- The Washington Times - Tuesday, September 14, 2004

Allan Roberts, a Laytonsville accountant who is putting two children through private college this fall, is amused by reports from the nation’s top inflation-fighters that prices are under control.

Mr. Roberts expects to pay $30,000 apiece in tuition for his sons, while he has had to foot astronomical increases in health insurance premiums averaging 30 percent a year for the 15 employees of his accounting firm.

Add to that the hefty increases in his home-repair bills, soaring gasoline and utility bills and double-digit gains in housing prices, and he thinks some people at the top must be out of touch.

“We have an inflation problem,” he said. “My crystal ball tells me the inflation genie is about to be let out of the bottle,” even though official readings of inflation are not showing much concern.

The government’s main measure of inflation, the Consumer Price Index, posted a decline of 0.1 in July after a flare-up in prices driven by spiraling energy and food costs during the first half of 2004. In the past year, the index rose a moderate 3 percent.

The Producer Price Index, the cost of goods at the wholesale level, fell 0.1 percent in August, the Labor Department reported Friday.

“Maybe they’ve got the same accountants working for the government that they did at Enron,” Mr. Roberts joked, taking note of the 4.5 percent increase in the health care index in the past year. “It’s much more than that for me.”

Hans Kidd, a deliveryman in Falls Church, also sees a major problem with the price of gas hurtling to more than $2 a gallon this past spring, even though Federal Reserve Chairman Alan Greenspan and other economists dismiss such energy spikes as mostly temporary.

“I’ll probably be broke after a month or so if the prices continue to rise,” Mr. Kidd said. “If the economy continues to go down, I may not even have a job anyway.”

Consumers are having unpleasant encounters with the nation’s most vexing and intransigent inflation problems. Some of them — such as health care and tuition costs — have persisted for years, while others — such as soaring energy prices — sprang to the forefront in the spring.

The inflation problems most troubling to consumers, although diverse, have something in common: Their causes are complex and largely beyond the reach of the Fed with its main inflation-fighting tool, higher interest rates.

Although the Fed moved this past spring for the first time in four years to stifle the uptick in inflation with gradually higher rates, the central bank is hoping that the upward spiral in oil prices that has fueled inflation will be “transitory.”

Record-high oil prices of more than $43 a barrel were largely the result of overseas developments that are beyond the Fed’s control, including soaring demand in China and threats to supply in the Middle East and Russia.

Meanwhile, stubbornly high education and medical costs rose briskly even when inflation fell to the lowest levels in decades after the 2001 recession, seemingly impervious to either the business cycle or the Fed’s remedies.

Candidates tackle issues

The acceleration of these costs has become a hot topic in the presidential campaign. Analysts say politics and governmental policies are partly to blame for the problems, and political leaders must play a role if they are to be solved.

Democratic nominee Sen. John Kerry decries the “middle-class squeeze” created by the rising cost of essentials, coming at a time when average wage gains have dropped to the lowest in decades.

He is proposing new programs and expanded funding to help people who can’t afford the high cost of health care and education, while pushing conservation, fuel efficiency and intensive efforts to find alternative sources of energy.

President Bush wants to put a lid on health care inflation through wider use of tax-free medical savings accounts, limiting medical lawsuits and enabling small businesses to pool together to purchase insurance.

Like Mr. Kerry, he wants to step up research on hydrogen fuels, clean-coal technology and other future energy sources. But political opposition has forced him to abandon efforts to open up more federal lands to oil and gas drilling to help temper energy costs.

The issues being debated in the campaign are as critical to businesses as they are to consumers. Surveys of businesses rank energy and health care costs as top concerns. Fears that soaring oil prices will crimp corporate profits and thwart consumer spending drove the stock market down this summer.

Businesses are hesitant to hire and make expansion plans because they are worried that consumers feel defeated by high prices and job worries and will pull back on their spending, said Bill Zadrozny, chief executive officer of Siemens Financial Services.

“When you look at the inflation statistics, they tell us it’s very tame. But when you ask the consumer, they feel very pinched,” he said. “A lot of it is energy and food prices and fees. … I’m not sure everything’s being captured or correctly accounted for.”

Jason Shenker, economist with Wachovia Securities, noted that although gas prices surged 33.4 percent in the past year, they had a small effect on the overall inflation rate, because energy makes up only 3.2 percent of the price index.

With energy prices being blamed for a sharp slowdown in the economy this past spring, he said they should be given a larger role in the index.

Also, Mr. Greenspan and other economists should stop routinely dismissing rising energy costs as temporary, Mr. Shenker said, in light of evidence that the jump in oil and gas prices reflects a long-term trend of demand outpacing supply growth worldwide.

Some economists also question whether the price index accurately measures housing costs.

Although two-thirds of Americans own their homes and pay a monthly mortgage, the housing price index is based on rental costs, which have been tumbling because of high vacancy rates even as home prices soared in recent years.

Whether the government is accurately measuring housing costs is important, because they make up about one-third of the prices consumers pay and could be seriously understating inflation.

Costs fall hard on some

Regardless of how prices are measured, the cost of essentials such as fuel and housing can have a severe effect on consumers. First-time home buyers, mostly young people and minorities, are pinched by record-high home prices, and many are being priced out of the market.

Rural and low-income households are hit the hardest by high energy costs, according to a recent New York Fed staff study, while families with children are burdened the most by rising education costs, and seniors are hurt the most by surging medical costs.

