Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, July 14, 2005

Prices Rise But Inflation Doesn't?

So, here's for the economists among you. You exciting and excitable lot. The news today is that once again we are being told there is no inflation. Let's review:

  • Gas prices have more than doubled in the past three years. Seriously, gas in CA sold for close to $1/gallon in 2002. It's now above $2.50. It's $3.09 for premium near my house.
  • College tuition has increased almost 10% per year for the past several years (various sources).
  • Housing prices are going up by 20% per year.
  • Health insurance premiums go up by 10-20% year or more.

It seems that food (subsidized), and clothes and electronics (imported and cheap) appear to be the basis for the claim that there is no inflation.

I believe we are living in highly inflationary times except for small consumer goods, and there needs to be more said about this. Put another way, my salary buys a lot less now than it would have 5 years ago. Anybody else see the same thing?

34 comments:

Anonymous said...

I'm not sure exactly how they report inflation but I'm pretty sure they exclude oil prices. They also control for growth somehow. So inflation is the increases in prices over and above that explained by increased economic productivity (I think).

Like unemployment measures there is a lot of political game playing that goes on with this.

I'm not surprised you notice a decline in your purchasing power in California though. The housing market is out of control out there and there is much written about how it is inflated. That probably drives a lot of the local economic trends.

I can't compare because I just got a higher paying job in a lower cost state so from my perspective the economy is doing great.  

// posted by Raised By Republicans

Dr. Strangelove said...

Energy prices are included. However, judging the strength of the economy by comparing the CPI month to month are about as useful as judging the strength of your poker game by comparing your winnings from one hand to the next. You need to look longer term to get above the noise. For the NY Times to report the noise as the news is pathetic.

Since September 11th, there's a clear trend: the 12-month change in CPI was 1.6% in 2002, 2.3% in 2003, 2.7% in 2004, and is averaging over 3% in 2005. Inflation is real and accelerating. Check out the Bureau of Labor Statistics CPI page for more.

Anonymous said...

Ach Danke Herr Doktor. And of course you are right about the trends. I should have made that connection. 

// posted by Raised By Republicans

Anonymous said...

Why, exactly, is the price of housing and medical insurance excluded from these calculations? Those who speak of a squeeze on the middle class in prices (e.g.. Elizabeth Warren, The Two Income Trap) WITHOUT speaking of "inflation" because we are conditioned not to talk of these things as inflationary. Why? Or, as Jesse Jackson put it in 1984, "twenty years ago, a man could support his family on his own. Now, with both parents working, most can barely get by." This is the economic reality for most Americans, and it needs to start becoming a political reality. One way to do this is to start talking about the problem as if it is real, by including soaring prices for housing, health care, education, and transportation under the rubric of "inflation" rather than just asking how much a taco costs. 

// posted by LTG

Anonymous said...

It's tricky, though, because the standard of living has gone up dramatically too. It's like saying computer prices have remained roughly steady over the past decade without mentioning how much better our computers are.

I am not sure LTG is correct that things are harder now than they used to be. It is not so easy to measure. For example, housing costs have gone up... but so have house sizes. And medical insurance costs more... but medical care and technology continue to improve. 

// posted by Dr. Strangelove

Anonymous said...

Houses are almost certainly NOT getting larger in California. Any comment LTG? Seventh Sister? 

// posted by Raised By Republicans

Dr. Strangelove said...

The National Association of Home Builders (NAHB) has some statistics on the matter.

For NEW single-family dwellings, the NAHB data shows the average home size continues to increase:

1950: 983 sq ft.
1970: 1500 sq ft.
1990: 3080 sq ft.
2003: 2330 sq ft.

(The median follows a similar trend.) Assuming that older homes do not decrease in size, the average size of all single-family homes in the U.S. must be getting larger.

Of course, since many people do not live in single-family homes, this is not quite the same as saying that most Americans have found themsleves with a larger living space these days. But the NAHB also says that the percentage of heads of household who own their own homes has increased steadily from 67.4% to 69% from 2000 to 2005. And the U.S. Census burueau shows a steady increase from 44% in the 1940s. (However, again this is complicated by the fact that the percentage of people living alone has increased from 7.7% in 1940 steadily to over 25% today.)

Amenities in homes have also been improving. For example, the percentage of homes lacking complete plumbing has dropped from 45% in 1940 to 1% today. Although I could not find data, I expect the quality and quantity of air conditioning and heating units have also improved over time. So although houses and rents are going up, you are getting more for your money as well.

