The Ukraine war and the cost of living

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Whatever else it is, the war in Ukraine is a war to control food and energy supplies.  The turning point was the 2014 coup, which took Ukraine out of the Russian economic orbit and into the U.S.-dominated  “rules-based economic order.”  

Umair Haque gives the big picture.

Food prices rising — commodities prices in general — were a directeffect of climate change.  So what about Putin’s war?  Well, just think about what it’s really about. Controlling resources.  Putin knows that if he controls the resources — oil, gas, metal, wheat, and so forth — he can control a dying planet.  He who controls the resources controls a dying planet, because we all need them that much more.  You can see this very, very clearly in the way that Putin’s skewered Europe right on the horns on an insoluble dilemma: allow war in Ukraine, or depend on Russian resources?

Putin’s war in Ukraine is driven by ideological reasons, true — the weird blend of religion and fanaticism I’ve called New Age Fascism.  But more than that, it’s the first of the great resource wars on a dying planet. Ukraine is a strategically vital nation, at least on a dying planet — it’s Europe’s breadbasket, provides the world all kinds of basic resources from wheat to metals.  Ukraine is one of the very first nations you’d want to conquer if you wanted to control what few resources were going to be left on a dying planet, and this is the deeper logic of Putin’s game.

Resource wars are not going to end. In fact, they are only now just getting started — just after commodities prices have been soaring for the last few years thanks to failed harvests.  See how predictable that is?  It’s not that the two are even consciously linked — some dictator sees commodities prices rising and thinks “it’s time for war!” — it’s just that this is what inevitably happens.  Putin’s wars are obviously not going to end.  China, soon enough, will have to secure its own empire of resources, as the planet goes on dying. The West appears to have no strategy for any of this, because it’s only answer is “globalization,” which has failed the way that my first marriage did — she threw plates at me, dear reader, because I was a bastard.

We are therefore now entering an age of (a) resource wars (b) shortages and (c) inflation.  Serious, sustained, vicious inflation.  These three things have already the defined the 2020s.  What did Covid do? Cause shortages around the globe — in a foreshadowing of the future on a dying planet.  Covid highlighted just how illusionary all this abundance of stuff really is — ships stop for a few days, borders shut down for a day or two, and bang — you can’t get stuff to eat or drink the way you’re used to.  But what happens on a planet of mega fires and mega floods and mega weather?  Mega risk does.  Shortages becomes endemic, a way of life.  As they slowly are now.

The flipside of shortages is, of course, inflation.  And inflation is the savage, gruesome reality of living on a dying planet.  There isn’t enough left to go around.  There never was.  20% of humanity — otherwise known as “The West” — consumes 90% of the planet’s resources.  That leaves just 10% of them for 80% of humanity.  The rest of the world has always lived without.  It’s just we in the West who are starting to discover what the real economics of existence are.

The true cost of living

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’

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.

LINKS

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.

Where the living is expensive (and not)

This Tax Foundation chart indicates that the cost of living is higher in New York state, where I live, than anywhere else in the USA except the District of Columbia and Hawaii.   The lowest cost of living is in Mississippi.

It’s measured by the relative value of goods that $100 can buy in each state.  The lower the figure, the higher the cost of living, and vice versa.

What I infer from the chart is that cost of living is influenced by high taxes, which makes everything more expensive, and by prosperity and by concentrations of rich people, which bid up prices.

I think these things is true of the District of Columbia and of New York City and its suburbs.   The cost of living might not be that high here in Rochester, N.Y., where I live.

What I also infer from this chart is that a low cost of living is correlated with a bad economy.  So I wouldn’t want to live in a place where the cost of living was extremely high or extremely low.

I suppose the reason the cost of living is so high in Hawaii is that everything must be shipped in from the mainland.  But why isn’t the cost of living proportionately high in Alaska?  I suppose the reason is low taxes.  Alaskans tax the oil industry and not each other.

Gadgets getting cheaper, necessities more costly

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]

Obama’s stealth attack on Social Security

President 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.

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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.

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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.

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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.

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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.

What does it cost to just live?

A blogger named John Pennington in San Francisco wrote a good post showing what it takes for average American families just to get by.

Let’s talk about costs for a family of four, two adults, two children, because that’s the most common family makeup in the US.

The first rule of thrifty living is to sweat the big stuff.  Forget bargain tooth paste.  If you are spending too much on the big ticket items—rent, car, food, etc.—no amount of counting pennies will help.  This is great advice, but worthless if market conditions where you live don’t allow you to save on big ticket items.

Take rent.  Average rent for a two-bedroom apartment in the US is $1,029 this year (2011).  That means your annual income must be about $41,000 at bare-bones minimum if you are not to spend more than 30% of it on rent. (The numbers are $2000+ and $80,000 here in San Francisco.)

Question:  If you have been unemployed for some time, how are you going to find a job that pays above $40,000?  In 2011, if you can find any work at all, it is likely to pay you $20,000 to $30,000.  That means that there will be no place in San Francisco and most other cities you can afford to rent.  This is why people commute rather long distances to work in cities; the rent is more affordable.  It’s also why there are usually two earners in such families, and why such families rarely save enough for retirement.

Here’s a pretty good target household budget from a noteworthy site:

Housing – 24 to 30 percent

Utilities – 10 percent (lights, gas, water, trash pick-up and sewer)

Groceries – 12 to 20 percent

Car Expenses – 15 percent (includes car payment, fuel and repairs)

Medical – 5 to 6 percent

Clothing – 4 to 8 percent

Debt – 10 to 12 percent (personal loans, old debt, credit cards)

Entertainment – 5 percent

Savings – up to 10 percent (as much as possible, but a little is better than none)

Charity – 2 -10 percent  (this is a personal decision)

And here’s the dollar figures for that budget, with a $41,000 income:

Housing  $820 to $1,025 per month

Utilities  $342

Groceries  $410 to $683

Car  $512

Medical  $171 to $205

Clothing  $137 to $273

Debt  $342 to $410

Entertainment $170

Savings up to $342 (10 percent)

Charity ?

Wow!  So the first thing we realize is that we can barely afford an average two-bedroom apartment. That’s on $41,000. On $20,000 to $30,000, we can’t afford a broom closet.

Our income is $25,000.  What the hell are we going to do?  Well, here are some possibilities: Share rent with others on a large apartment, or rent a 1BR; sell your car and use public transit; use neighborhood medical clinics; get clothing from Goodwill; you must get rid of credit card debt (which is a whole ’nother topic); minimize entertainment by going to free things;  forget savings.  Charity?—you are charity.

If two of you work, and do all of these things, you will get by somehow.  But what about education for your kids?  What if one of you becomes seriously ill, or injured?  What about income when you are old?

What if you can find no work?  There are five unemployed for each new job, so there’s only a 20 percent chance you will find work at all. In October 2011 there are 14 million unemployed persons, many more counting under-employed and the discouraged unemployed.  There are 49 million people living in poverty and 20 million people living on half the poverty level income.

Click on  What Does It Cost to Just Live? for the original post on Pennington’s Class War in America web log.

Click on Why the middle class isn’t making it for an earlier post of mine on this topic.