cost of living

House Rich, House Richer

Zachary BartschLeave a comment

The third quarter ‘All Transaction’ housing price data was just released this week. These numbers are interesting for a few of reasons. One reason is that home prices are a big component of our cost of living. Higher home prices are relevant to housing affordability. This week’s release is especially interesting because it’s starting to look like the Fed might be pausing its year 18-month streak of interest rates hikes. In case you don’t know, higher interest rates increase the cost of borrowing and decrease the price that buyers are willing to pay for a home. Nationally, we only had one quarter of falling home prices in late 2022, but the recent national growth rate in home prices is much slower than it was in 2021 through mid-2022.

https://fred.stlouisfed.org/graph/?g=1bTyD

Do you remember when there were a bunch of stories about remote workers and early retirees fleeing urban centers in the wake of Covid? We stopped hearing that story so much once interest rates started rising. The inflection point in the data was in Q2 of 2022. After that, price growth started slowing with the national average home price up 6.5%. But the national average masks some geographic diversity.  

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The Dodge Caravan, Quality Improvements, and Affordability

Jeremy HorpedahlLeave a comment

1996 was a big year for minivans. While modern minivans had been around for about a decade by that point, 1996 marked a turning point. That year Dodge introduced what is referred to as the “third generation” of its Caravan, and it won Motor Trend’s car of the year award. That’s the first, and only time, that a minivan ever won this award. If you drive a minivan today or see one on the road, you are seeing the look, style, and features that were first introduced in 1996 (interestingly, that year also seems to have marked the peak in sales for the Chrysler family of minivans).

If you wanted to buy the cheapest possible Dodge Caravan in 1996, you would have paid about $18,500. You could always pay more for more features, as with any car, but if you wanted this “car of the year,” and you wanted it new and cheap, that was what you paid.

Dodge continued to produce the Caravan for the US market until 2020, when it was discontinued in favor of other nameplates (though it still lived on in Canada). In 2020, the base model Caravan was about $29,000 (and now only available in the “Grand” version, an upgrade in 1996).

Oren Cass has used the prices of these two minivans to make a point about price indexes, quality adjustments, and affordability. If you look at the raw prices, clearly it is more expensive. But the consumer price index tells us that the price of new cars was flat between 1996 and 2020.

So what gives?

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What are the Richest and Poorest MSAs in the US? Cost of Living Is Probably Less Important Than You Think

Jeremy Horpedahl2 Comments

Income varies a lot across the US. So does the cost of living. Does it mostly wash out when you adjust incomes for the costs of living? No, not even close. Apples-to-apples comparisons are always hard, but it’s still worth making comparisons.

Let’s use some data that Ryan Radia put together that I really like, for several reasons. He uses the 100 largest MSAs — these comprise about 2/3 of the US population. He uses median income, so outliers shouldn’t effect the income data. He uses median family income, since the more common median household income is, in my opinion, very difficult to interpret (5 college students living together are a household, and so is one elderly person living alone). And Ryan also limits it to non-elderly, married couples, and then separates the data by the employment status of each member of the couple.

As an illustration, let’s use the data for married couples with only one spouse working full-time (I have played around with the data for other working statuses, and the results are similar). Before adjusting for the cost of living, here are the top MSAs with the highest median incomes:

  1. San Jose, CA: $169,000
  2. San Francisco: $140,000
  3. Bridgeport–Stamford, CT: $130,000
  4. Seattle: $130,000
  5. Boston: $129,000
  6. Washington, DC: $123,000
  7. Hartford, CT: $110,000
  8. Oxnard–Thousand Oaks, CA: $107,390
  9. Austin: $105,420
  10. New York: $105,000
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The Cost of Raising a Child, Revisited

Jeremy Horpedahl1 Comment

Last week my post was about a new article I have with Scott Winship on the “cost of thriving” today versus 1985. That paper has gotten quite a bit of coverage, including in the Wall Street Journal, which is great but also means you are going to get some pushback. Much of it comes in the form of “it just doesn’t feel like the numbers are right” (see Alex Tabarrok on this point), and that was the conclusion to the WSJ piece too.

Here’s a response of that nature from Mish Talk: “There’s no way a single person is better off today, especially a single parent with two kids based on child tax credits that will not come close to meeting daycare needs.”