Anonymous said...

The current inflation rate  is marked at 2.53%. This is based on the CPI-U. The “U” stands for Urban users. So I guess the country folk don’t buy anything.

To say there is no inflation is silly. Inflation is always with us and is completely normal. The question is, how much is too much inflation?

Actually, RBR, houses are getting bigger in California and in other parts of the country as well. NPR did back to back reports on this yesterday morning. What is happening is that land values far exceed the values of the houses. So people by the land, tear down houses, and then build bigger ones. The houses in my neck of the woods (where there isn't any land left) are now adding additional stories and basements.

Inflation is real, and it isn't just limited to California, RBR. It is happening everywhere, even certain parts of the Mid-West. Usually when it is reported, however, they say “excluding fuel and durable goods”. Basically, they exclude stuff you buy every day. RBR may be find in a year or 2 that his own salary doesn't go as far because as you earn more, surprisingly, your lifestyle gets more expensive. You just don't notice it until one day, the lack of a surplus in your checking becomes and consistent thing. And you look around for fixed costs to get rid of and you can't find any.

I tried to find out what types of things are counted in the CPI-U. I wanted to know if they adjust the basket of goods that they consider when calculating the CPI-U. It appears that they do. They also count rents. But I couldn’t find much on what was actually counted in the basket of goods. Another thing to consider is that I hear that salaries are actually falling in real terms. So people are working harder for proportionately less money.
 

// posted by USWest

Anonymous said...

Something's wrong with the stats posted by Dr. Strangelove. They suggest that new houses are decreasing in size, not increasing. But regardless, the relationship between increasing house size and prices very tenuous. In SoCal, older homes, which are the same size as they were, have tripled or more in value over the last decade, if not more. The average size of houses has probably been steady for a decade, but prices have soared.

Dr. Strangelove's comments about amentities also strike me as, frankly, bizarre. Most urban properties would be worth 3/4 or more of their present value even if the house just burned down. The land, not the house, is source of value. One reason why houses are getting nicer is that the cost of land is so great that the marginal cost of amentities is negligible by comparison. After spending $800K on a house, who cares about an extra $50K in marble and central air? Quite different math when the same house cost $200K in the '90s.
 

// posted by LTG

Anonymous said...

There is another thing to consider. As housing prices have spiraled out of control in California, the market has become restricted to only high end housing. People who used to buy houses now can only afford to rent. NPR's story today mentioned that there is a sever shortage of starter homes in California. The median housing price in the LA area is now about $470,000 to $480,000. Who buys such houses? What percentage of their income do they devote to housing?

When I was in college my parents told me if I paid more than 40% of my monthly income on housing I was living beyond my means. Such a rule of thumb is usually greated with laughter in California. Has it always been so? If not then Californians' standard of living is dropping not rising.

US West. I would ask you if you could afford to buy your parents' house right now? Do you make more or less than your father did (controlling for inflation) when he bought the house? Is your career of similar social standing and does it require similar levels of investment in education/training? Your answers to these questions should be a good annecdotal heuristic for our little debate about Californian living standards and inflation.

Of course inflation and declining living standards effect the Midwest. And there is worse here. Actual economic contractions are hitting the rural areas of the Midwest. Inflation may be the "theif that robs in the night" but economic contractions represent misery on a truely enormous scale - ghost towns, abandoned farms, real Grapes of Wrath stuff. 

// posted by Raised By Republicans

Anonymous said...

RBR, I will answer your questions (I suspect you already know the answers), but first, let me qualify my response by briefly describing my parents' home so we know what we are talking about.

My parents live in a 1800 sq foot house that was about half that size when they bought it in 1950. It was a post war tract home. It had 3 small bedrooms and a single bath. It sits on a 1/2 acre with an alley behind it (this we are told is a big plus). On one end of the street is the local high school. On the other, is the local Catholic Church with a school that serves roughly 3000 families. They live in a medium size Central Valley town. In 1968, they added a large family/dining room to the house with a fireplace and laundry room with a toilet. Beyond that, it is the same 1950's home. They paid $8000 for it. My mother never worked outside the home. Despite that, they managed to feed, clothe, and put 5 kids through Catholic School and pay their house off in full.

