Here's Mr. Israel with a follow-up to his "Why CPI Ignores Homes and Stocks (The Daily Economy, Karl-Friedrich" #1566496... This time: taxes and asset prices, and proper recalculations

https://m.stacker.news/158192

very cute caption image

recap:

First, the fiscal cost of https://thedailyeconomy.org/article/article-author/karl-friedrich-israel/ is obscured because taxpayers do not choose voluntarily to buy national defense or a regulatory agency the way they choose groceries. And second, the https://thedailyeconomy.org/article/why-cpi-ignores-homes-stocks-and-the-cost-of-getting-ahead/ the price of stocks, homes, and other assets, because the index is built for “pure consumers” who spend the whole of their income on present consumption, holding no portfolio and building no wealth for the future. This third and final piece asks what happens to measured real wages when we include those missing numbers.

"Are households’ paychecks actually buying more over time, when those very relevant factors are included?"

Combining the CPI, federal tax receipts, and two asset-price series into one index requires a weighting scheme, and just like for the subindices of the CPI, there are no objectively correct weights. For this measure, CPI inflation is weighted at 70 percent and the growth of tax receipts is weighted at 30 percent (matching the OECD’s estimate of the average tax burden on a representative US household).

https://m.stacker.news/158212

and:

To fold in exclusion number two, the CPI weight of 70 percent is split into 70 percent of genuine private consumption (CPI) and 30 percent assets. This 30 percent weigh is split into 18 percent to stocks (https://fred.stlouisfed.org/series/sp500) and 12 percent to real estate (https://fred.stlouisfed.org/series/CSUSHPINSA), mirroring the https://www.federalreserve.gov/releases/z1/current/z1.pdf on American household investments.

THIS was a pretty beautiful final account:

https://m.stacker.news/158213

"Since 1995, the CPI has grown at 2.54 percent a year. Even the conservative version of the broader measure runs distinctly hotter, at 3.36 percent."

"...The exact weights are debatable. The direction and rough magnitude of the gap are not."

An inflation index is not just a number. As the denominator dividing wages, it becomes the yardstick for whether workers are actually getting ahead — or not.

What the gains in (nominal) wages and earnings mean "depends entirely on what it is measured against."

This is the saddest little graph:

https://m.stacker.news/158214

"That is the standard, official account of how American workers have fared: real wages essentially flat to modestly improving."

Comparing the broader measure to the official CPI, these are not small revisions to the same basic story. They are two different stories. One, which the government reports and the media repeats, says the typical worker’s purchasing power has been roughly stable for three decades, or slightly increased. The other, which includes taxes and asset prices Americans actually pay,says it has fallen by somewhere between a twentieth and nearly a half. The baseline indicates household purchasing power has declined by about a third in the past 30 years.

Not every household experiences this gap the same way, and it is worth being precise about why.

Important. And, for justice/standard-of-living type considerations, it's worth noticing that you're not made materially worse off from a consumption point of view: it's being priced out of assets that's driving this. So you can still buy as many/more chickens, airfares, clothes, avocados, soda drinks etc (we've talked about this before: #1573531 #1572145) as before... you're just having a harder time preserving that economic value across time, e.g., via a house or a stock portfolio.

The broader measure proposed here treats asset-price inflation as a straightforward cost, on the theory that stocks and homes are things people eventually need to buy. But a household that already owns a diversified portfolio and a home does not experience rising stock and home prices as a cost at all — it experiences them as a capital gain, one that shows up nowhere in a wage statistic but does show up on that household’s balance sheet.

...meaaaaning:

"For asset-owning households, the official CPI story may actually be closer to the truth, or even an understatement of how well they are doing once portfolio appreciation is counted."

The broader measure is most relevant, and most sobering, for households on the other side of that divide: people whose income is overwhelmingly labor income, who hold little or nothing in the way of financial or real assets, and who are trying to build that wealth from scratch. This describes younger workers early in their careers more than older ones, renters more than owners, and lower- and middle-income households more than upper-income households almost by definition.

Yes, fuck the boomers #1468968.

Altogether excellent and balanced piece. Go Karl!