Technological Improvements and the Cost of Living
Dan Drezner reflects on the fact that Burger King gives away free radios with cheap kid’s meals: “Thirty years ago, when I was a child, this would have been a $20 ($68.71 in 2006 dollars) birthday gift that would have made me the coolest kid on the block. It is now an afterthought, a free, promotional gift as part of a $4.00 kids meal that is affordable to 99% of all American households.” Extrapolating, he predicts, “by the time my son is my age, Burger King will include the equivalent of an IPod Nano in every kids meal.”
He and his commenters come up with other examples of things that were luxury items twenty or thirty years ago: scientific calculators, waterproof cameras, cellular telephones, photocopying, and newspaper content. Megan McArdle adds her own list:
1) air travel
2) air conditioning
3) healthcare technology
4) power wheelchairs/scooters
5) second cars
6) affordable long distance calling
7) flash frozen fish
Drezner notes, correctly, I think, that the Consumer Price Index does a poor job of factoring in such technologically generated changes in the way we live in figuring the cost of living. It’s certainly true, though, that the working poor and lower middle class of our day have higher standards of living than their 1972 counterparts. Indeed, even Brad DeLong seems to agree that this is the case; he merely argues that, given the size of the pie, those people ought get a bigger slice.
Update (Steve Verdon): Just thought I’d point out that while James’ observations about the CPI and technological advances are basically correct, there is one tiny wrinkle here: the CPI is not a Cost of Living Index (COLI). The CPI is a price index (hence the name Consumer Price Index). A true Cost of Living Index is basically impossible to calculate as it requires knowing the consumer’s underlying preferences, and even if we have just one consumer, this is impossible. Nobody can articulate this kind of information in a way that an economist could use to calculate a COLI. Basically, while this bias exists, it is outside the scope of the Bureau of Labor Statistics (BLS) to deal with, and when pressed the BLS has always treated the issue as a political one, and tossed it right back at Congress.
As for Brad DeLong’s closing comment about lion’s share vs. the Tyrannosaurus’ share, well that might be considered a bad analogy in some circles and if your talking about Tyrannosaurus rex.
Update (James Joyner): Steve’s right that CPI doesn’t claim to measure cost of living but merely the fluctuation of the cost of a market basket of goods. The public policy debate around CPI, though, has everything to do with the former. Indeed, the primary purpose to which it’s put it to make cost of living adjustments to government paychecks, benefits, and the like.
That people are using an imperfect measure of price fluctuation as a proxy for cost of living is unfortunate but true. If we’re going to raise people’s pay based on CPI, we ought at least factor in the degree to which CPI’s market basket doesn’t correspond to the actual cost of living. Or perhaps come up with a better statistic for this.
Steve’s also right when he says that calculating a COLI would require figuring out preferences; I’m less sure that we can’t figure that out in some aggregate measure. The fact that I don’t personally buy a lot of flash frozen fish and have, to date, purchased zero wheelchairs/scooters can presumably be extrapolated onto an index along with data taken across the board.