Today, in that neighborhood and considering the improvements made to the home (central air and heat, new insulation and windows, etc), it could be sold of $230-250K.

So, could I afford this house today? No, not on my single income. I don't have the down payment. And even if I could afford the mortgage, I may not be able to handle the taxes and upkeep. I make much more than my dad did when he purchased the home controlling for inflation. My career is considered of a much higher social standing. I am white collar, he was blue collar. It took a great deal more education and specialization for me to get my job. I carry a student loan that takes a pretty hefty chunk of monthly income.

Another story: same town, different family. They were white collars, earning either to same of more as me considering inflation, highly educated. They custom built a 4 bedroom, 3 bath, 2000 sq ft Spanish style home in the same town in 1970 for $30K. They installed a swimming pool, and put on a Spanish tile roof, put Spanish tiles on the floors and hardscaped one of the 3 small patios. The house sold in 2002 for about $380K. The house was basically sold before it went on the market.

Draw your conclusions.
 

// posted by USWest

Anonymous said...

Since we are talking about housing and land, I'd also mentioned that the other thing that will make or break land value is zoning regulations. In my part of the Coast, buying a piece of land- if you can find one, is no easy thing. You have to make sure you have water rights. In CA, this is a very BIG deal. If you don't, the land is worthless.

Today, there are a great deal more zoning laws and permits required than in the past. These are added costs that go into the overall price of land and housing. And, once you have the house, making improvements can take years just to get the permits (depending on the city). CA is being abandoned by insurers as well. So those that are left can pretty much charge what they'd like. Some more added costs. So I am at a loss in understanding how you can really measure inflation when the number of things you HAVE to pay for is increasing and when there are so many other intervening factors in the economy.

I am also at a loss in understanding how property can be a good investment at this point. In fact, housing inventories are actually going up in my area because the number of able buyers is declining rapidly. In my county, the number of families (i.e. composed of 4 people, of course) able to buy a home has dropped about 1% a year for the last 5 years. It is becoming a crisis. What happens when no one can afford to buy stuff anymore? I can hear the economic foundations creaking as we speak!

 

// posted by USWest

Dr. Strangelove said...

1950: 983 sq ft.
1970: 1500 sq ft.
1990: 2080 sq ft.
2003: 2330 sq ft.

oops.

Dr. Strangelove said...

Does the average American today enjoy a lower standard of living than his parents did? Do more of us work longer hours to achieve our standard of living?

LTG is correct that the price of *land* has increased very rapidly over the past several years. It does not follow, however, that the size and quality of the average American home has decreased.

LTG is also correct that the price of medical care has gone up very fast too. But it does not follow that the quality of average American medical care has decreased.

There is increasing stratification--and widening gaps between rich and poor. That's the real problem.

Anonymous said...

I think what Dr. Strangeloves magically changing statistics (just a little jab in the ribs among friends) are picking up is the increase in the standard of living among the top 5% or so of the income distribution. Any average is going to be very sensative to outliers. So as the size of the biggest houses goes up, the average house size goes up even if the size house an average American can buy gets smaller.

One of the phenomena commonly discussed among economists, sociologists and political scientists but not included in the inflation numbers is income inequality. Income inequality has been improving globally (when one measures it at the individual rather than national level) but is getting worse within most industrialized countries.

There are also different kinds of inequality. In China for example inequality appears to be getting worse because where there were only poor people before there are now both rich and poor. But is the addition of rich people a bad thing? Alternatively, you have a situation like what we may be seeing in the USA - the rich get richer and the poor get poorer. That's a very bad thing. I suggest we leave the debate for what causes income inequality for another thread.

I think our conflicting views of the inflation/standard of living trends reflects these complexities.  

// posted by Raised By Republicans

Anonymous said...

I'm not sure I understand Dr. Strangelove's comment that increasing land values don't mean decreasing house size or quality. Of course they don't. But if the increase in house size over a decade is 10% but price is 200%, that tells you something about inflation, I think. House "quality" is probably the least changed over the past 20+ years. For medical care, the coverage and care are generally decreasing while cost is increasing.

Dr. Strangelove's comments ARE true for technology: I pay $14.95 for broadband internet - I used to pay $20 for 14.4kbs. Computers especially so. But that's not all that important. Take cars: a new 2005 vehicle is about 2x as much as a new 1990 vehicle, but it's hard to say it's "twice" as good. In fact, there's not that much difference between the cars over the past decade or so. 

