Friday, August 31, 2012

Cost of Living

While I was thinking about the economic implications of the event, call it the culmination of the decline, I started wondering about standards of living.  It is very obvious to those of us seeing the coming wall that standards of living will drop, how far is the only question at hand.  While thinking about that I started wondering what the equivalent standards of living were.  Visiting this website gave me some idea, though it still left much unanswered.

While incomplete I tabulated a list for each single year out of each decade. I would rather have done a rolling five year average but my day leaves very little time to do number crunching during the weekdays. I found data for home prices, car prices, milk prices, gas prices, and average income.  Now the first thing I will say is that these numbers can vary quite a bit so some skepticism is warranted. The other is that the data shown obviously doesn't include the change from a household being supported by a single person to one that is supported by two individuals.  There is a lot of data that can, and needs to be collected, to really do a thorough assessment on our quality of living then versus now, but it serves as a useful starting ground.

The first chart shoes the nominal price of a home, a car, and wages for each respective year.

The second chart shows listed nominal prices for milk, to cover staples, and gas, covering energy requirements.

These next two charts show the equivalent price today assuming an average inflation rate of around 3%; note the home, car and wages equivalents were taken directly from the website.

What is interesting is that looking at this data absolute wages have increased since 1951.  But the cost of goods have risen as well.  Cars prices were relatively stable from 1971 to 1991, but dramatically increased in price after 2001.  The same thing can be said of homes.

What isn't surprising though is that the incomes as a percentage of homes have remained relatively constant.  Everyone is familiar with the first rule of real estate, location, location, location; however, few recognize the second rule.  The second rule is that the price of real estate cannot be priced more than expected earnings if it wishes to sell, in commercial real estate, and for residential real estate, the property cannot be priced outside of the ability of a person to pay for it. This explains why, excluding the missing bubble years, from 1981 to 2011 that incomes have average around 19% of the price of a home.

This next chart shows the percentage of yearly income a gallon of gas and a gallon of milk are.

More than anything it confirms the notion that there is too little data present  to come to a hard conclusion about the standards of living, in a purely fiscal sense, from 1951 to now.  Due to improvements in agriculture and husbandry the cost of milk is as low now as it was in 1961 when you look at it as a percentage of income.  While the cost of gasoline has increased, though not to the high of 1981.  This seems to suggest that standard of living has been pretty constant in a purely monetary sense. Meaning technological improvements are the result for the increase in the quality of life we enjoy today.

Now there are some obvious holes. Firstly, there is the fact that we are taking a single, very limited, snapshot of a single year every decade.  A lot more data needs to be collected before any real confident conclusion could be made due to that reason alone.  The other is that the data ignores the drastic changes that have resulted to help maintain household incomes were they are.  In 1951 a single man could support his family; today, both parents probably work.  And lastly, this data in no way accounts for the durability of goods manufactured then versus today. Dishwashers, Fridges, Cars, Clothing, etc were far more robust in 1951 than they are today.  America is awash in a consumer culture that throws away goods as fast as they are made.

What I will venture to say is that if this data shows the same trends and results in a more thorough and expansive study then it would suggest that an Americans ability to provide a middle class lifestyle is little improved from 1951.  Yes aspect of our lives are better, the cars are cooler, we have technology devices such as computers and smart phones, and consumers have far more choice. But some of the core items have remained relatively unchanged when compared to our incomes.  This suggests the coming event will be painful indeed. Yes we will still have our cool gadgets, and technology will help ameliorate the pain, but certain core items are going to become more prohibitively expensive if incomes drop significantly.

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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.