Real Wages: Is this true?

[Puppycow]

Is the following chart true?

Wages and Benefits: Real Wages (1964-2004) (http://www.workinglife.org/wiki/Wages+and+Benefits%3A+Real+Wages+%281964-2004%29)

REAL WAGES
1964-2004
Average Weekly Earnings (in 1982 constant dollars)
For all private nonfarm workers

1964: $302.52
. . .
1974: $314.94
. . .
1984: $279.22
. . .
1994: $259.97
. . .
2004: $277.57

Were real wages in the US in 2004 actually less than they were in 1964? (and presumably still today?)

[Yoink]

Is the following chart true?

Wages and Benefits: Real Wages (1964-2004) (http://www.workinglife.org/wiki/Wages+and+Benefits%3A+Real+Wages+%281964-2004%29)



Were real wages in the US in 2004 actually less than they were in 1964? (and presumably still today?)

The figures are real, but they leave out non-wage compensation (chief among which is healthcare benefits). If you include those, overall "real compensation" has risen fairly steadily over the same period.

[Puppycow]

In other words, the cost of health care is rising faster than wages.

http://www.washingtonpost.com/wp-dyn/content/article/2009/09/19/AR2009091900112.html

http://facts.kff.org/chart.aspx?ch=854

The cost of healthcare rose from 5.2% of GDP in 1960 to 16.2% in 2008. :jaw-dropp

[Captain.Sassy]

In Canada, mean real wage has increased, but median real wage has stagnated for decades.

[The True Scotsman]

You might want to go with more reliable sites in the future, like this one:

http://www.bls.gov/

[Startz]

Some of this depends on how you measure things. Average hourly earnings (using the CPI for a price index) were about $8/hour in 1964. $9/hour in 1972. $8/hr in 2004 and abour $8.40 now. There is some argument that the real increase is more because inflation is overstated. But the message that real wages have not done well is correct.

[Yoink]

You might want to go with more reliable sites in the future, like this one:

http://www.bls.gov/

From the OP's link: "Source: U.S. Bureau of Labor Statistics."

[Puppycow]

You might want to go with more reliable sites in the future, like this one:

http://www.bls.gov/

If that site has the same data it's not on the front page.

[kevinquinnyo]

If you use the % GDP method to calculate relative worth of the dollar today versus 1950, then the 30 cents it cost for a gallon of gas is only 5 cent today, if paid in 1950 dollars..

Something to think about...

[Puppycow]

If you use the % GDP method to calculate relative worth of the dollar today versus 1950, then the 30 cents it cost for a gallon of gas is only 5 cent today, if paid in 1950 dollars..

Something to think about...

IOW, gas was cheaper then (in real terms)? Or more expensive? I'm confused. :confused:

[Puppycow]

According to this inflation calculator (http://www.westegg.com/inflation/), $0.30 in 1950 is $2.66 in 2008, which means the real price of gas is almost exactly the same as it was in 1950.

http://www.fuelgaugereport.com/

http://www.educationworld.com/a_lesson/dailylp/dailylp/dailylp076.shtml

[Nosi]

The price of electronics (computers) has dropped. What about food?

[gumboot]

Some of this depends on how you measure things. Average hourly earnings (using the CPI for a price index) were about $8/hour in 1964. $9/hour in 1972. $8/hr in 2004 and abour $8.40 now. There is some argument that the real increase is more because inflation is overstated. But the message that real wages have not done well is correct.



If you think about it none of this should really be any surprise. Think about it. In a free market, wage levels should pretty quickly settle into an equilibrium in relation to living costs. If wages increase for any reason this will result in the cost of everything increasing, so the real value of your earnings will remain the same. Likewise, if the costs of living increases for any reason average wages will naturally increase to return the system to equilibrium.

[Puppycow]

The price of electronics (computers) has dropped. What about food?Food is cheaper too.

http://www.ilfb2.org/fff06/51.pdf

http://www.salem-news.com/articles/july192006/food_prices_71906.php

Also, people eat out more than they used to.
http://www.ers.usda.gov/briefing/CPIFoodAndExpenditures/Data/Expenditures_tables/table8.htm

http://www.ers.usda.gov/AmberWaves/September08/Findings/PercentofIncome.htm

[Puppycow]

As far as things that have gone up in price, there's the cost of education as well as healthcare.

[PogoPedant]

You might want to go with more reliable sites in the future, like this one:

http://www.bls.gov/

There is one thing that the US government does better than just about every other: publish statistics. Seriously, you guys rule.

[drkitten]

If you use the % GDP method to calculate relative worth of the dollar today versus 1950, then the 30 cents it cost for a gallon of gas is only 5 cent today, if paid in 1950 dollars.

But since the GDP of the United States has been continuously growing -- industrial and technical productivity issues aside, the population has increased substantially -- since 1950, that's a rather silly method of calculating "relative worth."

[drkitten]

If you think about it none of this should really be any surprise. Think about it. In a free market, wage levels should pretty quickly settle into an equilibrium in relation to living costs. If wages increase for any reason this will result in the cost of everything increasing, so the real value of your earnings will remain the same. Likewise, if the costs of living increases for any reason average wages will naturally increase to return the system to equilibrium.

This ignores technological progress (as well as external markets).

If someone invents a better widget-maker so that I can make (and sell) twice as many widgets in a day as I could before, then my average wage can increase without necessarily raising the price of widgets. (In fact, the price of widgets is likely to go down because there's a larger widget supply, but my wages still go up.)

That's one reason that US has had a long-term trend of increasing real wages for centuries. Unfortunately, this trend seems to have stopped recently. Economists and politicians are still arguing about why.

[blutoski]

Some of this depends on how you measure things. Average hourly earnings (using the CPI for a price index) were about $8/hour in 1964. $9/hour in 1972. $8/hr in 2004 and abour $8.40 now. There is some argument that the real increase is more because inflation is overstated. But the message that real wages have not done well is correct.

Does US CPI include the cost of housing?

[blutoski]

Does US CPI include the cost of housing?

