Gas Prices are High — But Don’t Adjust Them for Inflation!

Gasoline prices are high and rising. Anecdotally, they seem to be increasing at the pump by the hour. And indeed, in nominal terms they are now the highest they have ever been in the US (this is true with both the AAA daily price level and the EIA weekly price level). At over $4.10 per gallon, the price now exceeds the peaks briefly hit in 2008, 2011, and 2012. And it’s looking like this peak might not be so brief.

But we all know you can’t compare nominal dollars over long periods of time. We need some context for this price! Plenty of news stories provide what they think is the right context: adjust it for inflation! For example, USA Today reports that today’s price “would come to around $5.25 today when adjusted for inflation.”

$5.25: that’s a pretty concrete number. But it’s not really useful. OK, so clearly that’s higher than the current price, about 20% higher in fact. Still, it doesn’t really give us the right context.

As I argued in a previous post on housing costs, inflation adjustments aren’t always the best way to contextualize a historical number. Yes, when you want to compare income or wages over time, it’s good to adjust for inflation. It’s necessary, in fact. And a good economist will always do that.

However, when comparing particular prices over time, it doesn’t really make sense to adjust for other prices. All you are really saying is “if the price of gasoline increased at the same rate as the average price level, here’s what it would be.” Perhaps slightly useful, but it doesn’t really get at the thing we’re really try to address: is gasoline more or less affordable than in the past?

The best approach is to adjust the prices for changes in wages or income. Which measure of wages or income you choose is important, but it’s the best adjustment to make. No need to make any inflation adjustments, are worrying about whether the index you choose is properly accounting for quality changes, substitution effects, etc. If you want to know how affordable something is, compare it to income.

Here’s what I think is the best simple comparison for gasoline, which I’ll explain it below. In short, it tells us how many minutes the average worker would need to work to purchase one gallon of gasoline.

Since the price of gasoline is rising sharply every day lately, my chart will surely be out of date very soon. But right now, it’s the most current data I could provide with a comparable historical series: EIA weekly data current through March 7th, 2022 (Monday). We can see that at current prices, it takes about 9 minutes of work at the average wage to purchase a gallon of gasoline. At the peak in 2008, it took over 13 minutes of work to purchase a gallon, and it fluctuated between 10 and 12 minutes of work for much of 2011-2014.

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The Taxman Comes for Homer

Last week I wrote about the Simpsons’ mortgage payment. In short, I found that using a reasonable assumption of Homer’s income, the median housing price, and the rate of interest, the Simpsons are likely paying less of their household budget on housing today than in the 1990s.

But what about the family’s taxes? Are they getting squeezed by the taxman? Taxes are referenced throughout The Simpsons series. Here’s an article that collects a lot of the references. And that makes sense: the Simpsons are a normal American family, and normal American families love to complain about taxes.

Using the same reasonable assumption about Homer’s income from last week’s post (that Homer earns a constant percentage of a single-earner family, rather than merely adjusting for inflation), we can calculate the family’s average tax rate and how it has changed over the year. Conveniently, “average tax rate” is just economist speak for “how much of your family’s budget goes to the government.”

First, let’s just look at the federal income tax, since this is where most of the changes happen. Don’t worry, I’ll add in payroll taxes below, though this is a constant percent of the family’s budget since it is a flat tax on income!

The chart below shows the average tax rate the Simpsons paid for their federal income taxes. I didn’t go through every year, because: a) it’s a lot of work (I’m doing each year manually); and b) it’s more interesting to look at years right after or before major changes in the tax code. So no cherry picking here — the years selected are picked to tell a mostly complete story.

I’ll now briefly explain each of the years chosen, and what changes in the tax code impacted the Simpsons. But as you can see, just like their mortgage payment, the Simpsons are now spending less of their household income on federal income taxes (don’t worry, the trend is similar with payroll taxes included). In fact, they are now getting a net rebate from the federal government, and have been since the late 1990s!

