Help me understand the economic state of the US

[ZOmegaZ]

I've seen some posts here that are very impressive in depth, and I'd like some feedback on what I think I understand.

Inflation is the increase in cost of things over time. This seems like a bad thing, except as compared to deflation; if costs go down over time, economic activity grinds to a halt. Why would you spend money when you know what you're buying will be cheaper next week? So a low rate of inflation is the preferred direction of prices. This has been the case in the US since about 1983, with a bump around '91, and deflation briefly in 2009.

Inflation means the cost of living is going up. Wages must also increase to compensate, or the standard of living goes down. Wages in the US have roughly tracked inflation since about 1973, which would seem to correlate to a roughly constant standard of living since then. This is what is meant by "real wages" being stagnant.

But if real wages are stagnant, one would expect the standard of living to be roughly constant. Yet my feeling is that this is not the case. My impression is that more people are working harder, at more jobs, and having a harder time making ends meet. One of these things must be wrong. Either:

A) people are not, overall, having a harder time making ends meet, and my impression is wrong; or
B) real wages are not stagnant, but are in fact decreasing; this would imply either
B1) inflation is higher than official numbers suggest; or
B2) non-adjusted wages are lower than official numbers suggest

My suspicion is that inflation is higher than the official numbers suggest, and that they don't account for things that are part of the cost of living in the US. I think this might be related to the Bureau of Labor Statistics Consumer Price Index, but at that point I'm out of my depth.

Please, educate me. What's reality?

[Darmalus]

Increases in Cost of Living, the actual prices of things like bread, rent and clothes, has greatly exceeded inflation.

[ZOmegaZ]

^So does that mean the inflation rate is a meaningless fluff number? Or is it just meaningful in a different context? Is there a more relevant number that should be used in discussions of cost of living?

[Simon_Jester]

Inflation is, unfortunately, NOT properly tracked to the cost of basic commodities that form a necessary part of the standard of living.

Inflation measures today may be more accurate from the point of view of the financial sector (for whom all money is fungible and commodity costs only matter if you're dealing in commodity futures). I wouldn't know.

[Darmalus]

Inflation is the total across the entire economy, from money supply to bulk iron ore to the entire real estate market to gold plated iphones.

Cost of Living is the cost of staying alive, food, clothing, shelter, healthcare. This is what eats up your wages first, before luxuries (people who put luxuries first tend to die and stop being part of the economy). They are included in inflation, but are not all of inflation.

Both numbers are useful, but it is a common mistake to treat them as synonyms. Inflation is useful if you are a banker or international investor. Cost of Living is important if you actually live there.

Real Wages are adjusted against inflation, not Cost of Living. Real Wages have been stagnant since 1970, so if you were to stick the entire economy in a blender and make a puree of bulk iron ore and gold plated iphones and everything else, you would be able to buy as much now as then.

But since people don't buy Economy Puree, instead buying things like pants and potatoes, that Real Wage buys less, since Cost of Living has increased. Since staying alive (which comes first) costs more now, people have been (on average) taking an effective pay cut every year since 1970.

[madd0ct0r]

You may need to account for your age. We've gone from a decade long boom to a decade long recession and stagnation. Admittedly, I think the UK experience was worse then the USA one. Then again, healthcare costs in the USA have outpaced inflation too, and one major long lasting illnesses might be enough to swallow a family's income.

For anyone under thirty, it does feel things are going backwards. I don't think that holds for the indefinite future.

[K. A. Pital]

Please, educate me. What's reality?

Inflation indicators tend to change over time; the goods basket is also very broad. But there are things which you would consider essential (like housing) that have outpaced inflation - and are now far larger in relation to the average or median income, especially to median wage income - and thus the actual cost of living increases outpace inflation. Hence, real wages are stagnant, while the standard of living is decreasing. It is the relative pauperisation of the proletariat - the loss of the working-class wage bying power. It is partially offset by declines in the cost of clothing - paid for in blood.

[ZOmegaZ]

So is there a more appropriate number that descbribes the annual change in cost of living? Inflation apparently being meaningless for the purposes of my question?

[K. A. Pital]

Well, you should I think do the research yourself, but a few tips can't hurt.