Nevermind... apparently it does. Also includes medical care and education.

[Ziggurat]

In other words, the cost of health care is rising faster than wages.

It's not just healthcare, though that's a big part of it. 401(k) deferments and even yearly bonuses are not included in earnings figures either.

[MikeMangum]

That's one reason that US has had a long-term trend of increasing real wages for centuries. Unfortunately, this trend seems to have stopped recently. Economists and politicians are still arguing about why.

China, and Mexico. China (and the Philippines, and Vietnam, etc.), by manufacturing goods that due to a comparative advantage in labor costs, can be sold here at lower prices. Mexico, by exporting to the US labor that has a comparative advantage in the US domestic market, keeping wages from growing significantly in real terms.

The US economy has basically maintained living standards for existing residents while boosting living standards for many immigrants AND foreign workers. Of course, living standards have actually increased, because the CPI index has limitation that are grossly magnified as the time frame of comparison increases.

The CPI index compares goods solely on price and not quality, which leads to comparing the price of a 1960 Ford Fairlane (4 door sedan) to the price of a 2010 Honda Accord (4 door sedan), nor does it account over the long term for completely new technologies. Cell phones, Blue Ray players, and PCs didn't exist in 1960, for instance. The CPI doesn't adequately measure things like the difference between 1) an old 23" Zenith TV with the 2 dials for channels and rabbit ears or a roof mounted antenna (the kid was the "remote") and 2) a modern 22" tv (http://www.provantage.com/samsung-2333hd~7SAMQ0FC.htm), or the difference between the average PC in 1990 and the average PC in 2010.

Using the CPI for long term measures of inflation or standards of living is very problematic.

For example, from the OP:
REAL WAGES
1964-2004
Average Weekly Earnings (in 1982 constant dollars)
For all private nonfarm workers

1964: $302.52
. . .

2004: $277.57

If earning really had not changed during this time frame in real terms, then people would have the same standards of living, no? But that is not the case. Looking at those people who the Census Bureau classified as living in poverty (http://www.heritage.org/Research/Welfare/bg2064.cfm) in 2005,
The following are facts about persons defined as "poor" by the Census Bureau, taken from various gov*ernment reports:

•Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.


•Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.


•Only 6 percent of poor households are over*crowded. More than two-thirds have more than two rooms per person.


•The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)


•Nearly three-quarters of poor households own a car; 31 percent own two or more cars.


•Ninety-seven percent of poor households have a color television; over half own two or more color televisions.


•Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.


•Eighty-nine percent own microwave ovens, more than half have a stereo, and more than a third have an automatic dishwasher.

The purchasing power of the average poor person in the US is better than the purchasing power of the average US citizen in the 1970s. I don't know the ages of people on this forum, but I can say with a great deal of certainty that living standards in the US have improved substantially since the 70s. Things that were ubiquitous then (clothes lines in back yards, for example) are almost entirely gone now. I don't have ready access to the numbers (and I'm too lazy to look it up) but I know that there has been a dramatic increase in households with indoor plumbing, electricity, gas or electric stoves, dishwashers, clothes washers and dryers, etc. and a significant increase in square footage of living space, in just the last 50 years.

How that happened without an increase in "real" wages is beyond me.

[Startz]

The CPI index compares goods solely on price and not quality, which leads to comparing the price of a 1960 Ford Fairlane (4 door sedan) to the price of a 2010 Honda Accord (4 door sedan), nor does it account over the long term for completely new technologies. Cell phones, Blue Ray players, and PCs didn't exist in 1960, for instance. The CPI doesn't adequately measure things like the difference between 1) an old 23" Zenith TV with the 2 dials for channels and rabbit ears or a roof mounted antenna (the kid was the "remote") and 2) a modern 22" tv (http://www.provantage.com/samsung-2333hd~7SAMQ0FC.htm), or the difference between the average PC in 1990 and the average PC in 2010.



According to the BLS
... for example, if a television in the CPI is replaced by one with a larger screen and higher price, the BLS can make an adjustment to the price difference by estimating what the old television would have cost had it had the larger screen size.

Many of the challenges in producing a CPI arise because the number and types of goods and services found in the market are constantly changing. If the CPI tried to maintain a fixed sample of products, that sample quickly would shrink and become unrepresentative of what consumers were purchasing. Each time that an item in the CPI sample permanently disappears from the shelves, the BLS has to choose another, and then has to make some determination about the relative qualities of the old and replacement item. If it did not--for example, if it treated all new items as identical to those they replaced -- significant upward or downward CPI biases would result.

[Nosi]

The Daily Mail recently had this article (http://www.dailymail.co.uk/news/article-1253338/Five-millions-Brits-permanently-overdrawn-families-struggle-cost-living.html) maintaining that the rapidly rising cost of living is forcing five million Britons to be permanently overdrawn. There have been similar blogs-newsey articles about Americans struggling in this economy.

[timhau]

Is it rising costs of living, or striving for a lifestyle that is unsupportable at their income level?

[drkitten]

Is it rising costs of living, or striving for a lifestyle that is unsupportable at their income level?

You can't separate the two. Lifestyle isn't the sort of thing you can change at a moments' notice (which is why people get foreclosed upon when they lose their jobs).

I can have a lifestyle today that is supportable, and then costs rise and it becomes unsupportable tomorrow faster than I can unload the lifestyle.

From the article:


Many are desperate to stop relying on their overdraft, but their finances are being crippled by a pay freeze or pay cut at work, or redundancy.

Two-thirds of workers in the private sector were hit by a pay freeze last year, with many braced for a second one this year.

To make matters worse, the cost of living has jumped sharply, with the rate of inflation trebling from 1.1 per cent in September to 3.5 per cent today.

[kevinquinnyo]

But since the GDP of the United States has been continuously growing -- industrial and technical productivity issues aside, the population has increased substantially -- since 1950, that's a rather silly method of calculating "relative worth."

:o

yeah i guess you should just use the CPI for gasoline, i dont know why i did that

[daenku32]

Is it rising costs of living, or striving for a lifestyle that is unsupportable at their income level?

