Bleve wrote:
> Nick Payne wrote:
>
>>My first custom bike cost me about $300 (just after the introduction of
>>decimal currency) and was pretty much top line everything. These days a set
>>of gear shifters cost more than that.
>
>
> and 5c worth of chips would feed 5 people, a house cost $15,000 and the
> average monthly wage was around what? $100?. What's that $300 really
> worth?
Since you brought it up, I'll post this long meail I received from a
Georgist friend today about the how much stuff cost. Also ties in with
house prices. For those who don't know about Henry George; basically he
proposed a system of land rents to provide income for the state.
==============================================
THE PROGRESS REPORT -- INDEPENDENT NONPARTISAN NEWS DAILY
http://www.progress.org
This article can be viewed at
http://www.progress.org/2006/mason02.htm
Your Income and Lying Bureaucrats
Denying Inflation: Who, Why, and How
Dr. Mason Gaffney is probably the world's top economist. Here are
Gaffney's latest thoughts on inflation and why wimpy bureaucrats cannot
figure it out.
by Mason Gaffney
Henry George foreboded that landowners might take a growing wedge of the
national "pie", or product. In our times, George's grim scenario is
coming true. Since about 1975, labor's wedge of the pie is shrinking.
"Real" wage rates have been falling since about 1975. "Family wage" used
to mean a breadwinner's wage high enough to support a family; now it
means the combined wages of two adults. Many of these are "DINKS"
(Double Income, No Kids) because that is all they can afford without
cutting their customary material and educational standards.
What is this "real" wage rate? It is a ratio: the nominal money wage
rate on top, divided by an index to the Cost of Living (COL) on the
bottom. The higher the COL, the lower the real wage. Landowners cut into
labor's share from both the top and the bottom, because the COL includes
many products of land (like building materials and energy) and land
itself (like home sites). Shelter costs are by far the largest part of
household budgets.
The standard index to the COL is the Consumer Price Index (CPI),
calculated and published regularly by the Bureau of Labor Statistics
(BLS). This index is, we will see, a political football.
An old Kingston Trio classic offered the following folk wisdom about
survival in The Everglades: "If the skeeters don't gitcha then the
gators will." If the skeeters of life are nicks taken from money wages,
the big gator now is the price of buying and owning a home.
Why deny inflation? Those in power have several reasons to understate
rises in the cost of living, measured by the CPI.
1 To mask the fall of real wage rates. This is supposed to placate
working voters. It is supposed to support orators declaiming that
our standard of living is ever rising, and we should all feel good.
Actually, real wage rates have fallen steadily, since peaking in
about 1975. That is using the official Consumer Price Index to
measure rises in the cost of living. If the CPI understates rises
in the COL, real wage rates have fallen even faster than the data
show. (This denial of inflation supports those who like to dismiss
Henry George as a false prophet of doom.)
2 To mask the fall of real interest rates, making savers and lenders
feel better, and more willing to lend to governments. In this age
of massive and growing federal debts, the U.S. Treasury depends on
willing lenders more and more, to stay solvent.
3 To slow the rise of income tax brackets, which are indexed to the
CPI. That is, when the CPI rises by, say, 5%, the income level at
which you pass into a higher tax bracket also rises by 5%.
Congress, for once in a reasonable mood, enacted this sensible
provision when enough people became aware that they were victims of
"bracket creep". Bracket creep is when inflation boosts your money
income into a higher tax bracket, although your real income has not
risen. However, if the true COL rises by 10%, while the CPI rises
by only 5%, this provision no longer protects us against bracket
creep. It just gives a talking point to those who claim to protect
us. Sneaky! That is why you, dear reader, may have had a hard time
following the bean under one of the three shells. Politicians, of
course, are good at withdrawing promises. The sneakier the method,
the easier it is for them to cover their tracks.
4 To cut the real value of social security payments. This point is
straightforward. These payments are also indexed to the CPI. If the
CPI understates the COL, real social security benefits fall every
year. Congress gets to spend the savings on wastes like Alaska's
"bridge to nowhere", redundant imperialistic ventures, tax cuts for
major campaign contributors, and no-bid contracts for the
well-connected.
5 To cut rises in labor union and other wage contracts that are
indexed to the CPI. The Federal minimum wage, like most state
minima, is also indexed to the CPI.
6 To give the Federal Reserve Bank credit for having "tamed
inflation", when in fact inflation of land prices is running wild.
That is the "Why" of veiling inflation. Now let us look at the "How".
There have been two major steps in recent decades.
First was removing the costs of buying and owning homes from the CPI.
The Bureau of Labor Statistics (BLS), the agency that calculates the
CPI, did this from 1983 onwards. They didn't remove it altogether, that
would have been too transparent. Instead they substituted the "rental
equivalent" of housing. This is supposed to be what your house would
rent for, or what you would pay to rent a similar house. It is a
hypothetical, casual figure -- sloppy and unverifiable, that is -- based
simply on questionnaires to a sample of homeowners. It takes no account
of the fact that some people will, and therefore everyone must pay a
premium to own, because of expected higher future rents and resale
values.
Thus the land boom of 1983-89 was mostly blanked out of the official CPI
of those years. The CPI rose gently as though the land boom never
happened. Again, in 2004 housing prices rose by 13%, while these "rental
equivalents" rose only by 2%. (The CPI also takes no account of the
price of extra land around some houses. It takes no account of
recreational lands, which now have displaced farming and forestry over
whole counties and regions.)
