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Rikki Schlott: Young people are hitting important life milestones at later and later ages, if at all. They’re delaying leaving home, settling down, and doing all the things that were once promised as part of the American dream. But what if this isn’t because Gen Z lacks motivation? What if it’s because they’re responding to bad government policies?

I’m Rikki Schlott, and welcome to the Cato Weekly Podcast. Today I’m joined by Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics here at Cato, and the primary author of the Affordability Handbook, which talks about a lot of the issues that we are about to tackle today.

So Ryan, I want to start with just a general impression that I feel like a lot of young people my age have, which is that everything from housing to healthcare, education, is unaffordable for us in a way that it wasn’t for prior generations. In your view, is that a defensible position? And also, what are the major policy issues that are kind of causing that impression among young people?

Ryan Bourne: I’m not sure that things are less affordable than for previous generations on the whole, but I think we’re currently going through a real affordability crunch. I think that’s worth splitting out into two components. The first component is we just lived through the highest inflation since 1981. The price level today is about just under 30% higher than it was six years ago. Inflation is when you have too much spending in the economy relative to the amount of goods and services being produced, and as a result, all prices go up over time. So I think people are really struggling on the one hand, because what they’re seeing is that prices are much higher than they expected them to be, and they feel that in everything that they spend on.

Now, of course, on top of that, in individual sectors that we really care about, housing, energy, childcare, other things like that, there are ordinary demand and supply factors which can increase prices at certain times. So the Iran war just drove up gas prices, oil prices, and hit people who were driving their cars quite often. But even beyond that, I think the key thing to take away is that there are many government policies that may have been on the books for a long time that actually inflate the basic cost of living higher than it needs to be, because they impose barriers to the supply of goods and services. So, you know, we impose barriers on the building of homes, which inflate home prices. There are many things that we do that restrict the growth of the grid for electricity that raises energy prices. And so in my view, once you separate out the inflation issue, I think what government should be focusing on is removing those barriers that they’ve imposed that raise the cost of living higher than it needs to be.

Rikki Schlott: So I’d love to walk through just sort of the pathway of a typical Gen Zer who’s trying to build a life right now, and most of them will start with education and getting a college degree. We know that federally backed student loans have made tuition more and more expensive for young people. How else has government gotten in the way of young people being able to access education and just start that pathway?

Ryan Bourne: Well, you’re definitely right to point this out. If you look since 1970, the inflation-adjusted price of tuition and fees has gone up three times, so like 300% higher now, even accounting for inflation over that 56-year period. So, you know, that’s a big increase. I think it’s fair to say that there are many things that drive up the cost of higher education that don’t have anything to do with policy. It’s a very labor-intensive service. It’s competing for skilled workers with other industries where productivity growth has been very strong. So you kind of have to pay more over time.

But on top of that, I think you’re absolutely right to say that as the government has expanded access through not just student loan support, but also tax credits as well, a lot of that extra demand has fed through into higher prices. So even though more people are able to go, the actual market price of tuition has actually gone up as a result.

There’s one big cause of this, I think, that’s underexplored and then one big consequence. The big cause that is underexplored is that because of a range of accreditation barriers, how difficult it is to start a new university, when you get this big increase in demand, a lot of it flows through into higher prices rather than a greater availability of perhaps lower-cost options for students. So students are pushed into kind of the traditional route, and that kind of drives up prices because there are more of them wanting and able to go with that support.

But the societal consequence, I think, which is underexplored, is that as a result of more people going to university, it’s now become the expectation in the labor market that you have a degree for many jobs. So many jobs where you previously didn’t require being a graduate, you now do. And so as a result of that, more people are going and feeling like they’re not getting ahead, right? So they’re only getting the jobs that they would have got had they not gone to university in a previous generation, but they’re loaded with debt and they feel worse off as a result.

Rikki Schlott: And so I know that a lot of colleges are producing classes where a large proportion of them are not even out-earning just the typical high school graduate. What sort of policy proposals would you suggest to help make higher education both more accessible but also more effective at the other end?