If you need a car to go to work, it may be unsupportable with the income level, but hardly a strive to live beyond means.

[oggiesnr]

The lifestyle and what we expect has changed out of all recognition in the last fifty years. My mother left work to become a full-time mum when she had her first kid, I remember our first car and TV and my Dad was relatively well paid. Telephones were not universal, I remember the first colour TV on our estate, we had and expected a lot less. Credit cards did not exist, you wanted it you paid for it. Overdrafts were carefully controlled, living beyond your means was a mortal sin.

I suspect that the wage figure in the OP are fairly accurate and we could live fine on them if a) we were prepared to live like we did those many years ago and b) house prices (in the UK) weren't seemingly predicated on having two people working.

Steve

[blutoski]

... b) house prices (in the UK) weren't seemingly predicated on having two people working.

This is why I was asking about whether housing was included in the CPI. According to the government website's FAQ, it appears to be, but my impression is that housing prices have inflated considerably faster than wages, and make up a huge proportion of consumer cost. I'd have expected housing costs to have almost single-handedly propelled the CPI for the last three decades.

Can anybody help me understand this?

[Puppycow]

This is why I was asking about whether housing was included in the CPI. According to the government website's FAQ, it appears to be, but my impression is that housing prices have inflated considerably faster than wages, and make up a huge proportion of consumer cost. I'd have expected housing costs to have almost single-handedly propelled the CPI for the last three decades.

Can anybody help me understand this?

Housing prices did outpace inflation and wages but especially during the bubble of the last decade:

http://mysite.verizon.net/vzeqrguz/housingbubble/

[Nosi]

Housing prices did outpace inflation and wages but especially during the bubble of the last decade:

http://mysite.verizon.net/vzeqrguz/housingbubble/

The American dream of a home (house) is out of the question for most families here where I live. That includes even two income families. Even renting an apartment stretches two income families to near breaking point.

The closest the one income family or low income family can even dream of the American dream here is buying the second hand caravan or motor home-RV-trailer. Some of them are forty feet long and have two 'bedrooms' for the parents plus the kid(s).

The wheeled American Dream has exploded though.

[quixotecoyote]

The American dream of a home (house) is out of the question for most families here where I live. That includes even two income families. Even renting an apartment stretches two income families to near breaking point.

That's one of the things I like about Kansas City. They've got a good rent control program for families earning less than $33k. Certain apartments are set aside for that income bracket and the prices fall to match the buyer's available funds.

Granted, it's been a little frustrating this month as I'm only slightly over the income cutoff which means I don't qualify for a lot of the affordable housing.

[JJM 777]

Some of this depends on how you measure things.
For example:
- Limited resources, such as housing land, have a price unrelated to the productivity of work.

- Technology improves all the time, so every year we get better and better products (electronics etc.) for the same price.

[psychictv]

Does US CPI include the cost of housing?
Nevermind... apparently it does. Also includes medical care and education.


Do you have a reference for that? AFAIK CPI does not include housing, gas, food, or clothing, which is why inflation is grossly understated and the real drop in wages is hidden. Which seems to correspond to anecdotal observations about the lifestyles of different generations, as long as you're not dazzled by nonsense like ipods and flatscreen TVs.

Edit: Hmm, bls says it does include those things. http://www.bls.gov/cpi/cpifaq.htm

[blutoski]

Do you have a reference for that? AFAIK CPI does not include housing, gas, food, or clothing, which is why inflation is grossly understated and the real drop in wages is hidden. Which seems to correspond to anecdotal observations about the lifestyles of different generations, as long as you're not dazzled by nonsense like ipods and flatscreen TVs.

Edit: Hmm, bls says it does include those things. http://www.bls.gov/cpi/cpifaq.htm

Yes, this is what surprised me when I read it. I had been under the same impression that you were, with the exception of food. I had been told that there was a standard 'basket' of groceries in CPI.

What I'm not sure of is the housing segment: "HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)" - does "owners' equivalent rent" mean mortgage payments?

[psychictv]

Ah, here's the argument that I was trying to recall. The BLS calculates the potential rental value of housing rather than the actual sale price.

The cost of shelter for renter-occupied housing is rent. For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes.
http://docs.google.com/viewer?a=v&q=cache:R_h51MIrrAcJ:www.bls.gov/cpi/cpifacnewrent.pdf+cpi+measures+cost+of+housing+by+ rent&hl=en&gl=us&pid=bl&srcid=ADGEESiQNP2w1-x0VhqjlhENyUva4sfVuXKrqY57_UnLXUjOcILnUpd1V-rmv_pKKHMEhoDPv3k1FTb1Zs_zEFjlQegOA_p_1n5_Z1FIgkS6 E5DAZO6wahs2YA9wyI983N3ftPLkthjS&sig=AHIEtbTeXGHPDnjwLv9d6vD9V8b2Qrij2w

So during a housing bubble when sales prices rise faster than rents, inflation is underestimated. I think the hedonics nonsense helps hide the real inflation numbers too.

[blutoski]

Ah, here's the argument that I was trying to recall. The BLS calculates the potential rental value of housing rather than the actual sale price.

Yes, that is a weakness in what is a large portion of after-tax spending. My wife and I probably spend about 50% of our after-tax spending on mortgage. It has much more impact than miscalculating apples in the standard grocery basket.

[blutoski]

So during a housing bubble when sales prices rise faster than rents, inflation is underestimated. I think the hedonics nonsense helps hide the real inflation numbers too.

Not only do sales prices increase faster than rents due to lease arrangements, but low interest and extended amortizations change the ratio of mortgage payment (which will ultimately be proportional to rent charges) to purchase price.

To put this another way: when I bought my first apartment, the mortgage was $600/mo and I had amortized it 10 years ($75k purchase price). My refinance to rent it to tenants was calculated to keep that original $600/mo, but I am amortizing it 30 years ($300k est property value).

If we're just looking at the rental price potential, it's about the same over the last decade. However, the actual cost of housing is very different.