The second major step was the Boskin Commission Report of 1995 (Newt
Gingrich was dominating Congress), and its acceptance and
implementation. Michael Boskin of the Hoover Institution was called upon
to legitimize allegations that the CPI overstated inflation. He and his
Commission obliged, and supplied the rationale for several rounds of
trimming down the CPI even more.
The Boskin Commission's advanced methodology included a lot of
old-fashioned cherry-picking. They accumulated evidence supporting the
foregone conclusion, and omitted contrary evidence. Most tellingly, they
were silent about the biggest factor by which the CPI understates
inflation: the use of "rental equivalence" in place of home prices. Now,
shelter costs are about 40% of consumer budgets, and hence of the true
COL. To accept an extreme understatement of shelter costs, while
distracting us with lesser factors and arcane methodology, shows bias.
Sad to say, most professional economists treat Boskin's report as holy
writ. They come on like preachers — or cheerleaders — not like
scientists exercising independent judgment. I have recently surveyed
twenty current texts in Macroeconomics. They all list the same four
"biases", in the same order, that allegedly make the CPI overstate
inflation. These are:
a. Substitution bias. When the price of something rises, you use less of
it, so it should be weighted less in the index.
b. Quality improvement bias. Products of the same name keep getting
better, so they say.
c. New product bias. The CPI lags in showing how new gadgets raise our
welfare. Microchip products, of course, are the example of choice.
d. "Discount bias". The CPI scriveners assume that products sold in
discount stores are of lower quality, when they really are just as good.
Let's just take point "b", above, quality improvement bias. The texts
give some examples, but not a single counter-example. Here are a few of
the latter.
* 2x4 dimensional lumber is no longer 2x4, but 15-20% smaller in
cross-section, and of lower grade stock
* salmon is no longer wild, but farm raised in unsanitary conditions,
and died pink (ugh)
* "wooden" furniture is now mostly particle-board
* "wooden" doors are now mostly hollow
* new houses have remote locations, far from desired destinations
* ice cream is now filled out with seaweed products
* the steel in autos is eked out with fiberglass, plastic, and other
ersatz that crumbles in minor collisions
* airline travel is no longer a delight but a series of insults and
abuses
* gasoline used to come with free services: pumping the gas, checking
tire pressure and supplying free air, checking oil and water,
* cleaning glass, free maps, rest rooms (often clean), mechanic on
duty, friendly attitudes and travel directions. They served you
before you paid. Stations were easy to find, to enter and exit.
Competing firms wanted your business: now most of them have merged.
* cold fresh milk was delivered to your door
* clerks in grocery and other stores brought your orders to the
counter; now, many clerks, if you can find one, can hardly direct
you to the right aisle
* suits came with two pairs of pants and they fitted the cuffs free.
Waists came in half-sizes
* socks came in a full range of sizes
* shoes came in a full range of widths; the clerk patiently fitted
the fussiest of customers
* the post office delivered mail and parcels to your door or RFD,
often twice a day
* public telephones were everywhere, not just in airport lobbies.
Information was free; live operators actually conversed with you,
and might give you street addresses
* public transit service was frequent, and served many routes now
abandoned
* live people used to answer commercial telephones, and tell you what
you actually wanted to know
* autos used to buy "freedom of the road"; now they buy long commutes
at low speeds and rage-inducing delays. One must now travel farther
and buck more traffic to reach the same number of destinations.
Boskin et al. dwell on higher performance of cars, and the bells
and whistles, but take no note of the cost-push of urban sprawl.
* classes keep getting larger, with less access to teachers and top
professors, and more use of mind-numbing "scantron" testing. before
world war II, an Ivy-league college student lodged in a roomy dorm
with maid service and dined in a student union with table service,
and a nutritionist planning healthy meals. All that, plus tuition
and incidentals, cost under $1,000 a year. Now, to maintain your
children's place and status in the rat race, you'd put out $40,000
a year for a claustrophobic dorm and junk food. But a B.A. no
longer has the former value and cachet. Now you need time in
graduate and professional schools to achieve the same status. Many
students emerge with huge student loan balances to pay off over
life.
* warranties on major appliances cost extra, aren't promptly honored,
and expire too soon. Repair services and fix-it shops used to
abound to maintain smaller appliances. Now, most of them are
throwaway.
* replacement parts for autos are hard to find, exploitively
overpriced, and are often ersatz or recycled aftermarket parts
* musical instruments are mass-produced and tinny instead of
hand-crafted and signed
* many new "wonder drugs", if you can afford them, have bad
side-effects, while old aspirin still gets the highest marks
One could go on, but the point is that Boskin et al. seem not to have
considered counterexamples to their foregone conclusions. If they did
this where we can observe them, what else did they do under cover of
black box models? The BLS, succumbing to the political pressure, keeps
modifying the CPI to show less inflation, even while our daily
experiences and shrinking savings tell us there is more.
George warned that landowners might take most of the fruits of progress,
leaving labor barely enough to survive. Critics then and now have urged
us, instead, to don rose-colored glasses. The rosiest of these is the
CPI as manipulated to screen out bad news, especially news about soaring
land prices. Let us be aware of who is manipulating the news, why, and
how.