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Home(r) Economics

Is it harder to buy a home today than in the past? Many seem to think so. Lately, some people have used the example of the fictional Simpsons family to make this claim. A recent Tweet with around 100,000 likes expressed the sentiment:

The unspoken implication is that today a “single salary from a husband who didn’t go to college” couldn’t buy a typical home in the US. Or at least, it would stretch your budget so thin that you would have to give up something else or need two incomes to support that lifestyle (famously dubbed “the two-income trap” by Elizabeth Warren).

And it’s not just a Tweet that caught fire. A December 2020 article in the Atlantic claimed “The Life in The Simpsons Is No Longer Attainable” and used housing as a prime example. And while a 2016 Vox article on Homer’s many jobs doesn’t mention the cost of housing, they draw a similar conclusion and implication: “Homer Simpson has gone nowhere in the past 27 years — and the same could be said of actual middle-class Americans.”

But is this an accurate picture of the Simpsons family over time? And does that picture accurately represent a typical family in the US? Let’s investigate. And let’s start by pointing out that as measured by the availability of consumption goods, the Simpsons do see rising prosperity over time. They have flat screen TVs now, instead of consoles with rabbit ears, as the late Steve Horwitz and Stewart Dompe point out in their contribution to the edited volume Homer Economicus. But with all due respect to my friends Steve and Stewart, I don’t think many would deny that TVs, cell phones, and computers are cheaper today than in the 1990s. The familiar refrain is “but what about housing, education, and health care?”

In this post I want to take on the question of housing, partially by using the Simpsons as an example. My main result is this chart, which I will present first and then explain.

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Is Global Capitalism Increasing Poverty?

A few days ago on Twitter, Nathan Robinson made the claim that global capitalism wasn’t reducing poverty. In fact, it appears that poverty, using the threshold of $10/day (rather than the usual lower numbers) has increased from 1981 to 2017:

While there were a lot of critical responses to him on Twitter, he’s not wrong about the data: in 2017, there were 1.3 billion more people living on less than $10 per day (we’re going to assume in this post that the underlying data is basically correct, and correctly adjusted for inflation and purchasing power). It’s also true that at lower thresholds, such as $1.90 and $3.20, the absolute number of poor people has declined. And as a proportion of the world population, fewer people are under $10 per day. But in absolute terms there are more people under $10 per day. And not just a few: over a billion! There are also a lot more people above $10/day in the world than in 1981 (1.7 billion more!), but I agree that we should be concerned if there are more poor people too.

So how should we think about these numbers? Here’s what I think is the fundamental problem with Robinson’s claim: he asserts that the entire world has experienced something called “global capitalism” during this time period. But there has been considerable variation in the extent to which countries have experienced something we would call “capitalism,” and the degree to which it has increased in the past 40 years (I wrote a series of Tweets on this too).

The easiest way to see this is to break down that 1.3 billion people into different countries. Where were the biggest increases? Also, did any countries experience decreases in poverty? (Spoiler alert: YES!)

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What’s a Sewer Worth?

Have access to clean water and a functioning sewer system is something that many Americans take for granted. Not all Americans, of course, especially those in rural areas not connected to an urban water system. But most Americans do. But how much is it worth?

It’s a hard question to answer. We know clean water and sewers probably have large effects on disease transmission. For example, Ferrie and Troesken (2008) looked at several major improvements in Chicago’s water system, and found that there were large declines in mortality from diseases like typhoid fever after the improvements (here’s an ungated working paper, with the much better title “Death and the City“). But the limits of earlier studies like this are that they primarily looking at a time series of mortality rate and relating this to some change in public infrastructure. A good attempt, but perhaps not convincing to everyone.