[drkitten]

So during a housing bubble when sales prices rise faster than rents, inflation is underestimated. I think the hedonics nonsense helps hide the real inflation numbers too.

Why? Why do you assume that the CPI underestimates the "real" inflation rate and that the housing bubble tracks it?

Especially since you're actually arguing against yourself if you think the hedonics "nonsense" (why nonsense?) hides real inflation, too. They actually work in opposite directions!

The hedonics analysis compensates for improvements in the quality/value of goods. I.e. when better or more valuable goods displace less valuable ones, it updates the basket to reflect the more valuable goods.

But when a housing bubble causes high-priced housing to displace low-priced housing (i.e. the equity premium rises over the rent equivalent), using rent equivalent only specifically does NOT compensate for improvements in the value of goods (like home ownership).

You can't have it both ways. When the comparative value of owning over renting increase (just like the comparative value of Blu-Ray over normal DVD does), you either have to adjust the basket or you don't. The CPI adjusts the basket for the DVD player, but not for the equity premium. How can they have the same effect when they're opposite decisions?

[psychictv]

I'm not following you there. Admittedly that's probably my ignorance of economics. They way I see it though, there is a certain average cost of a TV today and a certain average cost to buy a house today. And there were different, lower costs for my grandfather to buy a TV and to buy a house. The TV might be 10 times more expensive than the one my grandfather bought, but hedonics says it's twice as good so inflation has only increased 5x. I think that's utter B.S. That's a way to understate inflation. The price of a house might be 20x the price of my grandfather's house but since CPI is calculated based on rents which rise more slowly, the rental value of my house may only be 19x the cost of my grandfather's house. That's also a way to slightly underestimate inflation.

I guess it comes down to whether you think we're better off today than we were 50 years ago. Some people seem to genuinely believe that the airbags, cruise control, gps, ipods, and flat screen HD digital TVs make it all worthwhile. Personally I think that my grandfather was far better off, considering that he could afford to buy his house outright, buy a new car every year while trading in the old one, put four kids through college, all on a single salary while never having to worry about the cost of healthcare. But I guess his TV was a lot smaller and only in ...gasp... black and white! :jaw-dropp So the fact that I probably make less than he did in real dollars is justified, right?

[drkitten]

I'm not following you there. Admittedly that's probably my ignorance of economics. They way I see it though, there is a certain average cost of a TV today and a certain average cost to buy a house today. And there were different, lower costs for my grandfather to buy a TV and to buy a house. The TV might be 10 times more expensive than the one my grandfather bought, but hedonics says it's twice as good so inflation has only increased 5x.


Bad example. The TV you bought is more like 10x better and only 2x more expensive in nominal dollars (Moore's law again).

But you've more or less got the idea right.

I think that's utter B.S. That's a way to understate inflation.

Why is it utter BS? The idea of "comparable goods" is hardly B.S., nor is it even controversial.

If you want to know how much your four-bedroom, 2 bathroom house is worth, you look at other 4/2 houses in your area. If a 4/2 house sold for $30,000 thirty years ago and $300,000 today, that's a 10x increase in price, yes?

But if your grandfather lived in a two-bedroom, one bathroom house that he bough thirty years ago for $15,000, the house hasn't gone up in value 20 times, because it's a substantially different house. Even though today a "single family house " demands at least four bedrooms instead of two.

And your real estate agent would think you a fool if you tried to sell your 2/1 house for the same price that a 4/2 house two doors down sold for a month ago. (If your house was "comparable," that's of course exactly what the agent would recommend -- but half the house will not command anywhere near the same price.)

Let's get back to color TVs. In the 1960s, your (great?)-grandfather probably watched TV on a small (14") black and white set that cost about $150. (http://www.tvhistory.tv/tv-prices.htm) If he had wanted a 21" color TV, it would have set him back about $500. A 30" color TV wasn't even available, but would have probably run him at least a thousand dollars.

Today a 21" color TV costs about $150, and a thirty-inch one about $300.

So why is it unfair (or B.S.) to say that TV prices have dropped more than three times?


I guess it comes down to whether you think we're better off today than we were 50 years ago.

In other words, you've already decided how much inflation there's been, and you're looking for data to support your preconceived conclusion.

That is utter B.S.


Personally I think that my grandfather was far better off, considering that he could afford to buy his house outright, buy a new car every year while trading in the old one, put four kids through college, all on a single salary while never having to worry about the cost of healthcare. But I guess his TV was a lot smaller and only in ...gasp... black and white! :jaw-dropp So the fact that I probably make less than he did in real dollars is justified, right?

Yes. In fact, you almost certainly make more than he did in real dollars, but you spend it a lot less wisely. For example, you don't need to have a television at all; he certainly didn't regard it as a necessity, and he bought a TV only after he had saved enough that he could feel comfortable paying to educate his children. He didn't have gps on his car and instead either read a map or asked for directions if he needed to know where he was.

Try living his life for a while and you'll find out just how much more money you have than you thought you had.

Just as an example -- you can still find 21" TVs, and even 30" TVs, but they're getting much harder to find. You'll find a few tucked discretely away in the backs of the local shop, but the action (and most of the sales) is in the 50" HDTV giant-screen TVs. People are (demonstrably) more willing to spend $1000 for a TV than they are to spend $200 for a TV and put $800 away towards the college fund.

Similarly, your grandfather didn't need to buy a starter home as soon as he graduated, or got married, or started a family. He was perfectly content to rent for a while (and not pay equity premium), using the money he saved by renting to put towards eventually purchasing a house. Now it's expected that newlyweds will buy houses. Which means that people are choosing to (over)pay for housing just as they are choosing to overpay for televisions.

That's not inflation. That's a choice about how to spend money.

[Francesca R]

Yes, that is a weakness in what is a large portion of after-tax spending. My wife and I probably spend about 50% of our after-tax spending on mortgage. It has much more impact than miscalculating apples in the standard grocery basket.Mortgage interest costs track imputed rents better than they track the selling prices of houses.