He mentions daycare costs, but never comes back to it in the post (it’s mostly about housing costs). Daycare costs are undoubtedly an important cost for families with young children (though since Cass’ COTI is about married couples with one earner, they may not be as relevant). And in the CPI-U, daycare and preschool costs only getting a weight of 0.5%. Surely that’s not reality for the families that actually do pay daycare costs! If only there was an index that applied to the costs of raising children.

In fact, there already is. Since 1960, the USDA has been keeping track of the cost of raising a child. Daycare costs are definitely given much more weight: 16% of the expenditures on children got to child care and education. And much of that USDA index (recently updated by Brookings) looks similar to what COTI includes: housing, food, transportation, health care, education, but also clothing and daycare. I wrote about it in a post last year and compared that cost to various measures of income (including single-earner families and median weekly earnings). But what if we compared it to Oren Cass’ preferred measure of income, males 25 and older working full-time? Here’s the chart.

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The American Family Is Thriving, Even if They Only Have One Male Earner (But Most Don’t)

Jeremy Horpedahl4 Comments

62 weeks. That’s how long the median male worker would need to work in a year to support a family in 2022, according to the calculations of Oren Cass for the American Compass Cost-of-Thriving Index released this year. Not only is 62 weeks longer than the baseline year of 1985 (when it took about 40 weeks, according to COTI), but there is a big problem: there aren’t 62 weeks in year. It is, by this calculation, impossible for a single male earner to support a family.

Is this true? In our new AEI paper, Scott Winship and I strongly disagree. First, we challenge the 62-week figure. With a few reasonable corrections to Cass’ COTI, we show that it is indeed possible for a median male earner to support a family. It takes 42 weeks, not 62 as reported in COTI.

But wait, there’s more. Much more. In our paper, we provide a range of reasonable estimates for how the cost of thriving has changed since 1985. In the COTI calculation, the standard of living for a single-earner family has fallen by 36 percent since 1985. In our most optimistic estimate, the standard of living has risen by 53 percent. The chart below summarizes our various alternative versions of COTI. How do we get such radically different results? Is this all a numbers game?

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The Economics of Brushing Teeth and the Tooth Fairy

Jeremy Horpedahl2 Comments

There are many papers with titles in the style of “The Economics of X” with X covering a wide variety of topics, some deadly serious (“Economics of Suicide“) and others more trivial or unintentionally hilarious (“The Economics of Sleep and Boredom” comes to mind). There is a related genre of papers on “The Political Economy of Y,” once again with papers that are both serious and occasionally silly (or sometimes deadly serious papers with silly-sounding titles, such as “The Political Economy of Coffee, Dictatorship, and Genocide“).

But perhaps the best paper of this sort is a 1974 article on the Journal of Political Economy by Alan Blinder, titled “The Economics of Brushing Teeth.” It is, as you might guess, a paper that is somewhat tongue-in-cheek (tongue-in-teeth?), but the paper carefully follows the formal style you would expect from a JPE paper in 1974. I recommend reading the paper in full, and I can assure you that it is not at all like pulling teeth. But if you prefer not to look a gift horse in the mouth, here are a few favorite parts.

The paper is, of course, full of tooth-related puns, even in the footnotes, such as this acknowledgment: “I wish to thank my dentist for filling in some important gaps in the analysis.”

There are also plenty of jokes about human capital theory, jokes that only an economist could love, such as: “The basic assumption is common to all human capital theory: that individuals seek to maximize their incomes. It follows immediately that each individual does whatever amount of toothbrushing will maximize his income.”

Another section manages to poke fun at both sociologists and economists. In reference to a fake paper (no, there is no Journal of Dental Sociology), Blinder chastises the fake sociologist for misattributing a change in brushing patterns (assistant professors brush more) to advancing hygiene standards over time. No! It must be about maximizing income: “To a human capital theorist, of course, this pattern is exactly what would be expected from the higher wages received in the higher professorial ranks, and from the fact that younger professors, looking for promotions, cannot afford to have bad breath.”

And what good is a paper without a formal model of teeth brushing? This is the kind of model that many young economists cut their teeth on in graduate school.

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