// posted by LTG

Anonymous said...

√ For me, this discussion sparks something bigger. There are huge sociological changes going on now that interweave with economics to create generational gaps in the standard and quality of living. The question that LTG and the Doc need answered is "what is the economic value of qualitative changes to living standards". Can you place an economic value on the convenience of having indoor plumbing, for instance? And once everyone has it, does that affect its value? Does indoor plumbing contribute to personal happiness? Can you place a value on that? We know money and economic well-being are not the be all and end all for a fulfilling, happy life. To me, inflation, cost and standard of living, expectations, and the like are all relative. That is what RBR was trying to demonstrate by having me tell all about my parents.

The bottom line is that we may well be the first generation to be less economically well off than our parents, or so the studies say. And the studies show growing gaps in wealth with a shrinking middle class. But it is pretty hard to judge. Perhaps our notions and definitions of class and economic well being need to change. And what we accept as healthy economic growth, inflation, etc. may also have to change. The NYT did a series of 10 articles on the subject.

Let's see how well off you all are. This is a rather interesting set of interactive charts from the NYT series   that will tell you what your class strata is. We aren't talking anymore about poor, middle, rich. We are much more refined about slicing out class. There is middle middle, upper middle, upper upper.

Also consider that today's generation has a host of options that weren't possible. I don't own a home and God willing, I won't be buying a new car for several more years, but I am traveling to Europe again this fall and I got to spend 23 years in school rather than 12. So I entered the money-making years later and I may well work longer as a result. People like us are considered in the top 10% of the population by virtue of our educations. What is the economic effect of having maybe 70% of the top 10% encumbered with heavy student loans and limited work histories when they hit the job market? Does that contribute to the new economic volatility? What people used to do in their early 20s, they are doing in their mid to late 30s. When my parents were young newlyweds, their options were much more limited.



 

// posted by USWest

Anonymous said...

I did the interactive thing and my profession (post secondary teacher) put me in the 74th percentile, my education (doctorate) put me at the top of that scale, my income put at about the 75th-80th percentile, my net worth however is near the bottom - because of the debt load US West alluded to combined with the fact I'm just starting out and haven't even gotten my first pay check yet at my fancy new job.

One thing this does though is look at things nationally. If you compare local conditions, you get an even more complect picture.

Check out this web site  to compare how far your income would get you in various locations around the country. When I compare the small college town I live in now to the large coastal city I used to live in, I see that my income would need to nearly double to get me the same standard of living on the west coast that it provides for me here. Of course I'm in a profession (education) that is somewhat isolated from the rural economic contraction that I mentioned earlier.

So we need to think about both space and time.

 

// posted by Raised By Republicans

Anonymous said...

RBR, did you compare the difference between renting and owning?

I did my hometown to where I now live. When I say my housing preference is OWN I only need a little over half my salary to live back in my hometown. When I click "rent", the difference between the two is negligible. Interesting.

On the NYT thing, I end up pretty much like you, upper middle for everything but net worth.
 

// posted by USWest

Anonymous said...

I just did the comparison you suggested. When I compare based on home ownership, maintaining my lifestyle after a return to the large urban area where I used to live in California would require a 59.4% incrase in my salary. If I base the comparison on renting, it would require a 24.5% increase in my salary.

According the US census, the median household (4 member family) income  in the United States is $65,093. The figure for California is $67,814. The figure for Iowa is $64,341. Think about that in the context of the dramatic increases required to maintain standard of living. The usual mantra in California is "oh, sure we have a higher cost of living but we have higher incomes too." The facts show otherwise. For the median Californian, living standards are far below those in Iowa despite the marginal advantange in median income. And of course the differences in the percentage of single parent families probably act to further disadvantage the Californian stats.

So who are the richest Americans? Minnesota (my somewhat more urban neighbors to the north) has a median income of $76,333. Comparing that salary in Minneapolis vs San Diego (a city of simliar size) suggests that the Median Minnesotan family would need to earn $95,971 to maintain their standard of living in LA. Without doing finding a direct comparison of living standards for all the states, my educated guess would be that if you are picking a place to live, Minnesota is your "best buy."

Now, if the Minnesota Chamber of Commerce would like to pay me my bribe now they know the number of the account.
 

// posted by Raised By Republicans

Anonymous said...

