The Price Index Divergence

Moneybox
A blog about business and economics.
Aug. 21 2012 3:25 PM

The Price Index Divergence

David Leonhardt is running a great series on the sources of American income stagnation and I wanted to throw into the mix a technical point that tends to get overlooked in this discussion. When we talk about incomes stagnating, we're talking (reasonably enough) about inflation-adjusted incomes. And typically we do that adjustment with reference to the consumer price index. But that's not the only price index in the land. There's also the GDP deflator which is used to distinguish between "real" and "nominal" GDP. And for the past thirty years, the GDP deflator has tended to rise more slowly than the CPI.

Why would that happen? Well in the short-term it's easy to get divergence because only some production (GDP) is consumed. Some of it is capital goods. But in the long-term, you might think these indexes would line up. After all, the capital goods are ultimately used to produce consumer goods so it should all wash out. Systematic trade patterns tend to undue this. The American economy exports a lot of capital goods—747s and Windows and so forth—but consumers are spending a larger and larger share of their income on personal services (especially health care) that can't be imported.

Advertisement

So there's systematic divergence. And it's a big deal. According to Lawrence Mishel of the Economic Policy Institute, this gap alone accounts for one third of the divergence between productivity and median compensation in the 1973-2011 period.

What does that mean in the real world? I think it's mostly a longwinded way of emphasizing that incomes and prices are two sides of the same coin. The political discussion normally talks about income and wages in one box, and then college affordability or health care or housing in some other boxes. But the point of income is to buy things. If it were as cheap to find a place to live in San Francisco or New York as it is in Duluth, that right there would constitute higher incomes. If health care were cheaper, real incomes would be higher.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Culturebox

The Ebola Story

How our minds build narratives out of disaster.

The Budget Disaster That Completely Sabotaged the WHO’s Response to Ebola

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

The Shooting Tragedies That Forged Canada’s Gun Politics

A Highly Unscientific Ranking of Crazy-Old German Beers

Education

Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.

Culturebox

The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Would You Trust Walmart to Provide Your Health Care? (You Should.)

  News & Politics
The World
Oct. 22 2014 2:05 PM Paul Farmer Says Up to Ninety Percent of Those Infected Should Survive Ebola. Is He Right?
  Business
Business Insider
Oct. 22 2014 2:27 PM Facebook Made $595 Million in the U.K. Last Year. It Paid $0 in Taxes
  Life
Dear Prudence
Oct. 23 2014 6:00 AM Monster Kids from poorer neighborhoods keep coming to trick-or-treat in mine. Do I have to give them candy?
  Double X
The XX Factor
Oct. 22 2014 10:00 AM On the Internet, Men Are Called Names. Women Are Stalked and Sexually Harassed.
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
  Arts
Brow Beat
Oct. 22 2014 10:39 PM Avengers: Age of Ultron Looks Like a Fun, Sprawling, and Extremely Satisfying Sequel
  Technology
Future Tense
Oct. 22 2014 2:59 PM Netizen Report: Twitter Users Under Fire in Mexico, Venezuela, Turkey
  Health & Science
Bad Astronomy
Oct. 23 2014 7:30 AM Our Solar System and Galaxy … Seen by an Astronaut
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.