Ryan Bourne: Well, I think universities themselves have to become more innovative in the way that they deliver higher education. Hopefully with artificial intelligence and things like that, you’ll be able to start for the first time providing courses and things that actually train people at much lower cost, because a big part of the cost obviously of providing university services is employing the lecturers and the tutors and others and the administrators. And hopefully AI can kind of obviate some of that.

In terms of a policy thing, I think on the supply side, we’ve got to really remove some of the barriers to new institutions. I think over the long run, we know as economists, the key thing that drives down costs is creative destruction, when you get totally new ways of doing things that facilitate big falls in costs or availability of lower-cost options to students. So I think we have to remove some of those state-level kind of accreditation barriers.

And I think in the longer term, the more difficult thing is untangling this web of subsidies and tax credits and loan support that you’ve talked about. Clearly, that makes some people worse off in the short term. If all of a sudden you make it more difficult for them to go to university, they might not like you for it. But as I say, the societal consequence of that degree of subsidy has been to have probably an excess of people going in the university route and diminishing the value of a university education as a signal to employers. So I think we’ve got to slowly unpick that. And I think a first step would be much more analysis of which courses have kind of higher returns, and trying to row back and reduce those subsidies in areas where we’re really kind of subsidizing things that have very little value added.

Rikki Schlott: And so then the next step towards adulthood would be getting a job and getting your foot in the door professionally, which I know from a lot of my peers is extremely difficult right now. And some people are on the job hunt for months and months and months on end. Obviously, AI has some element of impact here. But more broadly, what sort of policy proposals or policies that are in place are a barrier towards young people just getting their foot in the door and actually starting a career at that entry level?

Ryan Bourne: So when you’re an employer, there’s so much uncertainty about hiring somebody who’s perhaps a recent graduate or somebody who hasn’t even gone to university, has no experience on their resume to suggest that they might be good at the job. So what we want to do as far as possible is remove the barriers to those kind of entry-level positions. Unfortunately, over the last couple of decades, we’ve seen big increases in state and local minimum wage rates across the country. If you now average across all states and localities, the kind of weighted population average minimum wage is around $12.13. Well, around precisely $12.13, according to our calculations. And that is a high barrier for many employers, as an increase in cost to being willing to take on people who have no experience.

So we experienced this recently in California. They introduced a $20 fast-food-specific minimum wage.

[Audio clip]: And we began at four with that major minimum wage increase for fast food workers across our area. Many restaurants are already responding to the wage hike, raising the prices on everything from coffee to burritos to burgers. NBC4’s… That’s right. Never before has an industry faced a surge in labor costs like this. This was a 25% pay hike all at once.

Ryan Bourne: Some analysis of Jeff Clemens, who’s a big friend of the Cato Institute, academic at University of California, San Diego, he found 18,000 fewer jobs in that industry as a result of that policy. And they’re the sorts of jobs that they might not have huge transferable skills to other industries, but they get you a foot on the jobs ladder. They teach you the importance of punctuality, dealing with customers, dealing with colleagues. And with fewer of those jobs available, many young people will struggle to find employment.

Now, that actually is a sector where many employers are able to pass on much of that cost to consumers in the form of higher prices, because fast food is something you tend to consume locally. And if everybody faces the same cost increase, you can tend to pass it through in terms of higher prices. In other sectors, think about hotels, for example, they’re competing internationally for international tourists or perhaps for big conferences and things. And so if you actually increase their cost base a lot, what you’re really going to see is them just hire fewer people, cut back on the kind of quality of the service they provide, clean your room less often, that type of thing.

So the minimum wage is kind of for entry-level positions. Of course, there’s other things across the economy, though. Occupational licensing barriers, 22% of all jobs now require a license. Some of these are notionally for health and safety, but many of them are just about getting a piece of paper to say that you can go forward in a career.

