Stagflation: Albany's Gift To NY

The New York metro area is in the grip of a recession considerably harsher than what the rest of the country is experiencing. And yet inflation is also raging in New York at nearly double the national rate, when economic theory would lead you to expect declining, or at least moderating, prices. What's going on? Simple: Dysfunctional public policies are helping to drive up the cost of local housing and medical care, pushing the New York inflation rate up despite a shrinking economy.

The latest data show that inflation in New York increased by 2.3 percent in the first quarter, compared to just 1.3 percent nationally. More ominously, the city's core inflation rate, that is, the cost of everything except food and energy, rose 3.8 percent in the quarter.

Of the country's 14 largest metro areas, New York's inflation rate rose the second highest, giving the city a rare distinction: It not only ranks among the top metro areas in job losses, but also in price increases.

Economies aren't supposed to work this way. One of the few beneficial by-products of a recession is that inflation is supposed to subside, and prices might even decline.

For a high-cost city like New York, such declines are often an important prelude to a recovery, because the big premium between what it costs to live and work in Gotham versus other areas of the country shrinks a bit, making the city relatively more affordable.

In the wild expansion of the mid 1980s, for instance, inflation raged in the city well above the national average, increasing the cost of locating here. Once the recession set in during the late '80s, inflation gradually moderated, until finally the rate of price increases in the city came into line with price gains nationally. Only then did the city begin recovering.

But so far the reverse is happening here because of housing and medical costs—two areas heavily regulated by state and local government.

The area's cost of shelter—that is, rents and home prices—rose 50 percent faster than the nation's housing costs in the first quarter.

Such increases, even during recessions, are not unusual in New York because of the city's system of rent regulation, which artificially dampens the market for new housing construction. While a privileged few get the benefits of low rents, everyone else has to deal with the inflated cost of shelter caused by government-induced housing shortages.

The other significant contributor to New York's high inflation rate, medical care, is also subject to a highly regulated local market. New York policy-makers help drive up the cost of health care:

* by forcing insurers to cover all kinds of procedures considered optional elsewhere,

* by requiring those who have private insurance to pay hefty taxes and surcharges (such as the $350 yearly tax to fund medical education), and

* by keeping the size of the local health-care system artificially large and inefficient through government subsidies.

As a result, medical costs are surging ahead in New York at double the regular inflation rate and at a clip equal to national health-care inflation, when the region's steep recession should be moderating prices here versus the nation.

There is little indication that public-policy-makers worry about the effects of their actions—or even understand them.

For instance, even as medical costs soar, the state recently approved its latest mandate: requiring insurers to pay for infertility treatments—which is likely to bring new increases in health insurance premiums and to spur overuse of the medical system. And recently Albany legislators tried to use this election year to force through a re-authorization of the city's rent-control law a year before it expires.

These are hardly the kinds of actions New York needs in a time of economic crisis.

Steven Malanga is a contributing editor to the Manhattan Institute's City Journal. From www.city-journal.org.