Right. Minnesota, where the winters will freeze you. Look, we all know how content you are, RBR, to be back in the Mid-west paradise. However, when you talk about standard of living, you mean it in the economic sense. Then there is the quality of life. Now granted, standard of living plays a role in that. But I will gladly stay where I am rather than go back to the Central Valley where it is running 105 degrees all week this week and the only place to take a nice walk is the university campus of the canal bank. In the winter, the place is covered in fog.

Where I now live, I can kayak, hike, bike, surf, etc. all without leaving town and year around. I am geographically well located to do all sorts of things. I can get the best wines, the freshest fruit and veggies, the cleanest air, and great film, art, etc- much of it affordable and sometimes even free. And to me, that offers a higher quality of life than 10 below Zero.
 

// posted by USWest

Anonymous said...

When once I lived in Arizona, the joke used to be, "They pay us in sunshine." Those who preferred the money ended up moving elsewhere. Yes, there is an economic calculus to quality of life, including the climate. Ask yourself this: how much would you have to be offered to move to Minnesota. If you lost your job tomorrow, how would that calculus change. Me? Probably need at least a six figure incentive. 

// posted by LTG

Anonymous said...

OK, we're way off the inflation topic now. My point in mentioning the differences in standard of living and purchasing power was the support LTG's assertion that the economy in California at least is not one in which housing prices are going up because the value of the houses are going up. Also, I wanted to underscore that the median house price (and size) is unavailable to the median Californian family. I'm not trying to pick on California because I see this as an American problem first and foremost. California is just suffering the symptoms first.

All this reminds me of a Woody Guthrie classic. The song could apply to the entire country really. It's an anthem for the immigrant to an over heated economy.

Do Re Mi 
(singing)
Lot's of folks back east they say
Leaving home every day
Hitting the hot old dusty way
To the California line

Crossing desert sands they roll
Getting out of the old dust bowl
They think they're going to a sugar bowl
But here is what they find

For the police at the port of entry say
You're number fourteen thousand for today
And if you ain't got the Do Re Mi boys
You ain't got the Do Re Mi
You'd better go back to beautiful Texas
Oklahoma Kansas Georgia Tennesee

California's a garden of Eden
It's a paradise to live in or see
But believe it or not you won't find it so hot
If you ain't got the Do Re Mi

Now if you want buy a house or farm
That can't do nobody no harm
Take your vacations by the mountains or sea
Don't swap your old cow for a car
You're better of staying right were you are
You better take this little tip from me
Cause I look through the want ads every day
But the only thing the papers always say
Is hey if you ain't got the Do Re Mi boys
If you ain't got the Do Re Mi
You'd better go back to beautiful Texas
Okalahoma Kansas Georgia Tennesee

California's a garden of Eden
It's a paradise to live in or see
But believe it or not you won't find it so hot
If you ain't got the Do Re Mi boys
If you ain't got the Do Re Mi

 

// posted by Raised By Republicans

Anonymous said...

I know we are off topic. But RBR, one thing bugs me about the link you gave us where you can compare how far your income would get you in various locations is the difference between renting and owning. Help me out here because in California right now, renting is the cheaper proposition. My rent is at least a 1/5 of what a mortgage payment would cost me. Rents and mortgages are very much out of alignment in California. So what gives?

I think it is a given that the housing market is out of skelter. And if we ever have a thread dedicated to that topic, I will give my prediction as to what is going to happen. (in fact, I think we did way back when.)It is pretty much what economists are now saying. Only the Economist Magazine and me have been saying it for 2 years.

No one seems to be arguing that inflation doesn't exist. It does. And anyone who says otherwise is trying to pull the wool over our eyes.
 

// posted by USWest

Anonymous said...

Yes, that difference between renting and owning is odd. From what I understand the website was showing that the difference between regions is less if you look at renting - implying that costs are lower (relatively) in high costs regions if you rent rather than own. That makes sense to me.

That said, I disavow any responsibility for that link. It was just curious little dodad I found on the net. 

// posted by Raised By Republicans

Anonymous said...

BTW: NPR is reporting this morning that in some places, like Arizona, developers are starting to refuse selling to property investors. The developers say that having a development with too many rentals brings down property values. Investors are now taking the developer to court claiming discrimination. Interesting.  

// posted by USWest

Anonymous said...

The easier way to do it is include covenants against rentals. Ask Rehnquist if Arizonans know about covenants, wink wink. 

// posted by LTG

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