When you write weekly articles or lessons as I have during the last seven years or so, the news of the moment seems to blend together into a fast moving blurb of fears and challenges. It was just six months ago, when gasoline and commodity prices were running wild, causing inflationary fears on staple goods beyond anything I've witnessed during my short lifetime. And here we are just six months later, and many of those same inflated prices are down substantially as we now worry that deflation will create a sustained and deep recession.
While I am shocked by how the price of Windows based laptops have plunged (this morning WalMart featured a Vista loaded Compac laptop with 2gb memory and 160gb hard drive for $398), I am just as shocked that the renewal for my health insurance increased by 14% after increasing by 20% last year and 21% the year before.
Thus our question for this week's lesson is - Which Will It Be: Inflation or Deflation going forward? And my first question is why are my medical costs rising at unprecedented levels even though I am healthy and rarely use its coverage? My second question is why do college tuition costs continue to rise dramatically even though the cost of a terabyte of storage which sold for thousands of dollars 5 years ago now sells for $99?
I believe the answer lies in the amount of regulation; how efficient an industry operates; and whether the price of goods and services are based on free market pricing. In the case of computers and storage space, there are no regulations. The products keep getting more efficient. Over the last two decades we have continued to receive more value for our money. And because there is a glut of supply at the moment, the price of computers and storage is plummeting as it should. Not good for the manufacturers of these products. But the price plunge is great for the consumers of these products.
In the case of Medical Insurance, these products and services are highly regulated in each state. The entire medical system is definitely very inefficient. Consumers don't choose services based on the price or quality of the service. We don't have any idea what a provider charges, until after the service is performed. If the operation is a failure, everyone still gets paid and the patient has to start all over again. No guarantees, no warranties on service!
And the sad part is no one is winning in this messy industry. The patients are crying about high medical premiums and poor service. The doctors cry that they can't make enough money to stay in business. The hospitals cry that they are going broke. And the insurers just keep raising premium prices at will because they are only interested in staying profitable regardless of who's complaining. And inflation moves forward in this over-regulated, inefficient industry at a pace that is making insurance coverage UN-affordable!
In the case of colleges and universities, we find another sad state of affairs. Too much waste at every line item; students graduating in majors where there are no jobs available; and the cost of an education is placing its graduates in financial debt that can last for over a decade to re-pay.
While the current credit crunch is sure to change the spending habits of consumers around the world, deflationary pressures may be the soup du jour for most purchases. However this is only true when prices are based on efficient industries and free market pricing based on supply and demand. Look for even more inflation in 2009 in education; medical insurance; homeowners insurance; and any other industry that the government or its regulators have their paws attached in some way.
I believe the coming year will be full of financial challenges for governments, businesses, private and public institutions; charities and consumers. Everyone will have to change their spending habits and adjust to more sensible budgets. The days of spending money without worrying about the consequences have already come to a halt. Credit will be scarce and only be offered to those who deserve to receive it. This is how we should have acted all along.
While our new president has high hopes of fixing our economy, trying to do so through more excessive government spending and the creation of more bureaucratic waste is expensive, inflationary and futile long term. We need to create incentives to make congress; government agencies; our health care system; our educational system; and failing industries MORE EFFICIENT and mandate that they MUST provide VALUE, transparency and accountability to its constituents for every dollar they receive and spend. Until we all become more accountable and efficient, we will just act as firemen attempting to put out a runaway fire in a blazing wind.