David R. Henderson  

Steve Horwitz on Cost of Living

Robert Frost and Michele Bachm... Good News and Bad News on the ...

LearnLiberty has an excellent short video featuring St. Lawrence University economics professor taking on the myth that the cost of living has risen over the years.

He does it in two ways:
1. First, he looks at the prices of goods, not in dollar terms, but in amount of labor time you would have to spend to get the wherewithal to buy the goods. This is the technique Brad DeLong used some years ago in my favorite piece he has ever written, "Cornucopia: Increasing Wealth in the Twentieth Century."
2. Second, for goods like cars whose prices in terms of labor hours have risen, Horwitz shows that we are getting so much more for our labor hours: comfort, safety, luxury features, and durability. What would have been interesting, although maybe the data would be hard to get, would be to look at labor hours spent per thousand miles of driving. I bet that has gone down.

One annoying feature, to me at least, is the background music. Steve has a rich voice that needs no musical back-up and the music was both boring and distracting.

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CATEGORIES: Growth: Consequences

COMMENTS (12 to date)
effem writes:

Yet consumer confidence is at multi-decade lows. Clearly there is more to life than "economic progress."

Eric writes:

As one bald man to another, Steve needs to lose the awkward patches left in the back. It is not flattering during the rear shots when he appears on Freedom Watch

steve writes:

Certainly, the standard of living has risen over the years. However, I don't see inflation as a measure of hours worked. I see inflation as a measure of money as a store of value.

Currently, if you want to save for retirement or anything else, money is the last place you would want to store your savings. This is not in any way altered by rising living standards. It is effectively measured by inflation.

If you want to cast inflation as the standard of living or some other measure, you will simply have to come up with a new word for measuring money as a store of value.

dullgeek writes:

I saw this video last night and I honestly didn't even notice the background music until you pointed it out.

David R. Henderson writes:

Inflation is not a measure of hours worked. Neither Steve nor I said it is. I'm not sure why you're making this point.

Matt Bramanti writes:

The miles-driven data is available - the National Highway Transportation Safety Administration uses it to calculate accident rates. So many accidents per 100,000 miles, if I remember correctly.

That being said, I have no idea where the NHTSA gets the data. Fuel sales divided by average CAFE, maybe? Odometer readings from car registrations?

Does anyone here know?

steve writes:


Your correct. My point is rather a non-sequitor here. (The perils of comments is that they can be made off the cuff.) I was just reading Steve Horowitz's point number 2 and all I could think off was Hedonic Adjustments.

Daniel writes:

Steve and David,

Steve's point about inflation applies, he just used the wrong word/phrase.

The term "living" as in "cost of living", at least as I understand it, isn't a measure of hours needed to purchase a basket of goods. It's a given indifference curve, and the cost of living is the cost of obtaining that indifference curve at a given set of prices.

That, again, as I understand it, is the reason why the Laspeyres index overstates the true cost of re-obtaining a given "living" when prices go up (at different rates). The Laspeyres gets you back to the old basket, but at the new prices a superior indifference curve is now obtainable if you have enough money to purchase the old basket.

In short, I think you still need another term. Why not "hours-based cost of living?"

Of course, then the video's opening claim that it's a myth that the cost of living is always going up is false (and this really was my only problem with the video). Either that is no myth because the (normal definition) cost of living IS generally increasing, or there is no myth because no one is really claiming that the houss-based colst of living is generally going up.

Second quibble: a non-economist (and perhaps a number of economists) watching this would think that the CPI does nothing to adjust for the quality of the goods in question. I'm not claiming that BLS's hedonic models are perfect...just that they ARE there.

Other than that over-reach and quibble, it was a good video, even if it's something that almost all economists are likely well-aware of.

Thomas Boyle writes:

I am a sport pilot, and it's interesting to note that the small airplane industry gives us a different type of example: a product built almost exactly the same way it was 80 years ago, with almost exactly the same performance, the cost of which has risen dramatically faster than the official inflation rate.

The Piper Cub was introduced in the late 1930s. You can buy a Piper Cub lookalike today. While the modern machine is somewhat better, it's remarkably similar to its 80-years-ago predecessor, and is built much the same way - steel tube framework, fabric covering, few amenities.

In 1947, the airplane sold for $2,400, or about $25,000 adjusted for inflation to today. In 2010, the modern equivalent, built in America, sold for approx. $120,000. The engine alone (a mass-manufactured component) now costs approx. $18,000 today.

The (depressingly few) sport pilots of today wonder how this happened - and what can be done to fix it...

David Henderson Author Profile Page writes:

Good counterexample, Mr. Boyle. See my latest blog post,
for the explanation.

aaron writes:

I don't trust the recent FHWA data, I think stimulus money introduce an unintentional bias.

When the 2010 report was published, numbers were up from TVT estimates far more than the norm. The 2008 data was revised upward 2.5% from tvt estimates. When I spoke with Steve Jesseburger about it, he said that TVTs are usually within 1%. Revisions were larger in 2010 and all up.


Joe Barnett writes:

Wouldn't it be clearer to use standard of living when referring to the things one can purchase with one's labor (as the rising standard of living), rather than the cost of living (which is going up due to inflation -- ie, debasement of the monetary unit)?

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