Rikki Schlott: Sure. What are some especially out-there jobs that one would have to go through unnecessary hoops to get licensed for?

Ryan Bourne: Well, there’s been examples in the past. There’s been some reforms at state level, but in the past, hair braiding and things like that, things that you would never expect would require a license. But a lot of these licensing boards are made up of existing suppliers into the market. So it’s kind of like a cartelization of the sector. So we need to strip away some of those occupational licensing barriers at state level.

And of course, there’s many barriers to just opening and running a business. I read a really interesting piece by somebody in the Washington Post recently who tried to open a child care center here in D.C. And she was told that she would probably have to wait a year to a year and a half from the moment she had the premises to the moment she could open. She had to wait like two or three months for a fire inspection. And of course, during that time, she’s paying this extortionately high rent, potentially hundreds of thousands of dollars in rent. So you impose all of those government barriers, it becomes difficult not just to get entry-level positions, but to make a career in a trade, in a service trade, or even to open a new business that could actually provide employment for a lot of other people.

Rikki Schlott: Yeah, could we talk a little bit more about the difficulty for people who are just trying to make it out on their own and start their own small business, the sorts of permits or zoning or fees that might be imposed and kind of be a barrier towards going down that pathway as well?

Ryan Bourne: Yeah, well, there are lots of these things. So, you know, in many parts of the country, there are big restrictions on home-based daycare, for example. So there are many people that might not want to go and work in a child care center, but might want to use their own home to be a child care service provider, perhaps so they can look after their own kids and provide child care to other people. But a lot of zoning codes restrict that from happening. And that’s just one example of, you know, many things you see across the economy.

In health care, for example, there are lots of people who are trained to provide many more services than they do. But there are big restrictions on what pharmacists can provide, on what nurse practitioners can provide. And we know from a raft of academic evidence that one consequence of that is making some of those services, child wellness checks, for example, much more expensive than they otherwise need to be. So this is like a general problem across many states, many localities as well. And at a minimum, what I think states should be doing is recognizing licenses from other states to make it easier for people to be mobile across state lines and practice their trades.

Rikki Schlott: And so let’s just say our hypothetical Gen Zer has gotten through college, has a job, now they want to buy a home. I was staggered by just how few new constructions are actually starter homes and all the barriers that kind of stand between someone getting their foot in the door with the American dream, which is often seen as starting with home ownership. What, in your view, are the biggest policies that are barriers to achieving that goal?

Ryan Bourne: Well, first of all, I think we should kind of outline the scale of the problem. So historically in the English-speaking world, house prices have tended to be, on average, about three times annual average earnings, average income, about three times. Now, in the U.S. at the moment, of 58 major housing markets, there are 23 where it’s five and above. Five of those are nine and above. So nine times your income. So another way of putting it is that I think on average it would now take people around seven years to save for a down payment on a home. But in some of those areas of California that are most expensive, that can be over 30 years. So that’s the scale of the problem that young people are facing.

Rikki Schlott: And is that typically in urban centers that are the worst of the worst?

Ryan Bourne: Yes, it’s mainly in urban centers, mainly in, well, historically it’s been in the highly productive areas that people really want to move to and find opportunity in. New York on the East Coast, Boston, and then kind of on the West Coast, the big Californian cities. But increasingly actually it’s the kind of second tier of cities as well. Many of those urban areas, Miami, Salt Lake City, places like that that are becoming more and more relatively expensive.

Now, you asked what the policies are that are driving some of that. Well, there’s a big literature on this. Zoning laws, land use planning restrictions, requirements that homes have minimum space, minimum number of parking lots, things like that. All of these things restrict the use of land to provide housing as efficiently as possible. So as a result, they tend to drive up house prices and rents by restricting the supply of housing that young people would especially want. You know, multifamily housing, big apartment blocks, types of housing, manufactured homes as well, those starter homes that you talked about. Homes that young mobile people who perhaps haven’t saved enough for a deposit would want to go into for a few years, facilitate their saving and then go out and kind of build a family elsewhere. That stuff is just not being constructed to the extent that it has been in the past. So that is a huge barrier.