House prices shouldn't be in a consumer price index any more than shares in Microsoft. It is the rental value of housing that is consumed, not the value of the house itself.

[psychictv]

The TV you bought is more like 10x better and only 2x more expensive in nominal dollars

I disagree. It's still just a TV.

If you want to know how much your four-bedroom, 2 bathroom house is worth, you look at other 4/2 houses in your area.

Exactly. But hedonics, if applied to houses, would say that the one with the granite countertops and the steel appliances or whatever superficial features are the current trend, is worth considerably more than the comparably sized house without those "improvements."

But if your grandfather lived in a two-bedroom, one bathroom house that he bough thirty years ago for $15,000, the house hasn't gone up in value 20 times
...In fact, you almost certainly make more than he did in real dollars, but you spend it a lot less wisely. For example, you don't need to have a television at all;...He didn't have gps on his car and instead either read a map or asked for directions if he needed to know where he was.

I guess this is where the anecdotes break down. Because both sets of grandparents lived in houses that were much bigger than 2 bedrooms, one bath (maybe this is a generational thing. my living grandparents are in their 90s). I have one fairly small TV, no cable, no gps, drive cars for 10 years until they fall apart, while he traded in for a new one every year, etc. I have one kid, he had four. We're probably a little better off comparatively than they were, but that's with two incomes compared to their one.

Similarly, your grandfather didn't need to buy a starter home as soon as he graduated, or got married, or started a family.

Where do you live that people buy a home as soon as they graduate!? Again, I feel like maybe there's a generation gap here.

[psychictv]

But if your grandfather lived in a two-bedroom, one bathroom house that he bough thirty years ago for $15,000, the house hasn't gone up in value 20 times, because it's a substantially different house.

Also, I can't decode what you mean by this sentence. My parents house has increased at least tenfold in value in 35 years or so. Both sets of grandparents, had they not moved would have very easily been looking at a 20x increase in the value of their homes without any renovations. Even sold just as a teardown, the value of the land alone would have been worth 10x what they bought the houses for. This in in CA though, so I guess that's why.

[drkitten]

I disagree. It's still just a TV.

Well, the entire electronics industry disagrees with you. If it really were "just a TV," then a 30" TV would cost the same as a 14" one.

People are demonstrably willing to pay more for a 30" TV, and have been for upwards of fifty years.



Exactly. But hedonics, if applied to houses, would say that the one with the granite countertops and the steel appliances or whatever superficial features are the current trend, is worth considerably more than the comparably sized house without those "improvements."

That's right. But it's not clear that you could rent the house out at a price to justify putting in those superficial features. So hedonics isn't really appropriate for houses. As Francesca pointed out, home rental is a necessity and part of the cost of living. Home ownership is an investment, not a necessity. The extra value in home ownership is no more related to inflation than the price of Disney stock.

[drkitten]

Also, I can't decode what you mean by this sentence.

I mean that looking at the price today of a 4/2 house and comparing it to the price forty years ago of a 2/1 house is not a reasonable comparison, because the houses themselves are fundamentally different. Looking at the price today of a 4/2 house and comparing it with a 4/2 house forty years ago is more reasonable, because the goods are "comparable."

[blutoski]

Mortgage interest costs track imputed rents better than they track the selling prices of houses.

House prices shouldn't be in a consumer price index any more than shares in Microsoft. It is the rental value of housing that is consumed, not the value of the house itself.

Yes, I appreciate that, but how do they factor that in? My parents paid off their mortgage pretty quickly, so the cost of housing became zero from that point on, even though they were "consuming" it for free for the next forty years. Certainly this is a material difference in affordability?

Very few of my colleagues are confident they will have their houses paid off by the time they retire.

[drkitten]

Yes, I appreciate that, but how do they factor that in? My parents paid off their mortgage pretty quickly, so the cost of housing became zero from that point on, even though they were "consuming" it for free for the next forty years. Certainly this is a material difference in affordability?

Not really, any more than the CPI factors in the fact that if you buy food by the case at Costco it will cost you less than if you buy it a box at a time at Safeway.

[blutoski]

Not really, any more than the CPI factors in the fact that if you buy food by the case at Costco it will cost you less than if you buy it a box at a time at Safeway.

I think we're talking past each other. I'm not saying my parents reduced their amortization through balloon payments.

Rental equivalent is something that some people don't have to spend all their lives, whereas you pretty much have to keep buying food.

The observation that previous generations appeared to be able to pay down their housing debt earlier seems like a significant change in real costs, despite perhaps a similar monthly spending during the years they're making payments.

[Francesca R]

My parents paid off their mortgage pretty quickly, so the cost of housing became zero from that point on, even though they were "consuming" it for free for the next forty years. Certainly this is a material difference in affordability?Qualitatively that is the same as paying up front for a year's supply of potatoes and then getting free potatoes for 11 months. Any calculation of the cost of potato consumption for a typical household would be better if it made fluffy mash out of such lumpiness.

[drkitten]

I think we're talking past each other. I'm not saying my parents reduced their amortization through balloon payments.

Rental equivalent is something that some people don't have to spend all their lives, whereas you pretty much have to keep buying food.

Yes, they do. It's just rolled into the home ownership premium.

[blutoski]

Qualitatively that is the same as paying up front for a year's supply of potatoes and then getting free potatoes for 11 months. Any calculation of the cost of potato consumption for a typical household would be better if it made fluffy mash out of such lumpiness.

I hear what you're saying but I think we're still talking past each other.

I think it's hard to use a single-purchase as an analogy. I prefer a subscription comparison:

1960: phone service $25/mo (inflation-adjusted) for 10 years, free for the rest of your life - lifetime cost of phone service $3000

2010: phone service $25/mo for 60 years, free for the rest of your life - lifetime cost of phone service $18,000.

CPI argument: phone is $25/mo so consumer cost is "exactly the same" in 2010 as in 1960. Sounds like an incorrect assessment of purchasing power unless there's a way to account for this. You do imply this is factored into the estimate, in your other post. I'd be grateful for some elaboration.

