Good News For The Middle Class

By Rick Newman of the Exchange:

You’re used to hearing how the middle class is being shredded and life will never be the same for ordinary Americans. Please suspend disbelief for a moment, because a couple of important thing are starting to get better.

The cost of healthcare, which for many families has become a huge budget-buster, has now been rising at fairly normal rates for the past four years. And the cost of higher education, another big expense, has recently begun to moderate as well. If these trends continue or improve, it would go a long way toward alleviating the financial pressure — and in some cases panic — that has become a chronic condition for many families. 

The slowdown in healthcare inflation would be unremarkable except for the fact that a decade ago, healthcare costs were rising by nearly 10% per year — roughly five times the overall rate of inflation — and sucking up an ever-increasing chunk of the family budget. Remember when your healthcare premiums rose by an uncomfortable amount every year, and everybody said there was nothing anybody could do about it? You’re not hearing that so much any more.

Economists expected healthcare costs to rise more slowly during the 2007-2009 recession, since people typically cut back on all types of spending when money runs short. The good news now, however, is that cost increases have remained low even during the recovery. Government data just released show health spending rose by just 3.7% in 2012 (the latest numbers available), the same range of growth that’s been in place since 2009. That was still about twice the rate of inflation, but it’s a major improvement nonetheless.

Most media coverage of this important news has focused on whether the Affordable Care Act, President Obama’s landmark health-reform law, is responsible for the slowdown in healthcare costs. Most economists say no; the White House says partly. Ordinary people should say we don’t care why it happened, we’re just happy for a bit of relief from an onerous financial burden.

The road ahead

Nobody knows whether healthcare costs will go lower still or revert back to higher levels. Government pressure to lower Medicare and Medicaid costs could intensify, helping lower prices for everybody. New efforts to reduce medical errors, convert to digital record-keeping and better-audit costs could finally pay off, and consumers and businesses might become better healthcare shoppers as they bear a larger portion of expenses. But such efforts in the past have failed to rein in costs, so any predictions are highly suspect.

Still, for now, many families have a bit less to worry about. On a per-person basis, health spending rose just 3% in 2012. Spending on prescription drugs was a bright spot for consumers, rising by just 0.4% — mainly because several blockbuster drugs, including Lipitor, Plavix and Singulair, came off patent, opening the door for cheaper generics.

The skyrocketing cost of healthcare has become a bigger and bigger problem, leading in some cases to unsustainable debt levels and even bankruptcy; this is one reason Obama's health reforms earned enough political support to pass in the first place.

The Kaiser Family Foundation reports one-third of Americans struggle to pay their medical bills — even when they have insurance — and several studies have found huge medical bills are the biggest reason Americans declare bankruptcy. And because medical costs have risen so much during the past 20 years, many companies that offer their workers insurance have had to cut back on raises in order to continue offering coverage. There’s still a long way to go to make medical costs more affordable, and supporters and critics of Obamacare are bitterly split (big surprise) over whether that program will make a difference.

The education factor

As for the other fast-rising middle-class expense — higher ed — costs have only recently shown signs of flattening out. The cost of college tuition and fees, as measured by the government, rose about 17% per year from 2000 through 2012. In 2013, however, those costs rose by only about 4%. It’s not entirely clear why the slowdown happened and whether it’s likely to be temporary or permanent. But universities have come under considerable pressure lately as students have graduated with huge debt loads, only to find it difficult to find jobs that pay enough to finance their student-loan payments.

President Obama has proposed a few new ways to make colleges more accountable for their costs — using government-backed student loans as leverage — and families themselves may be getting shrewder when it comes to shopping for education. Student-debt levels are still at record highs, but data gathered by the Federal Reserve Bank of New York suggest that may soon peak or even fall.

Meanwhile, 2014 is shaping up as a turnaround year for the economy, with more jobs, fewer fundamental problems and less likelihood politicians in Washington will mess everything up. People tend to notice more when things go wrong than when they go right, but all the same, a little less bellyaching this year would be a sign of progress.