A better method would be to look at not mortality rates but property values. People are, surely, willing to pay more for a home with piped water and a sewer system. But how much more? Knowing this could give us better information on the value of the water systems. And that’s exactly what the authors of a new working paper do, once again visiting Chicago in the nineteenth century to look at how much property values increased after the installation of water and sewer systems. The paper is “The Value of Piped Water and Sewers” by Coury, Kitagewa, Shertzer, and Turner (ungated version).

The effects are huge. There most conservative estimate is that sewer and water systems doubled property values (a 110% increase), but the effect could be much larger (almost 4 times as much, if I am reading it correctly, under other reasonable assumptions).

People are willing to pay a lot for sanitation, it turns out.

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Are Special Elections Special?

While the United States does have its problems with democracy, one area where we shine is direct democracy. Rare at the federal level, at the state and local level direct democracy is quite common in the US, much more so than most other democracies (Switzerland also stands out). Almost half the states have some form of citizen initiative or referendum process, and it is used frequently in most of those states. But even more direct democracy takes place at the local level.

And much of that direct democracy at the local level takes place through what are called special elections. I’m not talking about elections to fill unexpected vacancies in office — though of course those do happen. I’m talking about actual voting on issues. Many of these issues revolve around questions of public finance: whether to raise a local sales tax, to approve a property tax millage, or to issue bonds for a capital project.

One very relevant example for me is an upcoming special election in my city of Conway, Arkansas. Citizens are being asked to approve the issuing of bonds to construct a community center, pool, soccer fields, and some other amenities. The bonds would be secured by a tax on restaurants. The tax already exists — city councils can put these in place without a public vote. But to issue bonds, the citizens must be asked. I wrote an op-ed about it in my local paper (if that is gated, try this blog post).

The key is that this is a special election. There are no other issues on the ballot. It takes place on February 8th, not a date that probably stands out in voters minds as an election date. What will this special election mean for voter turnout? A lot of academic research, including a paper that I wrote (currently under review, but summarized here), finds clear evidence that voter turnout will be much lower. Will the result be different? Again, a lot of evidence suggests yes. For example, property tax elections in Louisiana were less likely to pass with higher turnout, and less likely to pass in a general election (my research finds a similar result for sales tax elections in Arkansas).

But why are tax increases less likely to pass in special elections? On this question there are many theories, but they are hard to test. Is it because different kinds of voters show up at special elections, representing a different sample of the population? Possibly, but evidence is hard to find.

A new paper just published in the American Political Science Review sheds some light on these questions.

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Is the Labor Market Back?

Last month I asked if travel was back. Air travel has recovered a lot from the depths of the pandemic, but it was still only about 80-85% of pre-pandemic levels.

Labor markets also plummeted during the worst of the pandemic, and have slowly (and sometimes quickly) clawing their way back. But are we back to pre-pandemic levels?

The national unemployment rate is now under 4%, a level which is rarely reached even in the best of times. But there is considerable variation across states.

The latest BLS release of state unemployment data shows that some states are at their historic lows, with one state standing out: Nebraska currently has the lowest unemployment rate a state has ever recorded at 1.7% in December 2021 (the data go back to 1976). Utah is also just below 2% in December — at 1.9% it’s the 2nd lowest in history (after Nebraska, of course).

Of course, all is not well everywhere. California and Nevada have the highest unemployment rates, at around 6.5%. This is well above their pre-pandemic levels of about 4%, and also well above what you would expect during normal times, other than during and immediately following at recession.

So is the labor market back in Nebraska, Utah, and other similar states? Not so fast.

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Are Car Accidents Getting Labeled as “COVID Deaths”?

Of all the increases in mortality in 2020, one that is notable is motor vehicle accidents. There were 43,045 deaths from motor vehicle accidents, according to the final CDC data. This means motor vehicle accident was listed on the death certificate, even if it was not determined to be the “underlying cause,” though for 98% of these deaths the accident was listed as the underlying cause.

The increase from past years was large. Compared with 2019, there were over 3,000 more motor vehicle deaths, though such as increase is not unheard of: 2015 and 2016 each saw increases of around 2,500. Even so, the crude death rate from motor vehicle accidents in 2020 was the highest it has been since 2008.