Health care costs, which have resumed double-digit growth after a lull during the 1990s, are not fully reflected in the Consumer Price Index because most medical expenses are paid by employers or the government through the Medicare and Medicaid programs.

Though consumers don’t see all the costs, they nevertheless pay the price. Skyrocketing health insurance premiums have forced many businesses to drop insurance or to hold down raises, leading to anemic wage growth in recent years.

Many employers, like Mr. Roberts, have asked their staffs to pay more of the insurance bill. The increased paycheck deductions and insurance co-payments have caused much grumbling among consumers and have become a top concern in voter surveys.

Medical inflation slowed for a while during the 1990s as businesses and consumers embraced health maintenance organizations, designed to control costs. But widespread disenchantment with the denial of some services prompted by cost controls led to a consumer backlash and a revival of both the services and inflation.

Consumers who are not covered by their employers or government programs, mostly low-income wage earners, often are hit with exorbitant hospital and doctor bills when they seek treatment.

The cost forces these low-income consumers to rely on charity or file for bankruptcy when they cannot pay hospital bills that reach into the tens of thousands of dollars — driving up costs for others.

Remedies debated

Mr. Kerry is proposing to break the upward spiral in medical costs by providing backup catastrophic insurance for employers that adopt programs encouraging preventive care for people with chronic health conditions such as obesity and diabetes. Studies have shown that steps taken to manage such chronic diseases lowers costs.

Mr. Bush and Congress last year enacted medical savings accounts that enable businesses and individuals to deduct the cost of purchasing catastrophic health insurance policies while setting up tax-deductible savings accounts to cover routine expenses.

By encouraging consumers to pay more of their medical care out of pocket, the proposal is aimed at making them more cost conscious and willing to avoid unnecessary and duplicative care — a major factor driving up medical costs.

But in providing new drug benefits to seniors under Medicare, Mr. Bush eschewed a proposal endorsed by Mr. Kerry to tame soaring drug costs by enabling seniors and other consumers to purchase lower-cost drugs from Canada.

Both candidates want to broaden the availability of inexpensive generic drugs and encourage providers to lower administrative costs and medical errors by computerizing their filing, prescription and information systems.

Mr. Kerry would hold down lawsuit costs through the wider use of arbitration and limiting punitive-damage awards.

He also is proposing a major expansion of the Medicaid program to ensure that all low-income children are covered and an additional 13 million low-wage parents and adults come under the state-run program for the poor.

He would pay for the $653 billion, 10-year cost of his new programs by repealing Mr. Bush’s tax cuts for the wealthiest 2 percent of taxpayers.

Mr. Bush would help many of the same low-wage families by providing up to $3,000 for the purchase of catastrophic insurance. As with last year’s $564 billion Medicare bill, he offers no way of paying for the $70 billion proposal.

Government: the problem or the solution?

Many economists say government subsidies have been a major factor driving up health care and education costs. The federal and state governments pay the bills for the most intensive users of medical care — the disabled and the elderly.

Under the government programs and most employer-provided medical plans, consumers are not cost conscious because they do not pay more for more services. Providers also have little incentive to hold down costs readily paid by the government or business.

Mr. Roberts said he likes the Bush plan because of the way it encourages more selective spending, and he is considering offering it to his employees. It would encourage them not to overspend on health care in the same way choosing to eat “a la carte” instead of from an “all-you-can-eat buffet” discourages overeating.

The upward march of health care and education costs are a big burden for taxpayers and society as well as individuals. Studies have shown Americans pay far more for medical care and education than consumers in other developed countries, yet they are no healthier or better educated.

“Achievement has not kept pace with spending,” said Frederick M. Hess, an education scholar at the American Enterprise Institute, noting that a 2000 study found the United States spent 66 percent more than Germany on primary education and 56 percent more than France, yet ranked 15th among 31 developed countries.

“Most troubling is that America’s standing actually deteriorates as students spend more time in school,” he said. Both Mr. Bush and Mr. Kerry propose to spend more on education, not less.

Federal and state spending on education, adjusted for inflation, tripled between 1960 and 2000, Mr. Hess said, driven largely by skyrocketing personnel costs — mostly for the bureaucrats who run the schools rather than teachers.

Although the government provides extensive subsidies for public colleges, consumers have had to pay more as strapped state governments pass on more costs to students and their parents. Private colleges also are raising tuition as they receive less support from endowment funds, grants and donations.

“Until we start rethinking how we use education dollars, boosting expenditures is little more than a costly recipe” that feeds the upward cost spiral, Mr. Hess said.

Energy is another area in which government policy and politics play a key role. Environmental concerns have severely restricted new drilling, the use of huge domestic stores of coal, and the building of new refineries, forcing the United States to rely increasingly on unstable foreign sources for oil and gas.

Environmental mandates drive up the cost of producing the clean fuels and emissions required of automobiles, power plants and factories.

Foreign policy has a heavy influence on energy prices. The biggest factors behind today’s escalating oil prices are worries about insurgent and terrorist strikes on oil facilities in Iraq and Saudi Arabia, and political instability among major producers such as Russia, Venezuela and Nigeria.

How the next president prosecutes the war on terrorism as well as handles these other far-flung geopolitical matters could greatly affect the course of energy prices, analysts say.

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