Now, of course, what then happens is a lot of policymakers are increasingly coming along and saying the rent is too damn high. You know, we need to impose rent caps and rent controls. You operate in New York, you know that Zohran Mamdani has just imposed a rent freeze on rent-controlled properties within that city.

[Audio clip]: I wanted to come and bring everybody a happy rent freeze, Kate. New York, the Independent Rent Guidelines Board just froze the rent. If you’re one of the more than two million New Yorkers who lives in a rent-stabilized apartment, your rent is going to be frozen next year.

Ryan Bourne: Now, that actually has even more harmful consequences or compounds the consequences for young people for two reasons. First is that if all of a sudden you’re saying to landlords, you can’t rent out your property at a market rate, on the margin that makes them more likely to sell it for owner occupation, to put it out as a condo outside of the rent control regime, perhaps even to put it on Airbnb. So you reduce the supply of available properties, meaning it’s more difficult to find one as a young person.

But at the same time, because you’re providing an effective subsidy to people who are actually living in it, what happens is that those people stay longer than they otherwise would. So you get a lot of older people in New York rent-controlled properties, staying in apartments that have three bedrooms, and they’re just like a single person and an elderly couple or whatever who historically would have moved out and enabled younger people to move in. So it really gums up that kind of life cycle of housing that we used to expect.

Rikki Schlott: Definitely. And at this point, I think a lot of young people who have a home, have a job, have a career would be thinking about settling down and starting a family. But increasingly, you hear from Gen Z and millennials that they feel that’s out of reach for them financially. What sort of policies actually make that a valid viewpoint for some young people and stand in the way of just forming a family, which used to be seen as sort of a rite of passage?

Ryan Bourne: Kids are expensive. Kids are expensive for a whole bunch of different reasons. Often you need a bigger place. You need an extra bedroom, so your rent or mortgage costs are going to be higher than they otherwise would be. There are a lot of one-off costs to having kids, things that you need to buy, strollers, car seats, bottles, the whole shebang there. But then on top of that, of course, the biggest cost is child care. It doesn’t really matter whether you’re talking about one parent actually staying home with their kids or not. It’s still a cost to the family because there’s an opportunity cost. If somebody stays at home rather than going out to work, they’re forgoing an income, often to a significant extent, which really hurts their budgets. But at the same time, child care, particularly in those productive cities that we’re talking about, is really, really expensive. Here in DC, it’s pretty much like if you have a nanny, for example, or an au pair or something, it’s basically like a second rent or a second mortgage. That’s a big barrier to people starting a family.

Now, child care would always be quite expensive in the economy that we have, for the main reason that it’s very, very hard to find productivity improvements in child care. You can’t really automate the in-person care that somebody will give for your child. Hopefully not, but we know AI companies will try that. As yet, robots aren’t changing diapers or feeding bottles or whatever, so you kind of need somebody. Also, parents want high-quality child care for their kids. Parents tend to like their kids. They want them to be well taken care of. As we get richer, people tend to want to spend a bit more on providing a good start in life for their kids.

But on top of that, there are a lot of government policies that make child care more expensive than it needs to be. These tend to be restrictions on the way child care centers operate on the one hand, but also on who can actually provide child care on the other. On the center side, there are restrictions. You have to have a minimum number of staff per given number of children, for example. In certain countries, they just don’t have that. They trust that parents will judge the quality of the child care centers. We know from a lot of academic studies that having very restrictive staff-child care ratios drives up the price that parents have to pay for care. An individual carer in a sector then can provide child care for fewer people. There are a lot of fixed costs. His or her wages are then being spread across fewer kids.

At the same time as that, though, there are zoning restrictions on where you can open these centers, of course. Then there are quality requirements that a lot of government agencies impose. How big these centers have to be, all the hoops that they have to jump through, the safety features that they have to have. That’s on the child care center side, which is very formal.

