Cost of Living vs. CPIThe official measures of inflation don't jibe with our everyday experience. Why? What makes CPI misleading? What alternative measure would be more consistent with our experience, with what most citizen want inflation to measure?
Draft: Dec 2013
Official CPI Estimates:
Our government produces two sets measures to estimate inflation or the cost of living. The one set is produced by the BLS and includes the CPI and PPI. The other is produced by the BEA.
Education: Before 1970 an American stood fair odds of entering
the middle class without a college degree. Many skilled labor jobs paid
enough for one income to support a family at a middle class level. Most
high schools offered classes so that boys could develop those skills.
Many companies offered on the job training at the company's expense.
Transportation: Before 1960 a typical American could get to work,
services, and shopping without a car. They might have relied on mass transit
for some transportation. Back then, looking for a job was called "hitting
the pavement" because a person would walk to all the local companies
to find work.
Resources: Before 1990 most jobs were advertised in local newspapers. Before 1970 a person could go to the company and apply in person. Now most jobs are listed on the internet. Most jobs require computer skills. Computer skills are changing so rapidly that a person needs constant practice to keep up. A home computer with internet access is now mandatory for staying out of poverty and improving one's position in the economy. Computers and internet access are now necessities that must be considered in the cost of living.
Housing: During this same period the cost
of housing has gone up significantly. The portion of income that Americans
spend on rent and mortgages is now much higher than it had been back in
the 1950s. Many Americans now spend more than 50% of their income on housing.
Increased instability increases the number times an American will be expected
to relocate to find work. Relocation is very costly.
Each choice we make has an initial cost and a consequence. Most consequences carry a cost. For the estimate of the cost of living to be useful, it must include the consequential costs we accept when we purchase necessities.
Food vs Health: Many poor Americans have, by necessity, chosen cheaper foods. However, diets overly dependent on GMO grains grown in pesticides and glyphosate consumed along with artificial sweeteners are linked to insulin resistance, diabetes, and other health problems. Cheaper foods lead to higher medical costs. An accurate estimate of the cost of living must consider food costs together with food related medical costs. Food related medical costs have been rising rapidly since the mid-1990s.
Housing vs. Commuting: A person can find cheaper housing. But the cheaper housing typically requires a longer commute to work. Cheaper housing is likely to be in a more crime-prone neighborhood. Cheaper housing may also come with other hidden side costs such as exposure to noise, exposure to foul industrial odors or toxic pollutants, etc. All these costs must be considered together since lower housing costs typically result in higher consequential costs.
Upfront Costs vs. Delayed Costs: Many costs, such as housing and education, require a person to make a tradeoff between initial costs and delayed costs. They also challenge a person to hedge their investments against related risks. The local businesses might close right after a worker purchases his house. A new technology might displace the career a person trains for. Saving for a down-payment will reduce interest costs but will also increase rent costs during the time one is saving. None of these tradeoffs and risk costs are easily calculated. But they all make up part of the cost of living. The instability of the economy comes at a very high cost not currently considered in the CPI. The losses that citizens suffered in the crash of 2008 should have been considered as risk-costs related to their housing, investment, and career decisions in the preceding decade.
The CPI is calculated with the assumption that Americans can purchase cheaper goods as they are developed. So as new cheaper products replace older costlier products Americans can have the same quality of life by purchasing goods with lower production costs. But this assumption ignores the consequential costs of switching to cheaper goods. Failure to include consequential costs in CPI estimates resulted in severely underestimating the real cost of living - the cost of staying out of poverty.
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CPI underestimates Cost of Living: From our observations above we can guess that the official CPI estimates significantly underestimate the real cost of living. Items once considered luxuries or comforts are now necessities. Some necessities costs (eg: housing, education, health care) have risen significantly faster than average prices overall. The average price of goods does not indicate the cost of living. The costs of necessities, along with their consequential costs, measure the cost of living.
Individual Factors: The cost of living is not the same for all. For the young and the poor the costs of education, transportation, and housing dominate their budgets. For the old health care dominates their budget. For parents child care dominates their budget. Any policy that applies the same CPI calculation to all citizens and all programs is intrinsically wrong.
Low Wage Work Prevents Opportunity: Workers must have both enough time and enough money to retrain for better find opportunities. Since higher education is required to stay out of poverty, any labor or service job that requires overtime work just to cover necessities constitutes a poverty trap not an opportunity. The cost of living correlates to a pay rate is sufficient for a person to find opportunities for advancement. Many service jobs now offer workers no chance for skill development and pay well below the rate that would allow the worker to retrain on his own.
Personal Experience Ignores Greater Economy: Some older citizens use their own situation or other anecdotal evidence to evaluate CPI, employment, or strength of the economy. This is incorrect. In a normal economy people gradually move up the economic ladder to higher status and pay. To say, "I am doing much better than 30 years ago," does not evaluate the economy. One needs to ask, "How are young people in similar situations to myself doing compared to when I was the same age?" Or conversely ask, "How did somebody my age and skill level do 30 years ago?" These are the questions correct for personal mobility within the economy. We see strong indicators that relative income and opportunity were higher 30 years ago than now.
Federal Budget Growth Gets Measured Incorrectly: Another popular error is expressed by some activist groups that measure the federal budget in terms of inflation. This is incorrect because the population has increased also. The population both pays the budget and receives the benefits. A larger population means both more citizens paying in and more citizens receiving benefits from the expenditures. Thus, we can correct for this error by measuring the budget in terms of both population and inflation. Or we could measure the budget in terms of percentage of GDP.
What we really want when we talk about cost of living is a measure that will estimate how hard it is to stay ahead of poverty. We want to know whether people need to work longer and harder to stay out of poverty or do they have more time to enjoy life. Cost of living would be more accurately measured in terms of how many annual hours of work for money are required to keep a family out of poverty. Working for money includes indirect work such as education-training and commuting to a job.
Over the last 40 years in America, many have seen vacation time decrease, commuting time increase, more working through lunch, and more taking work home. Forty years ago it was common to hear of a single income supporting a family of five. Now, it's common to hear of two incomes supporting a family of three. The standard basket estimate of CPI says that we have more. But time-at-work indicators suggest that we are actually poorer.