campaign ads if not in fact.
@gVOR10: I decided to go look for a story anyway, Richest 10% now drive about half of all consumer spending. As Piketty and Turchin teach us, this sort of thing leads to either reform or revolution. Ds should be running on reform.
It’ll be hard, but try to get some of the MAGA to see what they’re really supporting.
@Kathy: Aside from the logistical challenges of taxing paper wealth, I just don’t see how it doesn’t just drive people to offshore their money. There mere proposal of putting a wealth tax on the ballot is driving people to consider leaving California.
@Kurtz: @gVOR10: While inequality is massive and growing, I don’t think there’s any disputing that average and even poor Americans have waaaaaay more crap than we used to. There are entire cottage industries around decluttering, storage, organization and the like.
With the caveat that I don’t have the background to fully evaluate the methodology of this post (or the subsequent ones that build on this thesis), it certainly seems sound. “Amount/quality of stuff people own” probably doesn’t tell the story we think it does
(Skip over the first part where he talks about then-current market events down to the “broken benchmark” subhead)
https://www.yesigiveafig.com/p/part-1-my-life-is-a-lie
States seldom regulate prices. They regulate what goes in the rate base, and what return the utility can earn on that. Your coop is presumably a non-profit, so is probably very lightly regulated in that arena.
As for the cost of electricity per se, the official federal government model, espoused by FERC, is to have regional markets determine the wholesale price. Large examples include the California CAISO market, the Texas ERCOT market, and the multi-state PJM market. Utilities pay the wholesale price and pass variations on to the retail customers (with assorted degrees of smoothing and time delay). If the utilities are not allowed to pass variations on, Bad Things happen. California in 2000-01 for example, where the retail price was fixed by the state and the for-profit utilities were required to eat the losses when the wholesale price exploded. It’s hard to put a company the size of Pacific Gas & Electric into bankruptcy, but it happened. To the extent that your coop has to purchase wholesale electricity and those purchases are in an unregulated market, you’re at risk.
PJM is the poster child for regional markets, and I say that in a positive way. They’ve had fewer problems than other markets because they work so much harder at it than other markets do. PJM actually has several markets. There’s the real-time electricity market to do fine control of stability. There’s the hour-ahead and day-ahead markets for predictable demand. There’s a transmission market to get power from generator to retail providers. The hour- and day-ahead markets are linked to the transmission market to keep generators from selling power that can’t be delivered. There’s a spinning-reserve market to deal with emergencies. There’s a future-capacity market to insure new plants get built.
What none of the markets are equipped to handle is the addition of utility-scale customers — eg, an AI data center that draws a gigaWatt — much faster than new generation and transmission capacity can be brought online. When that happens, wholesale prices go up and up and up.
@Erik: Yes, I’ve seen it and it has merit in the abstract. He’s right that we can’t simply waive our hands and treat everything invented after 1950 as a luxury good; the barriers to entry to modern life have increased. At the same time, the notion that anything less than $136,500 in household income is “poverty” is obviously absurd. For one thing, most government subsidies are indexed rather than cliffed. So, earning $1 more doesn’t mean you lose tens of thousands in subsidies.
@James Joyner:
As per Kathy’s First Law: there are downsides to everything.
Still, the way things are going these days, I keep understanding better the passion for the guillotine during the French Revolution. Considering what harm billionaires and especially tech bros have wrought, see “social media”, at some point beheading seems too good for them*.
The culture needs to change, too. the problem is that the culture had already changed. See the New Deal and the Great Compression. That’s essentially what most people want to get to: jobs that pay enough for middle class living without excessive debt. But just about every policy proposal that would move the broad economy in that direction is denounced as SOCIALISM!
Meantime the oligarchs are angling to wield political power to further steer things along for their benefit.
Look, if the average person were given, say, half a million dollars one day, it would change their life. Many would waste it in extravagant spending, some would invest for the long term, some would pay down debts, some would start businesses, some might give it to charity, etc.
If you were to give an oligarch, like Zuck, or Tihel, or Adolf, five million dollars one day, they might not even notice.
*And I’m against the death penalty anyway. How about sentencing oligarchs to 20 years on what they can make from minimum wage jobs, with three dependents each? Not that it would ever happen, but I’d pay good money to see that.
I don’t know how to make sense of these numbers. I know that they represent aggregates that contain people doing very well and people tottering on the brink of serious poverty. Real disposable income is higher than ever, but at the same time credit card debt per household is higher than ever https://www.fool.com/money/research/credit-card-debt-statistics/#:~:text=Recent%20trends%20in%20credit%20card,Score%20remained%20stable%20at%20715. And bankruptcy rates are higher than ever https://www.businessinsider.com/bankruptcies-across-economy-small-business-households-corporate-2025-12. Some have more disposable income than ever, but we have more than 770,000 homeless https://endhomelessness.org/state-of-homelessness/. Maybe concerns about affordability are actually fears of sinking. You may be comfortable right now, but an accident or illness can easily destroy everything you have built.
James, you just had your head buried in sand five years ago. These are all worse, and may finally be hitting you and people you know much harder, but housing, healthcare and daycare have all been a crisis for decades.
Democrats have been trying to fix healthcare since… the Clinton Administration? I don’t know the full history of their failed, overcomplicated efforts, so it may go back before then, but costs have been outpacing inflation for my entire life.
And daycare’s crisis is in large part a healthcare crisis, since it is so labor intensive that healthcare costs for the workers are a huge part of the costs.
I do want to lay a large part of the housing crisis at the feet of the Obama administration. Since the 2008 crash, we have not been building the housing we need in the quantities we need anywhere. And with Obama being president for the 8 years after that, and it being a national problem, he at least gets blame for inaction and creating a new status quo.
(I think Mamdani’s rent freeze is not a great idea unless it comes along with a plan to get a who lot more housing built. But, I’m on the other coast and am not following it all closely.)
One very new thing with housing is the monopoly behavior of landlords. From the consolidation of the market, to the apartment-pricing-consortium software used by a lot of the smaller landlords, we need some serious antitrust enforcement to get back to a free market.
@Kathy: Zuck, Theil, and Elon combined couldn’t come up with $170 trillion, alas.
@Kathy: Zuck, Theil, and Elon combined couldn’t come up with $170 trillion, alas.
@Kathy: Zuck, Theil, and Elon combined couldn’t come up with $170 trillion, alas.