On the informal side, increasingly, state and local policymakers are kind of mandating that child care workers have to be trained in child development, for example. Rather than somebody who perhaps has had their own kids, their kids have got older, and then they go and use their experience bringing up their own kids to provide child care for other people. They’re now having to jump through educational hoops to provide the service they would have been able to without any restrictions. You add to that immigration restrictions. We have the au pair program, but it’s very restrictive in terms of the age of people that can come and be in that program, where they have to stay, the facilities that you have to provide for them. There are lots of things that we could tinker with that would, on the margin, reduce the price of child care a fair amount by broadening its availability.

Now, of course, a lot of people want high-quality child care. A lot of upper-middle-class and wealthier people want their kids to basically experience a pre-education environment, and that’s fine. The beauty of free markets, though, is that they tend to be pluralistic. They tend to provide a range of options to suit people’s needs. They can provide child care at night for somebody who is doing night shifts, you know, can provide in-home care for somebody who just wants a safe, loving environment for their kid. And that’s the type of stuff that we’re really restricting with these regulations.

Rikki Schlott: The Mamdani supporter voice on my shoulder here is saying, well, why doesn’t the government just subsidize child care for all then, which is what New York is endeavoring to do?

[Audio clip]: I want to share with all of you that I’m feeling happy because yesterday we announced that New York City is going to deliver universal child care for every two-year-old across the five boroughs. It will be felt not only when we make Pre‑K truly universal, but expand this care to include all two and three-year-olds across the city.

Rikki Schlott: Why would that not be a solution in your mind to this problem, and what sort of problems might arise from that policy being enacted?

Ryan Bourne: Sure. Well, you can do that, but of course, the consequence of doing that is you’re not really making child care more affordable. You’re just changing who pays for it. So you’re just increasing the tax burden on people who don’t have kids to cross-subsidize people who do have kids. And there’s a moral debate that we can have about that.

I think it’s actually a bit worse than that though, because when government subsidies come along, they tend to come with conditions attached. So in the Mamdani case, for example, at the same time that he wants the New York City government to provide child care for everybody, he also thinks child care workers should be paid the same as high school teachers. And as I said, this is a very labor-intensive sector where often labor costs make up about 70% of the flow of spending. So if all of a sudden you’re increasing that pretty dramatically, increasing wages by government dictate, what you’re doing at the same time is not just subsidizing child care at the same price. You’re actually raising the underlying costs of provision. So actually you’re passing taxpayers a much bigger bill than the bill that would be paid privately.

And of course, not everyone will be eligible for the subsidies for various reasons. They tend to come with means tests and things like that. And if the government is subsidizing formal child care, that tends to increase the demand for it, drive up the market price, and then people who don’t benefit from the subsidies pay more. So you can do this, but it’s mainly a redistributive tool.

What I would say to all policymakers is, before you go about just throwing subsidies at a problem, why not take a step back and see some of the current things that you have on the books that make child care more expensive than it needs to be? Remove those barriers, and if you do that and prices are still high and you think that there are social benefits from providing child care, then we can have a conversation about it. But at the moment, you’re restricting the supply and then subsidizing the demand.

Rikki Schlott: And so along this whole pathway towards adulthood, we’re all obviously incentivized to save and have enough financial cushion to one day retire. But one of the issues that I think a lot of young people might not even be fully aware of as they get their paycheck and see various tax lines deducted from it is that they’re actively paying for a large generation’s retirement while they themselves are young workers. So how does just the tax burden in general, and also Social Security specifically, prevent young people from developing the sort of cushion that they will one day need to retire themselves?

