Posts Tagged ‘Consumer Price Index’

The true cost of living

February 20, 2020

An economist named Oren Cass has written an argument for something I’ve long suspected—that inflation is not measured correctly, and that statistics that show average income keeping up with inflation are bogus.

The chart above shows that a median male wage-earner in 1985 could pay for four basic family needs—housing, medical insurance, transportation and education—in 30 weeks of earnings.  By 2018, those expenses would take up 53 weeks of that family’s earnings.

Which, as Cass pointed out, is a problem, since there are only 52 weeks in a year.

But most published economic statistics indicate that typical workers’ inflation-adjusted earnings are increasing.

Case said that is because of how inflation is now calculated.

For example, he said, inflation-adjusted data says that the price of automobiles has not increased since the 1990s.   Obviously that isn’t true.  But the argument is that today’s cars have so many features that cards didn’t have 15 or 20 years ago that the higher price isn’t inflation—it’s the cost of quality.

It’s true that the 2018 Grand Caravan (price $26,300) has many features that the 1996 Grand Caravan ($17,900) did not have.  The problem, as Cass pointed out, is that if you don’t have that extra $8,400, you can’t go back to 1996 and buy the older model.

The same problem exists in housing and medical insurance.

It’s true that most families have two income earners, not just one.  But there was a time when one American breadwinner could bring in enough to support a family.


‘Remind me why socialism is so great again’

February 22, 2018

Economist Mark J. Perry, who posted this chart on the American Enterprise Institute’s Ideas blog, argued that prices are highest in the economic sectors that are most heavily regulated.

Said he:  “Remind me of why socialism is so great again.”

One possible explanation of the price difference is Baumol’s Cost Disease, the tendency of the cost of human services to rise relative to the cost of manufactured goods.  That’s not the whole story.

The fact is that European countries that most Americans would consider socialist have free or affordable medical care and free or affordable higher education.   And it is not a case of costs being shifted from patients and students onto taxpayers.

Overall costs of health care and higher education are less in so-called socialist European countries (I write “so-called” because most of them have self-described conservative governments).

The reasons why health care costs less in those European countries than in the USA is that there are no for-profit insurance companies standing between the patient and the physician, that European countries control prescription drug prices and that the incomes of physicians and other health care providers are less.

My guess is that European universities cost less because they provide a no-frills education without spending huge sums on sports stadiums and student amenities.  My other guess is that their hospitals and universities are not so top-heavy with highly-paid administrators.

In and of itself, government regulation is neither good nor bad.  It depends on what is being regulated, how it is being regulated and in whose interest it is being regulated.


Chart of the day (century?): Price changes 1997 to 2017 by Mark J. Perry for AEI Ideas.

Mark Perry Has Never Heard of William Baumol by ProGrowth Liberal for Angry Bear.

Gadgets getting cheaper, necessities more costly

May 5, 2014


I’m old enough to remember when a personal computer or even a television set were so expensive than an average person couldn’t afford it.  But nowadays second-hand television sets and electronic gadgets are so cheap that hardly anybody does without them.

The things that are increasingly out of reach are child care, health care and education — the things you need to rise in the world.   The things that are affordable are the games, toys and entertainment that distract you from your condition and reconcile you to the limited life that you have.

Click on  Why America’s Essentials Are Getting More Expensive While Its Toys Are Getting Cheaper for more by Derek Thompson for The Atlantic.

Click on How the Middle Class Lifestyle Become Unaffordable for thoughts of Charles Hugh Smith.  One factor I failed to note in my original post is Baumol’s Disease, which is that as technology makes manufactured goods cheaper, the costs of human services become relatively more expensive.  [Added 5/7/14]

Why is Obama attacking Social Security?

April 15, 2013

The Chained CPI proposed by President Obama would limit increases in Social Security, disability and veterans benefits on the grounds that recipients could offset increases in prices by lowering their standard of living.  That is the definition of the Chained CPI.   It is a CPI that will not keep up with the increases in prices measured by the standard Consumer Price Index.  Since income tax rates also are tied to the Consumer Price Index, switching to the Chained CPI would also be a middle-class tax cut.

ClassWarKitteh_catfoodNote also that Social Security benefits are linked to lifetime earnings, which for most citizens are not keeping up with inflation, so future retirees are going to have a tougher time even if the President does nothing.

Obama said his purpose is to induce Republicans in Congress to accept his budget and tax proposals, but the Republican leadership has not asked for this and is likely to use this as a political weapon against Obama and the Democrats.  It would be an effective weapon for the GOP.  Why, then, does the President want to cut Social Security?  Why is so much of the Washington establishment in favor of it?

While I can’t read their minds, I can think of two reasons why they might.  One reason is political and the other financial.

The political reason is that so long as Treasury bonds are held by the Social Security trust fund, that portion of the national debt is off-budget.  The federal government owes about $16 trillion to holders of Treasury bonds, but the $2.5 trillion held by the Social Security trust fund and $4 trillion held by other government trust funds are off-budget.

