Simple Man Price Index (SMPI)

Post #1235

One way that governments get away with shenanigans and tomfoolery is by messing around with the price index. Government bureaucrats created value adjustments and turned inflation reporting into a subjective game of personal opinion. If your flat screen TV has twice the pixels, then officials can personally decide it is “worth” twice.

That way, if the price only goes up by 90%, then the government official will record that there was no inflation — because “quality” rose by 100%. But that process is highly subjective and the government official may be operating out of perverse incentives to “produce” numbers which do not look very bad, politically.

But a better way to measure inflation removes all personal opinion and personal decision-making. While still imperfect, a Simple Man Price Index was created out of the majority of all consumer spending. The logic is that, if you reach a majority of average spending, and the items bought go up by 5% in price, then inflation is 5%.

If “most” dollars go to things that rose in price by 5%, then 5% is a good estimate. Here is the nominal (not adjusted) median household income:

The year 2000 is marked because that is when the affordability of living standards for middle-income America stopped improving. It is also when China ramped-up exports to the USA. Here is the median household income corrected by the price of things that most dollars get spent on (the SMPI):

No improvement in the affordability of living standards occurred after 2000. Middle-income Americans could not, on average, earn a better living. Critics & detractors of the SMPI will complain that it is based on average consumer spending in the Consumer Expenditure Survey, so that rich Americans can cause upward bias.

This criticism is a legitimate one, and that is a drawback to this inflation index. The spending of billionaires can increase the mean value of consumer spending, even if the middle (median) spender does not spend the average (mean) amount on the items. But when governments lie, it is good to have alternatives.

A good one is Tom's Inflation Calculator.

A good index there is the Social Security Wage Index, because the rate of increase in wages is expected to be a good estimate of the rate of increase in prices — because businesses will not be “over-willing” to raise wages, where being over-willing means raising them faster than the rate of increase in prices. They used to, though.

Back when the US economy was at least twice as free* as it is now, wages rose faster than prices did. But now that we have less than half of the economic freedom of the past, that is no longer the case. This is a point which is sometimes missed, or at least not kept at the front of focus, by even the good guys, such as truth warrior, el gato malo.

The analysis above agrees with that of el gato malo — i.e., that things did not worsen in the first years after NAFTA. But the larger picture is that things did worsen in the USA with the rise of China. Many of the “good guys” cannot explain it. One guy who can explain it is John Carney of Breitbart.

Abstract theory depends on people acting at least roughly like Homo economicus. But the behavior of nations like China reveal that very large minorities of people could become willing to act much differently. Game Theory proves that a nonzero proportion of human beings are “spiteful competitors” who care more about you losing.

They even care more about you losing than they care about themselves winning!

It defies the understanding to try to picture it, so you actually have to see it. You have to actually witness someone willing to burn-it-all-down instead of letting you succeed by a little bit more than they did. Saying that this attitude is “childish” does not do it justice, because it makes you think it will go away on its own, with more maturity.

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*Finding multiples of economic freedom levels is possible by using the twin-metric of government spending as a share of GDP and total pages of federal regulation in the Code of Federal Regulations (CFR). If one era has government spending at 4% of GDP, along with 4,000 total pages of federal regulation in the CFR, then that era is “free.”

That first era might be called a “4x4 of rugged individualism.” However, if a second era is compared, and the government spends 31% of GDP instead of 4%, and if it has 185,000 total pages of federal regulation in the CFR instead of 4,000 pages — then that era is “unfree.”

With 7x the share of all resources being allocated by the government, and with 46x the total number of rules and regulations, economic freedom drops.

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Reference

[median household income] — U.S. Census Bureau, Median Household Income in the United States [MEHOINUSA646N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSA646N

[imports from China] — U.S. Census Bureau and U.S. Bureau of Economic Analysis, U.S. Imports of Goods by Customs Basis from China [IMPCH], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IMPCH

[at least 2% of human beings are spiteful competitors] —