Ryan Bourne: Yeah, I mean, there’s a big literature on this which shows that obviously taxes to provide benefits for current retirees, these kind of pay-as-you-go systems that we have, they both reduce the incentive to save because you think, well, I’m going to get some benefits in retirement too, so I don’t need to save as much, and they reduce your ability to save because you’re paying the high taxes for this growing burden of seniors. And that’s only going to go up, right? Unfortunately, we have built a Social Security system that used to be like a pyramid, with many people in their working lives paying for a small number of people in retirement. And increasingly that’s becoming more like a cylinder, where a greater number of retirees relative to working-age people is going to increase the tax burden on working-age people.

At the moment, the Social Security Trust Fund is due to go into big deficit, be depleted early next decade. There are reasons to think that might even be optimistic. And at that point, at some point there’s going to be a crunch where we either decide to cut benefits and restrict who’s able to access them, or to increase taxes pretty significantly. And unfortunately, if we go down the second route, it will be young people paying the price twice. They’ll be paying the price for the current retirees and paying more taxes through their lives ahead of their own retirement.

So that is a big challenge. It’s a challenge that most Western countries face. I don’t think it’s unique to the United States. And I think it’s mainly about demographics interacting with these programs. So it’s kind of a reality of the world that we have to deal with. But I think the sooner that we get the conversation onto the field of talking about how we reform Social Security to try and bend that cost curve that’s only going to go up, the better. Because the longer we leave it, the bigger the adjustment that has to be made in terms of increased taxes or sharp cuts to benefits.

Rikki Schlott: And so I think that a theme that we’ve been circling here is that at every step along the way, the government is interested in sort of socially engineering how young people reach adulthood, whether it’s getting involved in how they access loans or tuition or what jobs they can have and when and with what pay, or how they save for their own retirement. So let’s just zoom out for a moment and kind of from a libertarian’s principles standpoint, can you tell me why you think it’s important for the government to maximize freedom over this sort of social engineering and get out of the way of young people attempting to achieve whatever they might want to on their own terms?

Ryan Bourne: Yeah, underlying a lot of these policies we talked about is a conception of what a good life should be. So the government comes in, they say, well, people should be entitled to a certain type of minimum wage, nobody should work below that, or people should be entitled to a house that is of a certain size and to be guaranteed a parking space outside. But the reality of the world is that there are scarce resources and we have to find ways to allocate them in ways that fulfill people’s wants and needs. And not everybody’s wants and needs are the same. For some people, it’s really good to get that entry-level position and get some experience in the job market because that opens doors that you otherwise wouldn’t get. Other people want to move to New York City or want to move to a Californian city and would live in a tiny 200-square-foot place with just a bed if they could to get that opportunity. But at the moment, those opportunities are being restricted by all of the government policies we’re talking about. Not just restrictions on building things, but having to obtain government permission to practice a trade, or having the cost of many of life’s basics inflated by these government supply constraints, protectionism and licensing requirements.

And then as a result of that, we see some of the unintended consequences, and that’s when politicians come along and say, I really want to help you because I understand you’re struggling. I’ll subsidize your higher education. We’ll provide housing vouchers. We’ll cap rents. We’ll do all of these other things that kind of further distort the economy, further constrain opportunity.

So I would say from a moral perspective, what free markets are really fantastic at is providing for different wants and needs. We don’t think as libertarians that there is a solution. We think there are many solutions, and we think those solutions evolve as we experiment from people freely trading as buyers and sellers in individual markets. And a free market is the only entity that we know of that can provide for those different wants and needs in different ways. And every time the government comes in with these heavy-handed restrictions and regulations, they stop some of those wants and needs from being fulfilled and they shatter many people’s dreams. And so that’s what we try and fight against here at the Cato Institute.

Rikki Schlott: Well, thank you so much for being here today, and thank you for listening to today’s episode of the Cato Weekly Podcast. If you enjoyed today’s discussion, please subscribe and leave a review wherever you get your podcasts. To learn more about the ideas and research discussed in this episode, visit Cato​.org. The Cato Weekly Podcast is a production of the Cato Institute dedicated to advancing individual liberty, limited government, free markets and peace. Join us next time for more insights and conversations on the issues shaping our world.