Summers: Inflation Reached 18% in 2022 Using the Government's Previous Formula

Yes, so I am saying that a median income today could sustain a 6 person household if you were allowed to fix your comfort level to the level of the 60s. That is 3 more than a single median income supported in the 60s.

I am definitely not trying to paint a rose-glass view of the past. I am saying that we do have more prosperity today than we had 60 years ago.

I am also saying that we pay of a lot of time to have things that provide diminishing returns. (Ie. would you rather have flush toilets or access to facebook - style of reasoning). Maybe the famous 80% value for 20% cost is also inflating?

> Take 1963 as an Example. Sears sold entire two story home kits with all materials for $1600.

How big (area-wise) were those houses? What kind of heating did they have? How air-tight/leaky/drafty were they (which would dictate OpEx on heating)? Did they have air conditioning? What kind of electrical service could they handle (60A? 100A? 200A?)? Did that include the foundations/footings/slab? Were those parts insulated (i.e., how cold were your feet)? Did they come with sprinklers or even smoke/fire alarms?

> And you weren’t getting an HGTV-approved home in the 1950s. Those cheap homes everyone was buying were 700-900 square feet with two to three bedrooms and one bathroom. Most had no basement, porch or back deck. You were lucky if you got a one-stall garage.

> No open floor plans, granite countertops, stainless steel appliances, walk-in closets, man caves or room to entertain. Most homes were bare bones.

* https://awealthofcommonsense.com/2024/01/americans-are-bette...

I'm not sure how many folks would like to live in a current $1600-equivalent house.

> My point is that inflation isn’t abstract and it isn’t a law of nature. It’s a deliberate approach to stealing your prosperity while you cheer it on.

If you think inflation is bad, try deflation (1930s).

> Summers is right more than he’s wrong. Real inflation has always been higher than the bogus CPI numbers, and the past 5 years it’s been accelerating.

The pre-1983 algorithms were moved away from for a reason: do you know that reason? Was it a good or bad reason(s)? Why?

> In 1983, the government switched from using home prices — which also included mortgage payments and maintenance costs — to using rental prices to gauge the cost of housing.

> The cost of housing for people who own their property is now measured using what is called “owners’ equivalent rent”: how much their house would cost to rent if they did not own it.

> The idea is that homes are an investment. House prices appreciate, and you may eventually sell for a profit a property that you have purchased. Rent, however, represents consumption. It does not leave you with an asset that you can sell down the road.

> Critics often argue that by leaving home prices out of the equation, the inflation metric underestimates the cost of living at moments when home prices are increasing markedly and when it costs first-time buyers more to get a foothold in the market. Some even claim that if the government used the old methodology, its reported inflation rate would be much higher today than it was during the 1980s.

* https://archive.ph/zvtPw / https://www.nytimes.com/2022/05/24/technology/inflation-meas...

Housing prices are not considered in the CPI ("cost of living") because they are mostly an asset:

> House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance).

* https://web.archive.org/web/20210929154549/https://www.pragc...

> The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. [...]

> Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs.

* https://www.pragcap.com/should-house-prices-be-in-the-cpi/

Upkeep is a part of the CPI (as is Rent, under the broader Shelter category), but house/land prices are not. The "C" in CPI stands for consumer. Housing assets aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live.

'Shelter' is considered in the CPI generally though (and with-in that things like home repair (lumber, plumbing) are accounted for); for Canada:

* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...

And as the Bank of Canada notes, there is no internationally agreed upon method:

> International statistical agencies have unanimously adopted the net acquisition approach for durables, but there is no consensus about the best approach to the treatment of OA in the CPI16 (Table 1). Rental equivalence is the most popular approach among countries belonging to the Organisation for Economic Co- operation and Development.17 Johnson’s (2015) recent review of the U.K. CPI proposes using CPIH, which includes the costs of OA and is based on a rental- equivalence approach, as the U.K.’s main measure of inflation. Several countries in the European Union have refrained from incorporating OA into their CPI, although Eurostat is currently conducting a pilot study for the euro area based on the net acquisition approach. Australia and New Zealand use a net acquisition approach, while Sweden and Finland—like Canada—are using a partial user-cost approach. No country has adopted a full-fledged user-cost approach.

* https://www.bankofcanada.ca/wp-content/uploads/2015/11/boc-r...

In the StatCan CPI paper there is some explanation towards the complexities of shelter / owner accommodation:

* https://www150.statcan.gc.ca/n1/pub/62-553-x/2019001/chap-10...

* https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2017001...

Right. By virtually every metric, the average American family is materially more prosperous than they would have been in the 1960s.

Backwards movement in QoL metrics is mostly on the left tail: impoverished Americans have access to AC and refrigerators, but often live in food deserts or are subjected to perverse policies in our social safety net (e.g. welfare cliffs that punish people for working by taking away benefits that enable them to work).

Beware any election-year stories that just happen to elicit a deep sense of things being astray. Larry Summers in particular has a long track record of playing complex angles in his public policy views. The technical argument in the paper is totally separate from the headline here. The headline is what matters.

You can think of macroeconomic policy as having been trained on economic history, probably more so than any other hard-science discipline. The effect of the pandemic was ridiculously unlike any history on record, times a factor of 10.

The null hypothesis is that the inflation wave came and went. You won't find a credible economist that can prove otherwise.

Furthermore, the wave could not be avoided by any amount of conventional intervention, such as massive tightening. You'd have to get into war-time tools like price controls to manually constrain the massive shifts in supply and demand as people came in and out of the labor force, switched from demanding services to goods and back, etc.