As soon as the Social Security Administration starts to sell those bonds to private investors, the national debt will appear to increase, even though the only thing that changes is that the debt is held by private citizens instead of for the benefit of American senior citizens.

Recall that Social Security taxes were increased and the full-benefits retirement age raised for 65 to 67 back in 1983 to create a surplus, which is intended the retirement benefits of the baby boom generation were covered.   That surplus was invested in Treasury bonds.  While the Social Security administration is paying out more in benefits than it is collecting in taxes, it still is accruing interest on its Treasury bonds.  But it will soon have to start cashing in those bonds in order to cover its obligations.

The economic reason that financiers might object to this is that putting Treasury bonds on the market will decrease the price of bonds, which is the same as increasing the interest on bonds.   Many other interest rates are pegged to the interest rate on U.S. government bonds, so, all other things being equal, this would mean an overall increase in interest rates.  An increase in interest rates makes bonds a better investment compared to stocks.  In other words, drawing down the Social Security trust fund would tend to depress the stock market.

I don’t think the effect would be trivial.  One of the things that has generated the current stock market boom is that most savers can’t earn interest on their bank accounts or money market funds.   Investors are forced to take a risk if they want to increase their holdings

I have two moderate suggestions:

  • Have the Federal Reserve System create money to buy Treasury bonds from the Social Security trust fund, just as it is now creating money to buy “toxic assets” from the big Wall Street banks.   The Fed could hold or extinguish the bonds, so the financial markets would be unaffected and the national debt would actually be lowered.
  • Index the cap on income subject to Social Security taxes to the Consumer Price Index to keep Social Security solvent for the long-term future.


Obama’s stealth attack on Social Security

March 18, 2013

Chained CPIPresident Obama is trying to sell a truly bad idea—a stealth plan for cutting Social Security and other social safety net programs by changing the means of calculating cost of living adjustments.   Instead of using the present Consumer Price Index, which is based on the prices of a market basket of goods, the President proposes to use switch to a “Chained CPI,” which goes up at a slower rate than actual prices.

This would affect not only Social Security, but veterans’ benefits, disability benefits and any other government program that is linked to the Consumer Price Index.  It is a stealth increase in taxes, because income tax brackets are now indexed to the CPI so that taxpayers aren’t moved into higher brackets by means of inflation.  The taxpayers whose taxes would increase are those in the middle tax brackets, not those already in the highest brackets.


Click to enlarge.

Supposedly elderly Americans rely on three “legs” for their retirement income—savings, company pensions and Social Security.  I’m one of the fortunate few who actually has all three “legs”.  But most elderly American are down to just one “leg”  and would be  badly hurt by any cuts to Social Security.


Click to enlarge.

The above chart shows the dependence on Social Security of the various income groups.  The first quintile is the bottom 20 percent of elderly Americans in income, and the fifth quintile is the top 20 percent in income.  The chart above shows that the first three quintiles—60 percent of American senior citizens—get the vast majority of their income from Social Security, and the next quintile gets half.   The chart below gives a different breakdown.


Cost of living increases would be three-tenths of a percentage point less under the Chained CPI system that they are now. That doesn’t seem like much, but the cumulative effect would be sizeable.


Click to enlarge.


The existing CPI probably understates rather than overstates the rise in the cost of living for senior citizens.  We spend a larger fraction of our income than average Americans on medical care and housing, whose cost is rising faster than the cost of food, transportation and communication.  Some economists propose a CPI-E which would reflect senior citizens’ actual medical and housing costs.


Click to enlarge.

The great harm that Barack Obama has done as President has been to persuade Democrats to go along with anti-liberal policies out of loyalty and the perception that it is enough that he is not a Republican.  During the Bush administration, then House Speaker Nancy Pelosi blocked proposals by President Bush that would have undermined Social Security.  Now she is a proponent of the Chained CPI.

I don’t know the President’s motives in taking the stand he does.  I suspect that he simply accepts the consensus among the Washington elite that Social Security, Medicare and other elements of the social safety net need to be reduced, and that the most important objective for government is to eliminate the federal budget deficit.  My guess is that, in working against the interests and wishes of his core supporters, he thinks of himself as a great statesman, like President Nixon going to China.

Click on A President Who’ll Cut Social Security, and Liberals Who Love Him Too Much for analysis by Richard RJ Eskow for Crooks and Liars.

Click on House Democrats Express Openness to Entitlement Benefit Cuts for a Talking Parts Memo article on how Democrats embrace the Chained CPI.

Click on Chained CPI: the Younger You Are, the Bigger the Cut for analysis by the AFL-CIO.

Click on Numbers Racket for a 2008 article by Kevin Phillips on the history of changes in the CPI.  I doubt if you will be surprised to learn that each change in the CPI calculation made the rise in the cost of living seem less than it was before.