If that weren’t bad enough, another theory emerged in 2020 and continues to be suggested today: that car crashes are being labeled as “COVID deaths,” artificially inflating the COVID death count. While one can find this claim made almost daily by anonymous Twitter users, one of the most prominent statements was on Fox News in December 2020. Host Raymond Arroyo said that car accidents were being counted as COVID deaths, and that due to errors like this COVID deaths could be inflated by as much as 40 percent. Senator Marco Rubio made a similar claim on Twitter in December 2021, though he was talking about hospitalizations, not deaths.

Back in 2020, many doctors and medical professionals tried to debunk the “car accidents being labeled as COVID deaths” claim, but the problem was we didn’t have complete data. Anonymous anecdotes were cited, but medical professionals tried to reassure the public this wasn’t the case or at least wasn’t widespread.

But now, we have the data! That is, the complete CDC mortality data for 2020 available through the CDC WONDER database.

What does this data show us? Short answer: there aren’t that many car accidents being labeled as COVID deaths. At most, it’s about 0.03% of COVID deaths.

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Latest Inflation Data: Hot Dogs and Cheese On Sale!

The latest CPI inflation data was released this morning. Mostly the new data just confirms what we’ve seen the past few months: consumer price inflation is at the highest levels in decades, and it is now very broad based.

To see how broad based the inflation is, we can look at any of the “special aggregates” that the BLS produces. CPI less food. CPI less shelter. CPI less food, shelter, energy, used cars and trucks (what a mouthful!). All of these are up substantially over the past year. The lowest number you can get is that last aggregate I listed, which excludes almost 60% of consumer spending, and even it is up 4.7% over the past year — the largest increase since 1991 for that particular special index.

Or, you can just look at food. We all have probably observed that meat prices are way up recently — about 15% over the past year. But it’s not just meat. It’s fruit, vegetables, grains, dairy… the whole darn food pyramid. In fact, there are only two food categories (hot dogs and cheese) and two drinks (tea and wine) that are actually down since December 2020.

I’ve covered the symbolic importance of hot dog prices before, but the fact that only four food or drink categories had price decreases are indications that food-price inflation is extremely broad-based.

So what’s causing the inflation?

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Really Stable Prices

Breaking news in America this week: Little Caesars will be raising the price of their Hot-N-Ready Pizzas from $5 to $5.55. Some see this as a sign of the times, just another bit of bad news among all the inflation data lately. But what really surprised me is that this price has been stable they introduced it in 1997. This means that compared to median wages, these pizzas were about 50% cheaper than 1997 (before this price increase). That’s a doubling of America’s Pizza Standard of Living in just 24 years.

Keeping a fixed price is a somewhat rare, but fascinating pricing strategy. It can even become part of the identity of the product. The most famous example was Coca-Cola, which sold a 6.5 ounce bottle for 5 cents from 1886 to 1959. It’s so famous that it has its own Wikipedia page! “Always 5 cents” became a marketing slogan for them. And while we may regard that time period as one of generally low inflation, consumer prices on average more than tripled from 1886 to 1959.

Probably the most famous recent example is Costco’s $1.50 hot dog and soda combo, which has been stable in price since 1985. Rumor has it that the founder of Costco once told the current CEO that he’d kill him if he raised the price of the hot dog. Since 1985, nominal median wages in the US have tripled, meaning that your Costco Hot Dog Standard of Living has also tripled.

The concept of nickel and dime stores and later dollar stores are similar concepts, but they aren’t necessarily selling the exact same products over time. Coca-Cola, Hot-N-Ready pizzas, and Costco hot dogs really are the same product from year-to-year, so these products stand out as amazing examples of price stability during periods of time when most prices were rising in nominal terms (other than new technologies).

What are some other examples of consistently stable prices?