For example, it is easy to notice how the affordability of urban housing has gone down over the last decades:
http://www.economist.com/blogs/graphicd ... ly-chart-0

Some people tried calculating the affordability changes for other goods as well;
http://www.mybudget360.com/cost-of-livi ... inflation/
http://www.mybudget360.com/cost-of-livi ... s-college/

Food inflation has also outpaced the rise in the price of other goods - this means that the more critical things are becoming more expensive, which has a perverse effect on society by making the poor even poorer, and hitting the core working class the hardest:

[ZOmegaZ]

Great links, thanks! All this makes me think there should be some sort of combined "cost of living" index, separate from inflation, but it sounds like there isn't one. This strikes me as very odd. It sounds like it should both be measurable and a matter of some substantial interest. "Real wages" aren't quite so real if one is using inflation rather than this hypothetical cost of living index. I suppose the ratio would give us some standard-of-living index, which would be very interesting.

The next logical question is, is there compelling evidence of what caused this reduction in standard of living?

[aerius]

Inflation is the increase in cost of things over time. This seems like a bad thing, except as compared to deflation; if costs go down over time, economic activity grinds to a halt. Why would you spend money when you know what you're buying will be cheaper next week? So a low rate of inflation is the preferred direction of prices. This has been the case in the US since about 1983, with a bump around '91, and deflation briefly in 2009.

Let's take a step back and think. We live in a world where science & technology is progressing, we can build better things more efficiently today than we could 20 years ago. The computer, tablet, or phone that you're reading this on was not possible to make 10-15 years ago, either that or it cost $2000-$3000. These days those devices are well under $1000 thanks to improvements in technology & manufacturing. All other fields are like this, though most of them didn't see such a dramatic improvement. Since technological progress leads to efficiency & productivity gains, the cost of various goods should go down over time, not up.

As for deflation supposedly putting a halt on spending, I don't fully agree with that. If your car dies or your computer kicks the bucket, you'll be buying one ASAP, same with all the things that you actually NEED. It will put a dent in discretionary or frivolous spending, if you WANT a new TV or sofa you'll likely wait another year or 2 for the prices to come down a bit. This is a good thing, when everyone rushes out to buy shit because of inflation or whatever reason, it puts a false demand signal in the economy which leads to poorly allocated resources and inefficiencies in the economy.

[Arthur_Tuxedo]

Cheaper computing power and luxury goods are great if you can afford to pay your rent, put food on the table, and still have something left over. That's gotten much harder for the lower middle class and people near the start of their careers. It's wonderful that the middle class lifestyle is financially comfortable and poverty rates have greatly diminished, but the in-betweeners are getting squeezed harder than ever, and a nicer iPhone isn't going to make it okay.

[K. A. Pital]

Looks like computers getting cheaper applies to... computers, first and foremost.

[Jub]

Great links, thanks! All this makes me think there should be some sort of combined "cost of living" index, separate from inflation, but it sounds like there isn't one. This strikes me as very odd. It sounds like it should both be measurable and a matter of some substantial interest. "Real wages" aren't quite so real if one is using inflation rather than this hypothetical cost of living index. I suppose the ratio would give us some standard-of-living index, which would be very interesting.

The issue with this list is that it would, by its very nature, vary from city to city and probably even neighborhood to neighborhood. Not just for things like housings costs, but also for utilities, food, clothing, and fuel. Then you'd have to further add in length of commute, which could make a cheaper section of town nearly unlivable if the jobs are all too far away. You could try an average by county, and that would probably help somewhat, but you'd still have a whole host of cases where the numbers wouldn't come close to fitting.

Looks like computers getting cheaper applies to... computers, first and foremost.

A pretty major dent could be made if we shifted post-secondary school over to the current model for grades k-12 and treated it like society used to treat secondary school. I'd be the first in line to not only take advantage of such a system, but to pay the taxes needed to make it happen.

[LaCroix]

The problem is that these graphs always compute with state of the art stuff. Inflation only helps your purchase power when considering prices of items already on the market. The new stuff will always enter at a high price. In fact, the actual inflation on goods is much higher if you ignore the new products.

If I wait a year, the computer/TV/fridge/whatever I'm looking at right now will be 50% off and in the back shelf, while there will be new ones out on display being 20-30% better. Same for cars - wait one year, and you will get the same car, with like 10000 miles for half the price of a new one, for some doofus will want to change 'for the current model'. Even at a dealership, you will get a (slightly) better price if you take the last "old" models after a model rejuvenation.

Same for phones - the used ones are selling for like 20% of the new ones. The new ones drop like 30-50% the moment the next one is out. There is no need for a IPhone 6 if you can use a 4. It will still work fine for all things, and be a bargain you might even get for free with the contract by now.

