Readers Attack “Time-price” Theory

Last Thursday’s reckoning about the “time-price” theory of economics drew a bulging mail.

In brief review…

Time-price theory emerged from the combined researches of economists Marian Tupy and Gale Pooley.

This theory argues that Every Man Jack’s lot is drastically and perpetually on the upgrade.

That is because commodity prices have constantly declined relative to the labor required to fetch them.

And so the average fellow toils less and less to acquire more and more.

Example:

In 1986 the standard blue-collared American drudged 32 minutes to acquire his Thanksgiving extravagance.

But today?

The same overpiled plate devours a mere nine minutes of his labor.

But does time-price theory give an accurate story of galloping improvement?

You — our reader — are not half so convinced.

Readers Weigh in

Consider, for example, reader Mark S:

In the interest of preserving pessimism, I have to say that time-price economic theory has pushed my Irving Fisher button on how the stock market had reached [a permanently high plateau].

Irving Fisher is of course the gentleman who gloated the market had scaled the permanent heights — just prior to the Crash of ’29.

Next we come to reader J.M.S. He trusts Mr. George Gilder’s time-price analysis as far as he would trust a dog with his dinner:

The fact that Gilder is affiliated with Arthur “Laughingstock” Laffer, the guy who laughed at the predictors of the ’08 market crash, is all I need to know about Gilder’s economic analysis.

Finally we come to Hagan, another reader. The “Enlightened Three” of Tupy, Pooley and Gilder wring this fellow’s gizzard.

That is because this brainy trio tortures the facts into a false confession:

The “research” of Tupy and Pooley as espoused by Gilder is uninformed, condescending and insulting… This tripe from the Enlightened Three is worse than useless…

We find justice in Hagan’s argument. Pull up, for example, alongside inflation…

What Is the True inflation Rate?

This time-price theory may have something in it, as nearly every plausible theory has something in it.

But can it withstand an untortured inflation reading?

Official inflation runs below 2%. But if government number-torturers gauge inflation as they did in 1990, a vastly more inflated number emerges.

According to Mr. John Williams of ShadowStats:

Actual consumer price inflation runs above 5% — if the rules of 1990 were enforced.

And if government number-torturers tracked inflation by 1980’s exacting standards, the holy angels would shriek in horror.

That is because consumer price inflation approaches 10% — again, if we accept Williams’ damning verdict.

Are wages rising at the same 10% gallop?

Alas they are not.

Mix in medical care… housing… education — to name some examples.

Are these costs declining relative to the amount of labor to acquire them?

The facts argue otherwise. Direct your attention now to health care…

Health Care Costs Are Surging

Data company Clever went at a recent Bureau of Labor Statistics Consumer Expenditure Survey. They discovered that last year…

The average American household ladled out nearly $5,000 per person for out-of-pocket costs and insurance premiums.

That figure — we are informed — represents a 101% increase over the ~$2,500/person in 1984.

The Commonwealth Fund hatched its own study.

Last year, they discovered, health insurance premiums and deductibles represented 10% of workers’ median income in 42 states.

Yet in 2008… this fact only applied to seven states.

Is this the model of progress under time-price theory?

Come next to the nationwide costs of housing…

Record Housing and “Education” Costs

Housing costs have never been higher.

October rents increased 2.3% year over year. The median United States rent presently rises to $1,600 a month.

In all, Americans dedicate some 37% of income to housing — a record.

Apply time-price theory to housing. Does it tell a story of perpetual improvement, of progress unequalled?

We harbor severe doubts. Consider now the cost of higher miseducation in America…

College tuition has gone skyshooting 1,375% since 1978 — over four times the official inflation rate.

This we have on authority of the United States Department of Labor.

Meantime, total student loan debt presently exceeds $1.6 trillion. Over 44 million unfortunates groan and buckle under an average $34,000 of debt.

Have Americans sweated and toiled less to satisfy these costs? Or have they sweated and toiled more to satisfy these costs?

Double-digit Increases Year After Year

Our own Charles Hugh Smith in summary:

Government-issued statistics… purposefully misrepresent reality for political purposes, with Exhibit No. 1 being the completely fabricated Consumer Price Index (CPI) inflation rate, which has been a laughable 2% or less for a decade while big-ticket expenses such as rent, health care, child care and college tuition have registered in double-digit increases year after year…

Tens of millions of wage earners can’t afford what was available to everyone, even the working class, in previous eras: to buy a family home, however modest; to be able to afford to have children; to build meaningful capital…

Thus the time-price theory takes a mighty harpooning.

Yet perhaps we deal with exceptions. Exceptions — incidentally — bearing the heavy impress of government.

Is it coincidence that health care and education are subsidized heavily by government… and therefore spiral out of reach?

Just so, you say.

But costs of goods and services have declined overall. Take your look at computing, for example. Costs drop each year, relentlessly and reliably.

Certainly our average Joe and Jane have benefitted gorgeously from this magnificence.

But lean in for a closer look, argues Thomas Philippon…

The Decline of American Free Market Capitalism

Mr. Philippon professes finance at New York University. And he claims Americans hand out billions more than Europeans or Asians for life’s items.

These range from internet service to cellular telephone plans to air travel.

Thus American capitalism has lost the vigor and suppleness of youth… and its arteries have gone hard with age.

The good professor:

When I arrived in the United States from France in 1999, I felt like I was entering the land of free markets. Nearly everything — from laptops to internet service to plane tickets — was cheaper here than in Europe.

Twenty years later, this is no longer the case. Internet service, cellphone plans and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras and Swaziland.

American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales.

And so Americans flatter themselves grandly when they boast of free markets.

The Rise of Oligopolies

To what evil does Professor Philippon ascribe this woeful decline of American capitalism?

“Oligopolies.”

A handful of business concerns has gobbled the competition, enlisted government to throw up protective moats around their fiefdoms… and hauled up the drawbridges:

None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents…

Telecoms and airlines are some of the worst offenders, but barriers to entry also drive up the prices of legal, financial and professional services. Anti-competitive behavior among hospitals and pharmaceutical companies is a significant contributor to the exorbitant cost of health care in the United States.

Meantime, this “creeping monopoly power” has choked, throttled and suffocated the middle class.

The Middle Class Has Barely Budged in Decades

And so it rages and fumes against politics — even capitalism itself:

Creeping monopoly power has slowly but surely suffocated the middle class. From 2000–2018, the median weekly earnings of full-time workers increased from $575 to $886, an increase of 54%, but the Consumer Price Index increased by 46%. As a result, the real labor income of the typical worker has grown by less than 0.3% a year for nearly two decades. This explains in part why much of the middle class distrusts politicians, believes the economic system is rigged and even rejects capitalism altogether.

And so time-price theory of commodities comes crashing against the impossible granite of health care, housing, education and monopoly.

A fellow might labor merely nine minutes for this Thursday’s banquet. But how many additional minutes must he slave for these higher costs?

Last Thursday we feared time-price theory might undercut our cherished theories of doom.

But today our spirits are vastly brightened.

Tune in tomorrow. We will grant George Gilder a final defense.

Regards,

Brian Maher
Managing editor, The Daily Reckoning