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Would live to hear your comments. Thank You/

Prema Rachel

It sounds like you're asking "What should we be using to index social security or other pensions?" I think CPI is reasonable for that, since it basically measures access to what american society considers a standard consumption level. OTOH, I'm not sure the social security system is entirely reasonable. It's not at all clear to me that intergenerational transfer of wealth in that way is particularly efficient. I would like to see social security either disappear (gradually, keeping promises already made or at least 70-80%), or become a forced pension plan with private accounts, combined with a just-above-poverty means-tested safety net for those who mess up or who don't work enough to put much away. I don't think eithee of these is a realistic hope.

I do think that a lot of hand wringing about median wages failing to outstrip CPI is silly, because the standard consumption level will naturally rise if the bulk of the people are making more money.

For me, the interesting factor about median wages falling behind CPI is that it's so radically different than the *mean*, and so radically different from what we've typically experienced in the past (during non recessionary times). Something unusual is going on, and it would be helpful to figure out exactly what.

Is CPI-U – or CPI-W – a reasonable estimate for determining the many billions in income to transfer across generations? Your comment seems to be seeking a middle ground in the inflation index debate. For those on either side of the huge inter-generational transfers, can there be a middle ground?

In fact it's a very hard question, which I think both Don L. and Russ recognize.

The biggest flaw with doing a complete set of hedonic adjustments is that it doesn't reflect the real "cost of living".

Goods at the same quality as that found in 1970 do not necessarily exist in 2006, though if they did, they would be cheap.

Sometimes the market overcorrects. If I had a much smaller income, I might well like to buy a house that is only 600 square feet, as were not so uncommon in the first half of the 20th century. They are pretty uncommon now. If I can find one today outside of a very rural or depressed city area, the land alone will be valued based on it's ability to support a 2000+ sf house (after tearing down the shack), probably pricing it out of my range. If I really want to live in that house, I can't today live in a reasonable suburb or thriving city neighborhood. My only choices are to live in an apartment, a slum or the wilderness, all of which involve big tradeoffs from my original goal (which I could have achieved in 1915) of living in a 600 sf house in a suburb/village.

Same thing with quality improvements in consumer goods. There's a baseline below which prices don't go for computers. A 1995 computer today, while you can buy one on the scrap heap for much less than it cost in 1995, doesn't actually provide the same experience as it did in 1995, since it won't work with software that you can buy now, or on websites that exist now. What it costs to get "a computer that will do most of the stuff that people expect computers to do" is about the same today as it was in 1995. What people expect is different of course, but you don't really have the option of getting the same quality as in 1995, you get to have either a much better experience or a much worse one.

But quantifying this difference is not feasible to do exactly (or even all that accurately) because of the difficulty of interpersonal utility comparisons (I refuse to say "impossibility" — raspberries offered to Don L. and any other catallarchists on his side of that debate).

I actually think the current CPI is a reasonable estimate of the "cost of access to normal society". But we do need to be aware that it is measuring that, and not some arbitrary universal standard of good.

If real wages for the median worker fall according to CPI, a median worker will feel strapped and like their access is eroding, and this will be based on a reality. But that's not the same as saying that his standard of living is objectively worse. It's possible that it would be for a given person with a very odd utility map, but those people will be rare (if they weren't, the market would likely have provided them better tradeoffs). Most people wouldn't take Don B.'s trade.

The problem is that different measurements measure different things, and our sound bit politics tend to conflate all of it to produce a lot of meaningless comparisons.

If you want to study poverty, and who is truly being deprived, you need a different kind of metric than CPI. If you want to measure whether the bulk of citizens feel like they have access to middle class american society and to what extent, I think median wages relative to CPI is a pretty good measure.

It's only when we claim that that measure represents a declining absolute standard of living that we go wrong.

A CPI with a lot of hedonic adjustments would be very useful, OTOH, for determining how many people are truly left behind and in poverty — the attempt being to establish an absolute standard of living. But turning around and using that figure to measure how the median household is doing in terms of access wouldn't be reasonable either.

Michael