Given the example above, I would say that the equivalent cost over the same amortization period is $150/mo, or about 6x. I understand this is very rough, becuase of interest portion. It's just for illustration.

[drkitten]

I hear what you're saying but I think we're still talking past each other.

I think it's hard to use a single-purchase as an analogy. I prefer a subscription comparison:

1960: phone service $25/mo (inflation-adjusted) for 10 years, free for the rest of your life - lifetime cost of phone service $3000

2010: phone service $25/mo for 60 years, free for the rest of your life - lifetime cost of phone service $18,000.


Huh? I'm not following this analogy at all; I don't recall being offered free phone service in 1970, and I'm not expecting to be offered free phone service in 2070. My phone service today is a pay-as-you-go plan and it was largely the same in 1960 -- or 1890, for that matter.

The value of a house as a single-purchase entity is fairly well-defined. It's in the sales contract, after all. By purchasing a house, you're essentially "purchasing" a free place to rent for the rest of your life.

So it's fairly easy to do the math; rent an apartment at $1000/mo for the rest of your life, or buy a house at $400,000 (and any financial planner will be happy to do the calculations for you); the value of forty years rental is well-defined when treated as an annuity.

[Puppycow]

Do you have a reference for that? AFAIK CPI does not include housing, gas, food, or clothing, which is why inflation is grossly understated and the real drop in wages is hidden. Which seems to correspond to anecdotal observations about the lifestyles of different generations, as long as you're not dazzled by nonsense like ipods and flatscreen TVs.

Edit: Hmm, bls says it does include those things. http://www.bls.gov/cpi/cpifaq.htm

Yes, this is what surprised me when I read it. I had been under the same impression that you were, with the exception of food. I had been told that there was a standard 'basket' of groceries in CPI.

What I'm not sure of is the housing segment: "HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)" - does "owners' equivalent rent" mean mortgage payments?

There is an index called core inflation that does exclude food and energy costs, which are considered to be more volatile.

If they use rental value rather than market value for housing costs, that probably means that component of the CPI hasn't fallen as fast as it would have if they used the market price of residential real estate.

I'm now looking at a different measure of inflation called the PCE (http://en.wikipedia.org/wiki/Personal_consumption_expenditures_price_index). According to this measure, CPI may actually overstate inflation because it doesn't take into account shifting patterns of consumption.
The Fed prefers this one to the CPI (wonder why :tinfoil).

This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling.

The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Alternatively, an unpublished report on this difference by the BLS suggests that most of it is from different ways of calculating hospital expenses and airfares.[1]

In its "Monetary Policy Report to the Congress" ("Humphrey-Hawkins Report") from February 17, 2000 the FOMC said it was changing its primary measure of inflation from the consumer price index to the "chain-type price index for personal consumption expenditures".[2]

[Nosi]

There is more choice today than there was in 1960. For example, lets take the television (discussed exhaustively earlier in this thread). In 1960, when you purchased a television, it often came with a built in cabinet (http://www.tvhistory.tv/1960s-Advertising.htm) made of fine wood. These things looked as much like furniture as they do electronics.

Today's televisions are pure electronics. They can be plunked on the table, hung on the wall like a wiggly electric painting, shoved in your pocket, (http://www.chipchick.com/2009/08/portable_hdtv.html) or you can have a cabinet built to house your TV.

If today's TV's go on the fritz, you don't have to ditch the expensive cabinet your TV came in when you dump the box. Today's TV's can be used as free range picture tubes to yesterday's cabinet TV's.

[Francesca R]

CPI argument: phone is $25/mo so consumer cost is "exactly the same" in 2010 as in 1960. Sounds like an incorrect assessment of purchasing power unless there's a way to account for this. You do imply this is factored into the estimate, in your other post. I'd be grateful for some elaboration.I think it would be but don't know since that's probably a fictitious (or very rare) pricing structure.

If chocolate bars cost $1, but then get replaced with bars one tenth of the weight still costing $1, the CPI will record it as a price increase, which is it on a per-weight basis. If potatoes suddenly get sold in bags ten times as heavy as before, and now cost ten times as much, the CPI will record it as no change. Your service price examples are analagous to these.

More (http://www.bls.gov/cpi/cpiqa.htm) here (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf)

[Nosi]

If chocolate bars cost $1, but then get replaced with bars one tenth of the weight still costing $1, the CPI will record it as a price increase, which is it on a per-weight basis. If potatoes suddenly get sold in bags ten times as heavy as before, and now cost ten times as much, the CPI will record it as no change. Your service price examples are analagous to these.

More (http://www.bls.gov/cpi/cpiqa.htm) here (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf)

People are complaining that during this recession there has been some "sneak inflation" (http://moneycentral.msn.com/content/savinganddebt/p64971.asp). The price or cost of that box of cereal is the same. However... The content of that cereal box seem lighter than before? Hmm, are you getting less for the same payment?:eusa_doh:

[blutoski]

I think it would be but don't know since that's probably a fictitious (or very rare) pricing structure.

If chocolate bars cost $1, but then get replaced with bars one tenth of the weight still costing $1, the CPI will record it as a price increase, which is it on a per-weight basis. If potatoes suddenly get sold in bags ten times as heavy as before, and now cost ten times as much, the CPI will record it as no change. Your service price examples are analagous to these.

More (http://www.bls.gov/cpi/cpiqa.htm) here (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf)

I think the key problem is that homes are both consumed service and investment.

You can't both eat the chocolate bar or bag of potatoes and also expect to resell them later.

What I'm hoping is that the CPI is able to distinguish between the cost of the housing consumed, rather than the cost of the house purchased for investment. I'm not sure this is easy to do.

[blutoski]

Huh? I'm not following this analogy at all; I don't recall being offered free phone service in 1970, and I'm not expecting to be offered free phone service in 2070. My phone service today is a pay-as-you-go plan and it was largely the same in 1960 -- or 1890, for that matter.

It's an analogy. A house isn't a bag of potatoes either.



