Is the Cost of Living Really Rising?

Speakers
Steven Horwitz,

Release Date
August 17, 2011

Topic

Poverty & Inequality
Description

According to Prof. Steve Horwitz, one contemporary economic myth is that the cost of living has consistently risen for Americans over the past century. In fact, prices are higher today than they were 100 years ago. However, prices today have been heavily influenced by inflation. One way of avoiding inflationary distortions is to look at amount of labor hours required to make a purchase. Using this analysis, Prof. Horwitz finds that most goods and services have never been cheaper.

Is the Cost of Living Really Rising?
One contemporary economic myth is that the cost of living has consistently risen over the last hundred years and is now been higher for most Americans. At first glance, this seems to be true, as the sticker price of most goods and services is higher than it’s ever been. One thing we need to take into account there is inflation of course. But beyond inflation, the reality is that most goods and services have never been cheaper. The way to see this is to think about the cost of goods and services in terms of the amount of labor time it takes to purchase those at the average industrial wage. So for example, when the average industrial wage is low, it takes a lot more labor hours to purchase the average good than it does when the average industrial wage is high. What we discover is the cost of pretty much everything is dramatically cheaper than it was hundred years ago or even a generation ago. For example, in 1920, the average private sector wage was less than a dollar an hour and a 3-pound chicken took about two and a half hours of labor time to purchase. If we fast forward to the turn of the 21st century, when the average private sector wage was about 12.50 / hour, that same 3-pound chicken took about 14 minutes worth of labor to purchase. If we think about other kinds of examples, in the early 1960s, one could have gone into an appliance store, and for 500 dollars bought the top-of-the-line home stereo system. Today that same 500 dollars you can go into the store and buy 2 new IPods. Not only that, the IPod can carry all of your music with you anywhere you go, whereas as the old stereo system had to stand in your home and can only play one thing at a time. More importantly if you think about the 500 dollars that someone would have spent to buy that system in the early 1960s and then convert that over the labor hours and think about what the same number of labor hours can buy today, what we find is that could buy a whole variety of electronic products from LCD TVs, to blue ray players, to home speaker systems, to an IPod, to a laptop, to a digital camera, all of them, and all of them being of much higher quality than before. Some goods are actually more expensive than they used to be even if we calculate in terms of labor hours. One example of this are cars. Cars actually cost slightly more in terms of labor hours today than they did decades or even almost a hundred years ago. But one of the important things to realize here is that what we’re buying with our money is not quite the same. Cars early on of course were basically four wheels of seat in an engine. Today, they’re safer and they last longer. Today if you don’t get a hundred thousand miles out of your car, you feel like you’ve been ripped off. To get a hundred thousand miles out of a car in the 1920 or 1950 was nearly a miracle. So even though cars cost a little bit more in terms of labor hours, what we’re getting from them is a lot more. The dramatic fall in the cost of living over the course of the 20th century illustrates perfectly the power of market competition. As firms compete for consumer dollars, they have the incentive to come out with new and better products that are continually cheaper. Firms have the incentive to innovate, to find more efficient ways to make those products and to make them available to more Americans. The result of all this is that poor Americans today have more standard household appliances in their homes such as microwaves, refrigerators, freezers, air conditioners, even cars, than did the average American family a generation ago. So clearly, over the course of the 20th century, the cost of living has fallen as most goods and services are cheaper, in terms of the labor time it takes to purchase them and as a result, all Americans, poor, middle class as well as upper class, are living better than ever before.