Inflation means you can get pretty good stuff if you aren't hell-bent on getting the 'latest' model. Sadly, most people are...

[Simon_Jester]

For luxury consumer goods this is true- but the prevailing issue we're mulling over is that the luxury consumer goods are precisely the ones whose prices aren't increasing, while the prices for the necessities of life are. I don't have the option of waiting six months for gasoline to be cheaper; my car needs fuel now.

And Jub- one problem with treating college the way we treat secondary education is that we definitely need to preserve the idea that post-secondary education is, first, optional, and, second, available on a basis of merit only.

One of the reasons we don't have secondary education capable of preparing people for a career all by itself is that said secondary education is designed so that people with an IQ of about 70 can get a diploma as long as they're at least vaguely willing to work... and so that people with an IQ of 80 or up get their diplomas almost in spite of themselves after being offered chance after chance to 'make up' work and grades and classes they failed due to irresponsibility.

As a result, there is simply no way to put anything 'too difficult' into the standard high school diploma, which in turn makes it a nearly worthless credential and promotes credential inflation and the rush of high school seniors trying to get their "I'm worth more to your business than a trained monkey, honest!" certifications in the form of a bachelor's degree.

[Jub]

And Jub- one problem with treating college the way we treat secondary education is that we definitely need to preserve the idea that post-secondary education is, first, optional, and, second, available on a basis of merit only.

One of the reasons we don't have secondary education capable of preparing people for a career all by itself is that said secondary education is designed so that people with an IQ of about 70 can get a diploma as long as they're at least vaguely willing to work... and so that people with an IQ of 80 or up get their diplomas almost in spite of themselves after being offered chance after chance to 'make up' work and grades and classes they failed due to irresponsibility.

As a result, there is simply no way to put anything 'too difficult' into the standard high school diploma, which in turn makes it a nearly worthless credential and promotes credential inflation and the rush of high school seniors trying to get their "I'm worth more to your business than a trained monkey, honest!" certifications in the form of a bachelor's degree.

I somewhat in agreement with you, but that thought hasn't harmed nations where attending post-secondary school is vastly less expensive and thus less economically exclusive than the current US model. I think the same could be done with a more public school like way of treating college/university if we create meaningful entrance requirements designed to allow something like the top 60% of students to attempt to get a degree. The failure rate will then wash more of them out keeping degrees as a useful measure of skill and determination.

Or you could revamp the high school system to focus on allowing the top 70-80% of students to pass while creating other programs for the bottom 20-30%. Some nations already partially do this with work experience programs in place of academics from grade 10 onward. Further programs could further aid students that are otherwise unsuited for the usual method of education.

I understand that neither of my suggestions are realistic with the current US attitudes towards education, but I'd like to see a world that properly values education and educators and aims to create positive outcomes rather than simply ticking boxes to receive greater levels of funding.

[Simon_Jester]

[sighs]

Agreed. I mostly just tend to want to make sure people are mindful of the realities. Simply making college "more like high school" would not work in the US; it takes more than that because many of the reasons our college system is dysfunctional are themselves tied into the dysfunctions of our secondary education system.

And it's not as simple as "blame the Republicans" for the failings of the secondary education system either, since part of the problem is the refusal to admit that even if they come from a disadvantaged background, some children are quite simply not emotionally or cognitively prepared to receive an education including enough abstract thinking and advanced knowledge to prepare them for a typical middle-class career. And that is not a right-wing ideological brainbug.

[Jub]

[sighs]

Agreed. I mostly just tend to want to make sure people are mindful of the realities. Simply making college "more like high school" would not work in the US; it takes more than that because many of the reasons our college system is dysfunctional are themselves tied into the dysfunctions of our secondary education system.

And it's not as simple as "blame the Republicans" for the failings of the secondary education system either, since part of the problem is the refusal to admit that even if they come from a disadvantaged background, some children are quite simply not emotionally or cognitively prepared to receive an education including enough abstract thinking and advanced knowledge to prepare them for a typical middle-class career. And that is not a right-wing ideological brainbug.

Part of the issue is that the education problem feeds itself. People growing up with a system that worked for them aren't apt to change it, and those that the system failed often won't have the resources to bring attention to the system's failures. Toss in a bit of fear of change, some added costs, the time to implement the change, possible issues caused by transitioning between systems, etc. and the and you get the current system. The only changes are non-changes that simply entrench the current system further by doubling down on ideas without closely examining them for their true effect.