The value of a house as a single-purchase entity is fairly well-defined. It's in the sales contract, after all. By purchasing a house, you're essentially "purchasing" a free place to rent for the rest of your life.

So it's fairly easy to do the math; rent an apartment at $1000/mo for the rest of your life, or buy a house at $400,000 (and any financial planner will be happy to do the calculations for you); the value of forty years rental is well-defined when treated as an annuity.

My question is what does the CPI do about this?

[Francesca R]

What I'm hoping is that the CPI is able to distinguish between the cost of the housing consumed, rather than the cost of the house purchased for investment. I'm not sure this is easy to do.That's precisely what imputed rent calculations seek to do though. Different countries have different methods but it amounts to an exercise in backing out the cost of housing services that are consumed, which is equivalent to the net operating income from housing ownership plus maintenance costs.

This is the US's explanation (http://www.bls.gov/cpi/cpifacnewrent.pdf) of how they do it.

[drkitten]

My question is what does the CPI do about this?

Calculates the rent-value of the house as the amount that is "consumed," and treats the rest as an investment that is not part of the CPI.

So if you can buy a house cheaply enough, or stay in it for long enough, you could actually beat the standard government numbers. But that's really no different in principle than buying a local bakery (as a small business investment) and then providing yourself with free bread instead of buying it at the local supermarket. Or, for that matter, deciding to buy your toilet paper every six months at Sam's club instead of weekly at the 7-11.

[blutoski]

Calculates the rent-value of the house as the amount that is "consumed," and treats the rest as an investment that is not part of the CPI.

So if you can buy a house cheaply enough, or stay in it for long enough, you could actually beat the standard government numbers. But that's really no different in principle than buying a local bakery (as a small business investment) and then providing yourself with free bread instead of buying it at the local supermarket.

I'm not sure if that makes the bread free. In principle, you are getting it wholesale.


Or, for that matter, deciding to buy your toilet paper every six months at Sam's club instead of weekly at the 7-11.

I think that's still getting it wholesale (or low margin) instead of free.

[Miss_Kitt]

It is extremely difficult to compare the lifestyles and expenses of different eras, most especially when we have been in a time of such extreme technological and social change.

For example: My grandfather owned a farm and a service station. The farm was small, just providing most of the food for his (large) family; he earned his spending money with the service station. His wife took care of the kids, the home, and entertained his business guests (when he had them). His kids walked to school, ate food from home, took the horse when they had business in town--the only vehicle was Gramp's car, and it wasn't used by the children. The family ate at home most of the time, and they listened to the radio. Eventually, they did get a phone, but no one was allowed to tie it up for long periods of time. The only thing they bought on credit was their home, and possibly the vehicle. The kids shared bedrooms by gender, sleeping in bunkbeds so there was more floor space; and my Dad was off to college when his youngest sister was about 7 years old.

My lifestyle includes a house that is, I cheerfully acknowledge, too big for us; but we bought a starter home when we were a two-income family and traded up to be closer to my husband's work and this was the best deal in terms of price/location/opportunity. We have two children (one of whom grew up primarily at her mother's house) and two vehicles; my husband eats out for lunch most of the time. We each have cellphones including the 22-year-old; we have a broadband Internet connection that comes down the same cable as our digital (HD) TV service. We have multiple computers. I have a dishwasher, a clothes washer, and a dryer; a side-by-side refrigerator/freezer and a deep freeze out in the garage. We have gas heat and AC, controlled by an programable thermostat to be energy efficient--but the fact remains that we are both warmer in winter and cooler in summer than Gram and Gramps were until they were in their 60s.

I had braces in my teens, and my little girl just got hers at age 10. She has been vaccinated against mumps, measles, rubella, diphtheria, Hib, polio, chicken pox and probably something else that I've forgotten. She has a metabolic disorder that requires she take a simple medication daily for the rest of her life--but getting a diagnosis when she started throwing seizures at 3 months took a lot of medical know-how and technology that didn't exist even 25 years ago.

We all went down to TAM7 last summer, flying in a passenger jet aircraft to Nevada from Seattle; we stayed at the event hotel and my kids played in the pool or watched videos on a laptop in the hotel room while we attended a conference with speakers from all over the globe...including my little girl's hero, Adam Savage, whom she knows from her favorite show, Mythbusters. We splurged by going to see Penn & Teller (whose TV show she does not watch, or even know the title of) on the last night, and she got pulled up on stage to be used for one of the tricks.* The next day we checked out and flew home to Seattle.

My point is that it is just about impossible to accurately compare the lives of those at the start of the 20th century with those as the start of the 21st. What we consider 'normal' is health, safety, convenience, and luxury that was available only to the very rich then--if it was at all. (Had I been born with my baby girl's condition, I would have died at about 4 months of age.) On the other hand, it was not necessary to have a car or a phone to be employable in my granddad's day; now it is a practical necessity unless you live somewhere with good transit options. There wasn't as much for him to spend his money on, so he didn't feel the lack of what his neighbor had. There weren't shopping malls and social pressure to wear the 'right' jeans in high school--you wore what you had, and just made sure it was clean and mended. But then, so did everyone else.

What price do you put on the absence of the fear of polio? How do you amortize the relative value of taking the family up to Lake Michigan to a rented cabin for a week versus flying to Vegas for TAM? What's the adjusted value of dental care that involves more than pulling out the teeth that are badly infected? How do you account for the fact that fresh fruit is available year-round in the supermarket, and quick-prep microwave lunches are a 'cheap' way to bring your lunch to work?

I don't know the answers. I do know that we have gone from being primarily agrarian, local, and family-based to being largely urban, international, and mobile--both as a work-force and as a society. I know that for the price of my 4-bedroom, 2-1/2 bath home within commuting distance in Seattle I could buy a *palace* some place like Kansas City's suburbs--and not afford a 3 bedroom condo in the Bay Area. I know I have the ability to see and learn about things all over the world, and in very different demographic groups than where I am; but that also gives the occasion to desire things that my Grandpa didn't know to want.

