"Fuzzy Numbers" is my favorite Crash Course segment, because it seems to me to portray best of all how government wickedly deceives as well as distorts so much of what happens in the economy.
And yet… I wonder if Chris’ findings about inflation rates are overstated?
For many years past the published average has been around 4% a year, as is shown on one of the screens in this presentation. If the true rate has been as much as three times that, perhaps 12% a year, we would expect to see even more price distortion in the long term than I can, informally, perceive.
Take a 40-year period, for example – recall what prices were like in 1968. If general inflation has run at about 4% a year then 1.04^40 means they should now be about 4.8 times higher; but if the true rate has been 12% a year we should now be seeing prices that are 1.12^40 or 93 times higher.
So consider a few we might remember. Gasoline was then around 37 cents a gallon; today it’s 184 cents, post-bubble. That’s a ratio of 5.0 times. Rather close to the 4.8x
I recall admiring a Lincoln Continental in 1968, retailing at $6,000. Today an equivalent might cost what, $45,000? There’s a ratio of 7.5 times – more than 4.8 but a l-o-n-g way short of 93.
Housing has bubbled recently as we all know but I also recall a nice 4-bedroom, 3000 sq ft single family home newly-built within commuting distance of Chicago costing $30,000 in 1968. Today that would cost a good bit more than (4.8×30=) $144K, but a whole heap less than (93×30=) $2,790,000.
I also recall that forty years ago $30,000/yr was a very good salary indeed, equivalent perhaps to about $200K today. Again, the ratio is around 6 or 7 times but not 93 times. I rather doubt that an IBM Branch Manager typically earns $2.8 million a year.
I can’t explain this, but think there may be something fishy about these fuzzy numbers. They seem to fail the Whistle Test.
I think the dissonance you are experiencing is because you are taking one number used by Chris for Food Inflation in the video (12% for 2007 to 2008 for a constant basket of goods (used by the Farm Bureau) vs the Substition adjusted rate of ~4% used by the BLS) and then extrapolating it across ‘everything’ for the last 40 years. You are absolutely right that were the real inflation to be 3x actual inflation year over year for 40 years that the discrepancy would be too obvious to cover up. This isn’t, however, the real message underlying Chapter 16. Chapter 16 is pointing out that there is a persistant bias to the low side for reported inflation and a persistant bias upward for reported GDB. The bias to the reported CPI numbers does not need to be large for the impact to be significant over 40 years (significant and insidious).
For example: if the ‘actual’ inflation rate averaged over the last 40 years were closer to 5% vs the reported 4% the disparity in purchasing power for an employees annual wages 40 years ago vs the same employees annual wages today (presuming that employee only received salary adjustements that exactly matched the reported CPI) would be 1.04^40 / 1.05^5 = 0.68.
I believe the actual discrepancy to be a little worse than this but do not have any specific set of numbers to offer to ‘prove’ my case. I can however offer that when I was a child it was rare that both parents in your typical nuclear family would need to work full time to satisfactorily meet the food/shelter/ health and educational needs of their family, today – it is untypical that only one parent is working. Of food/shelter/health/.education – the latter two have become even more difficult to reach for the average family. I can speculate that the ‘average’ increases in these two may better reflect the actual inflation rates than the first two (why? just guessing – but it may be because the last two benefit far less from the availability of cheap labor provided by millions of illegal immigrants (and I am not trying to be inflammatory here when I offer this possibility) )
Thanks Daniel, and I concur. (Friendly amendment: I think that by "1.04^40 / 1.05^5 = 0.68" you meant "1.04^40 / 1.05^40 = 0.68".) "Real" average long-term inflation must be much closer to 5% than to 12%.
Incidentally here’s another way to reach a similar conclusion. Fiat money started, as Chris showed, with the creation of the Fed in 1913. That’s 95 years ago, and many sources suggest that since then the US Dollar has lost 97% or 98% of its purchasing power; that is, that $1 today would buy about what 2.5 cents would then and so that it’s worth $0.025 in 1913 terms.
0.025^(1/95) is 0.962, indicating an average, 95-year inflation rate of 3.81%. Close enough, perhaps, for government work.