A Ford Mustang Costs About the Same as in 1968, but College Costs a Helluva Lot More
A brief look at 50-year cost and quality trends in cars, houses, college and health care.
In my article, "Faster, Better, Cheaper," for the 50th anniversary issue of Reason, my editors asked me to trace the cost and technical trends for various common products over the past five decades as way of showing how our living standards have improved since the 1960s. When the article came out, various gloomy folks complained (in the comments and on twitter) that I had "cherry-picked" the items. In fact, the complainers asserted that we Americans are much worse than the steep fall in prices and vast improvements in a few consumer products could demonstrate.
If I were being serious and fair, many complainers suggested, I would have focused on the cost trends in cars, houses, health care and college education. So let's do that and see what we find.
In 1968, the average price of a new car was $2,822 ($20,806 in 2018 dollars). According to Kelly Blue Book the average price for a new car in 2018 stands at $35,359. On the face of it, this nets out to an increase of around 70 percent. But are bare prices really a fair way to compare cars over the past 50 years? For example, the average lifetime for passenger cars has increased from 12.2 to 15.6 years between 1970s and the 2000s. And not only that, we drive our cars a lot further than folks did back in the 1960s before we scrap them. In the late 1960s, just over half of cars had air conditioning. The average car got about 13.9 miles per gallon; today the average is 24.7 miles per gallon.
To illustrate the trend in car prices and functionality, let's take a look at an iconic American ride, the Ford Mustang. The price for a basic Mustang hardtop in 1968 was $2,707 ($19,598 in 2018 dollars); today the lowest priced Mustang goes for $25,680. That would suggest that the price of a basic Mustang has increased by 31 percent, but that would be wrong. Consider that adding features to the 1968 model that are now standard on the 2018 car, such as air conditioning, AM/FM radio, tilt steering wheel, power disc brakes, and power steering, would increase its price to $3,466 ($25,553 in 2018 dollars). And this does not take into account other standard modern features such as power windows, rear defrost, car alarm, back-up camera, intermittent wipers, power door locks, airbags, electronic stability control, and much more. In addition, the 1968 car got about 12.7 miles per gallon; today's model gets 31 highway miles per gallon.
What about the prices of single family houses? According to the Census Bureau the median price for a new house in 1968 was around $25,000 (about $185,000 in 2018 dollars). The median price was $320,000 for a new house in 2018. Prima facie that implies a 73 percent increase in the price of new houses over the past fifty years. But like the cars, new houses built fifty years ago were very different from those of today.
In 1968, the average floor area of new house was 1,665 square feet. By 2015, the average size had risen to 2,736 square feet and has recently dropped back to 2,495 square feet. Basically, the average price per square foot of living spaces was $111 in 1968 and is now $128 per square foot. In 2016, economist Mark Perry noted that the price per square foot has bounced around in that range since the early 1970s. But modern houses have many amenities that were not common in the 1960s that must be taken into account when calculating the price per square foot. For example, only 10 percent of new houses in the 1960s had two and half or more bathrooms; now nearly 50 percent do. Central air conditioning was found in 45 percent of houses in the 1960s; now 89 percent have it. In addition, most new houses incorporate improvements like better insulation, double-paned windows, and electrical panels rather than fuseboxes.
What about the rising cost of college education? The National Center for Education Statistics reports that tuition, room and board for a year at a public university averaged $1,245 in 1968 ($9,179 in 2018 dollars). That has more than doubled to an average of $21,370 this year. What accounts for this huge increase in the cost of a college education? The steady expansion of the federally subsidized student loan program is the biggest culprit.
Back in 1987, then-Secretary of Education William Bennett argued that "increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase." Recent research by New York Federal Reserve economist David Lucca and his colleagues have substantially confirmed the "Bennett Hypotheses" finding that a dollar increase in subsidized student loan caps result in a 58 cent increase in an institution's tuition sticker price. Research by Indiana University economist Grey Gordon and his colleagues confirm the dominance of this effect.
Gordon also notes additional cost drivers including substantially increased demand and the expansion of expensive high skilled workforce to meet that demand. Consider that in 1980, there were just over 12 million students enrolled in U.S. colleges and universities; today nearly 20 million are enrolled. Another relatively minor factor is "cost disease." Salaries in jobs that have experienced no or low increase of labor productivity, such as college teaching, nevertheless increase in response to rising salaries in other jobs that have experienced higher labor productivity growth. In order to teach more students, universities must hire more faculty and pay them enough to compete with their other opportunities. Ratcheting back subsidized student loans would seem to be reasonable first step toward moderating escalating tuition hikes.
Finally, my critics are dreaming if they expect me to explain in a paragraph or two the vexed issue of rapidly rising health care costs. That being said, a big part of the reason we pay more for health care is that we get more. Consider that average life expectancy in 1968 was just shy of 70 years, and is now 78.7 years. A considerable portion of that improvement can be attributed to increasingly effective medical treatments.
Back in 1968, total health care spending was $58.4 billion ($431 billion in 2018 dollars), amounting to $284 ($2,100) per person. As of 2016, U.S. health care spending had risen to $3.55 trillion (2018 dollars), amounting to about $11,000 per person. A lot of analysts point out that the service intensive health care sector suffers from cost disease. And if federal student loan subsidies are driving up college costs, surely $700 billion in U.S. government subsidies is having a similar effect on health care.
A 2017 study in the Journal of the American Medical Association found that five factors—population growth, population aging, disease prevalence or incidence, service utilization, and service price and intensity—are largely responsible for rising health care costs. Population growth and aging accounted for 23 and 12 percent of the increases, respectively. Rising service prices and intensity are responsible for more than 50 percent of the cost increases. Basically, Americans are resorting more to specialists and paying more for services like hospital stays and knee replacements.
One general point: Government mandates and subsidies have, during the past 50 years, distorted the cost trends in all four of the sectors discussed above. Safety and fuel economy requirements have contributed to keeping car prices higher; mortgage interest deductions along with building code and zoning regulations have done the same to housing costs. The vast proliferation mandates and subsidies have increasingly untethered the college and health care sectors from the disciplining effects of market competition. (It must be acknowledged that if health care can't be significantly automated, cost disease will likely continue to push up prices in that sector.)
The bottom line is that cars and houses have not notably increased or decreased in their prices over the past 50 years, but they have significantly increased in quality. Research strongly suggests that increases in educational attainment explains some 75 percent of recent economic development. So the most significant college education trend is that 33 percent of Americans now have bachelor's degrees and higher, up from only 10 percent in 1968. For one vision of how our dysfunctional health care system might be repaired, see my proposal for BaileyCare.