I've mentioned it before, but the school system itself is one of the main reasons I won't ever become a teacher even though I like kids and have enjoyed what few chances I've had to teach. The other issues pale next to that, even though the time between getting a degree and landing a full time teaching position, exceedingly long hours, and below average pay are large factors in their own right.

[LaCroix]

In European countries where University is either cheap or free. Still only about 40% of our students attend university, and only about 25% get a degree. Most know that they have no place in academics.

But on the other hand, they don't need a degree. We don't have that strict junior/senior highschool pathway to college/university - most students take a vocational school (either economics or various technological ones) which have a bit less biology/etc, and in turn give you a full-blown education that borders on university complexity. About a third doesn't attend senior high, but goes into appenticeships (which are regulated and include a school you have to attend for 2 months a year for the 3-year apprenticeship), which ends in getting a diploma for the job you learned.

These vocational highschool diplomas are really worth something, not only are you practically guaranteed to get a job, they let you even skip 2 or three semesters in university classes (even when you select different fields - my business law courses from economic college was worth about one semester of courses when I started studying law), while with the standard diploma, you wouldn't.

Furthermore, the Austrian technical high school diplomas can be upgraded to a bachelor degree in engineering after you prove to have worked in the field for three years, with no further tests.

This takes a lot of pressure off people to NEED a degree. You will do fine with just your standard school diploma

[Jaepheth]

I think it's worth noting how the number and nature of expenses for a given class have changed.

Information technology being the prime example. In the 70s you just needed a phone line (So I'm told); then Cable went from being seen as a luxury to being the norm. Then internet access became a thing that existed, and now moderate to high speed internet access is practically a requirement to modern life; as is the hardware that such services run on.

In short, I think increases in standard of living have outpaced both wages AND inflation.

[Elheru Aran]

Yeah... frankly the Euro system is much better than what we've got over here. There's no serious intermediate step between high school and college. Well... there is, but most people either don't know that it's an option, or dismiss it because "that's for failures/people who can't hack college/you'll never make enough money with an associate's degree". Never mind that a skilled plumber can make far more money for their day's work than someone with a M.Ed or a Ph.D.

[K. A. Pital]

Information technology being the prime example. In the 70s you just needed a phone line (So I'm told); then Cable went from being seen as a luxury to being the norm. Then internet access became a thing that existed, and now moderate to high speed internet access is practically a requirement to modern life; as is the hardware that such services run on.

In short, I think increases in standard of living have outpaced both wages AND inflation.

Information technology does not significantly alter my living standard, despite it being superior to 95% of humanity. Your explanation as to why it should? That something is a "requirement" means fuck nothing. I remember a time when malnoirished people around me had "high-speed internet", so please think again. Housing (essential to survival under -5 degrees already, unlike your high-speed internet) is more expensive and perhaps with the exception of the sick 2007-2008 boom - most expensive ever. I can live with a phone line, but not without a house.

[Simon_Jester]

Er, Stas, I think he's arguing that this is one of the factors increasing cost of living. He is not at all claiming that these things becoming available is somehow making life better for people or improving the standard of living noticeably.

I think it's worth noting how the number and nature of expenses for a given class have changed.

Information technology being the prime example. In the 70s you just needed a phone line (So I'm told); then Cable went from being seen as a luxury to being the norm. Then internet access became a thing that existed, and now moderate to high speed internet access is practically a requirement to modern life; as is the hardware that such services run on.

In short, I think increases in standard of living have outpaced both wages AND inflation.

Thing is, the cost of these combined services may seem high but it's not necessarily growing much faster than inflation. Health care has. College tuition has (at the same time that it's also become far more of a necessity and less of a luxury for the middle class). Housing has.

[Jaepheth]

The point got away from me. Housing has increased, yes; as has health care. In addition to those costs though are new costs that didn't exist 3 decades ago.

Can you live without internet? Absolutely. Are you going to be able to efficiently search for a job without convenient internet access? Not so much. Pretty much every position is applied for and filled through digital communication now. Yes, you can go to the library and work around their schedule and yours, but it becomes an additional barrier to entry on top of all the other stuff that did exist 30 years ago.

30 years ago a college degree was far more optional than now. A friend of mine doesn't even qualify for a manager position at the retail chain they work at for lack of a degree, despite being more competent and experienced than the current managers.

The point I'm failing to make is that there are a variety of issues at play, and the middle class is dying from a thousand cuts; not from something as easily labelled as "pay hasn't kept up with inflation".