How do you talk about poverty in a time when the poor often have cars and almost always have TVs and phones? If people are having a hard time putting meals on the table, that's just as bad whatever era they live in--but how much of that is, implicitly, choices that they and their society have made about how one should live?

I have a lot of questions, but no good answers.

Just my thoughts, Miss_Kitt



*Yep, the little girl who ran with scissors and insisted that it had to be "just a trick" at the Sunday show. That's my darling.

[drkitten]

I'm not sure if that makes the bread free. In principle, you are getting it wholesale.

No, you're getting it free; it costs you nothing (as its a perk from being the owner). It may cost the bakery something, and will therefore reduce the value of the bakery as an investment, but the actual bread is free to you.



I think that's still getting it wholesale (or low margin) instead of free.

Yes, that's getting it wholesale or low margin, because you're still paying for it.

But in either case, the question becomes one of what the value of the good that you're receiving is, and "value" is a different proposition than "price." Even if you get the bread for free, you're still getting something with positive worth -- and the easiest way to assess that worth is by looking at the price of bread at the local supermarket, or at a bunch of local supermarkets.

[blutoski]

No, you're getting it free; it costs you nothing (as its a perk from being the owner). It may cost the bakery something, and will therefore reduce the value of the bakery as an investment, but the actual bread is free to you.

I find that hard to accept, and still feel the analogy does not work. Continuing the analogy, obtaining free housing after paying off your mortgage does not 'cost the house something' and reduce its value as an investment. If anything, the more years you sit on the house and use it for free, the more it's likely to appreciate.

(again: ignoring stuff like maintenance, but you'd be paying that on a house whether you have mortgage payments or not, so it is a neutral base cost for the purposes of this discussion)





Yes, that's getting it wholesale or low margin, because you're still paying for it.

But in either case, the question becomes one of what the value of the good that you're receiving is, and "value" is a different proposition than "price." Even if you get the bread for free, you're still getting something with positive worth -- and the easiest way to assess that worth is by looking at the price of bread at the local supermarket, or at a bunch of local supermarkets.

For sure, but the real estate situation is something most people do, rather than an academic excercise about a one guy who bought a bakery to get cheap bread. I suspect a change in the way housing payments are amortized affects the majority of consumers cost of housing.

[drkitten]

I find that hard to accept, and still feel the analogy does not work.

Shrug. You're welcome to actually find a flaw in the analogy, then.

Continuing the analogy, obtaining free housing after paying off your mortgage does not 'cost the house something' and reduce its value as an investment.

That's right. There are a number of other businesses I could be in where the marginal cost of one additional freebie unit are zero (and therefore giving away a freebie does not decrease the value of the business that creates it); if Bill Gates wanted to download a free copy of Office, the marginal cost to Microsoft would be zero, but he'd still be getting a valuable product for nothing.

But I'm not sure what this has to do against the idea that you're consuming the rent-equivalent of your house.



If anything, the more years you sit on the house and use it for free, the more it's likely to appreciate.

Which affects its value as an investment, not as a rent-equivalent consumable.

[skullerello]

I only make $9.00 an hour, (a fact of which I am not proud...) but the wife can charge whatever she wants for tattoos, and that equals roughly $30.00 - $40.00 dollars an hour, still, she's working on her B.A., which, if she lands a job in her chosen field will net her approximately the same wage as me.
What's the point?!
She merely wants a degree to show to her mother, and to let her mother know that she's been wrong about her all these years.
"Revenge is a dish best served cold."

[Puppycow]

I only make $9.00 an hour, (a fact of which I am not proud...) but the wife can charge whatever she wants for tattoos, and that equals roughly $30.00 - $40.00 dollars an hour, still, she's working on her B.A., which, if she lands a job in her chosen field will net her approximately the same wage as me.
What's the point?!
She merely wants a degree to show to her mother, and to let her mother know that she's been wrong about her all these years.
"Revenge is a dish best served cold."

Sounds to me like from a purely economic perspective she should be tatooing people full time instead of getting a B.A.

Does she not like the work?

[blutoski]

Shrug. You're welcome to actually find a flaw in the analogy, then.

I can't be more specific than I have been in previous posts.




That's right. There are a number of other businesses I could be in where the marginal cost of one additional freebie unit are zero (and therefore giving away a freebie does not decrease the value of the business that creates it); if Bill Gates wanted to download a free copy of Office, the marginal cost to Microsoft would be zero, but he'd still be getting a valuable product for nothing.

But I'm not sure what this has to do against the idea that you're consuming the rent-equivalent of your house.

Probably nothing, which is why I thought it was a bad analogy!

The CPI certainly seems to be interested in price. When I'm living in a home I own and am not paying for housing, the price is $0. The CPI is assigning the equivalent of a price to this, which I believe misrepresents the comparable impact on things like disposeable income and misrepresents a change in standard of living.

I appreciate that if the government gave everybody a house for free, the value of housing received would contribute to a standard of living every month, but that's not the same as amortization's impact to lifetime value of housing.




Which affects its value as an investment, not as a rent-equivalent consumable.

Yep. Which is why I'm saying it comes across as a bit forced to fold this into the CPI, and may be distoring a view of how housing affordability changes.

What I'm saying is that I don't think the price of housing is properly reflected as a component of the CPI.

[drkitten]

What I'm saying is that I don't think the price of housing is properly reflected as a component of the CPI.

Let me turn this around. How would you assess the price of housing differently?

Rental housing, I submit, is easy. Your price and value of housing are identical; they're both just the amount you pay for rent. No more, no less. (Exception : if your payments cover rent and utilities, break out the utilities costs and put them in the basket under "utilities." Exception 2 : if for some reason you're paying rent that's way out-of-line with what your neighbors would be paying -- maybe you're renting from your parents and they're charging you $1/year -- then you're getting much more "value" for your "price," but your "price" isn't representative. We solve this by taking averages to figure out what "everyone" tends to pay.)

For owner-occupied housing, I think the question "how much would you pay if you were renting your current property" is the appropriate question to determine the value of housing you are consuming.