Why isn’t inflation running hog-wild?

March 28, 2011

Double click to enlarge

My friend Bill sent out the following e-mail:

During the 1970s we suffered a dramatic rise in inflation.  Whip Inflation Now was President Ford’s response and Nixon had  earlier ordered a freeze on price increases.  I remember complaining to a local store that increased the price of Simlac, a baby milk formula.  The result was they pulled Similac from their store and so I had to get the formula somewhere else where I didn’t know what the price was last week.   At the time I remembered being told that this inflation was a result of Johnson not choosing between guns and butter.  In other words we spent on defense and on discretionary items during the Vietnam War and that led to the inflation of the 70s.  Doing both caused inflation.  But the same conditions seemed to exist  from 2001-2008 with little inflation.  Now, I am hearing that inflation can be expected because there is too much money being created by the Fed.  Too much money in the system.  Yet, I thought classic inflation was caused by too much money chasing too few goods or because of the classic guns vs. butter cause.  Are we really facing a time when we have too few goods available for us?  The price increases in food and energy are not due to too little food or energy but multiple causes: speculation, droughts, increased industrialization in China and other former 3rd world countries.
I struggled through Econ 101 and 102 and now I find a good indicator of why I struggled.  Could someone smarter than me explain the seeming contradictions I have noted above?

I don’t claim to be smarter than Bill, nor am I a professional economist, but I do have a rough idea of what economists think about this subject.  Economists define inflation as an increase of the amount of money relative to the increase in the amount of goods.  The definition is my 1958 Webster’s is “an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.” My newer dictionary’s definition is “an increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices.”

According to this, the hangover from the Vietnam war and the 1970s oil price shocks wouldn’t have caused inflation if the Federal Reserve System hadn’t increased the supply of money to accommodate the extra costs.  If the money supply hadn’t expanded, then the Vietnam war spending and the oil price increases would have had to be offset by a fall in the price of something else or by the elimination of some product or service – which probably would have caused a recession.

The amount of money in circulation is determined by the Federal Reserve Board.  The Fed creates money out of thin air and puts it into circulation by buying government bonds; it contracts the money supply by selling bonds and making the money that’s paid for them disappear. Currency and coins are a small and important part of the money supply.

By the end of the 1970s, inflation was so out of hand that the Federal Reserve Board decided to clamp down on the money supply, even though its members knew a recession would result.  Throughout the tenures of Federal Reserve chairs Paul Volcker (1979-1987) and Alan Greenspan (1987-2006), the Fed gave priority to controlling inflation over promoting economic growth and creating jobs.

Economic conditions made this easier than it might otherwise have been.  The weakening of organized labor eliminated the wage-price spiral of the 1950s and 1960s.   Competition from overseas producers kept manufacturing wages and prices down, as did the shift from a goods-producing to services-producing economy.  An unfavorable balance of trade normally would result in a depreciation of a nation’s currency and higher prices, but the U.S. has been shielded from this by the fact that the dollar is (so far) the world’s reserve currency. Stagnation in wages and job growth lessened both the push of costs and the pull of demand.

But since the current recession began, the Federal Reserve Board under the leadership of chairman Ben Bernanke has been increasing the money supply in an effort to pump up the economy.  The question is why this has neither increased inflation nor stimulated the economy.  I think the reason is that for the money supply to affect the economy, it is not only necessary for the Fed to issue new money, but for the money to circulate.  This doesn’t seem to be happening.  Instead the newly-created money is being squirreled away by the big banks or used to pay down their  debt.

There’s another possible explanation, which is that inflation is actually more than the rise in the Consumer Price Index indicates.  The method of calculating the CPI has been changed a number of times since 1982, all in the direction of making inflation seem less than before.  Certainly the cost of food, gasoline and other necessities is up much more than 1.9 percent over last year.


Inflation through the ages

November 17, 2010

These charts are from a clipping of a Wall Street Journal reprint of an article in Forbes magazine’s March 1, 1975, issue.  I saved the article because I thought it was so interesting, and I still think it is interesting.

The price index was compiled by an Oxford economic historian named E.H. Phelps Brown from records of prices of food, cloth and fuel in Oxford, England, over the centuries.  It shows that inflation is not a normal state of affairs.  Prices have fluctuated around a base level except during two periods of history, the 16th century and the 20th century.

Phelps Brown also compiled a record of wages in both money terms and real terms – not just what a carpenter at Oxford was paid, but what he could buy with his wages.  The record showed that, in modern times, wages go down as well as up.  During the 16th century, the wages of an Oxford carpenter doubled in terms of pennies, but fell by two-thirds in terms of what he could buy.  It was not until 1880 that Oxford carpenters regained the lost ground.

Click on Measuring Worth for the U.S. Consumer Price Index starting in 1774 and continuing into the present.  In 2009, the CPI dropped for the first time since 1949 and is expected to fall again this year.