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Study On Poverty And Inflation Offers Useful Insights Beyond Housing Prices

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The Atlantic has a post about an inflation study with a headline that caught my eye not because it was inaccurate, but because it states the obvious as if it was a shocker. The headline I saw on my news feed was, “Even inflation is worse if you’re poor, analysis shows.” Wow. I thought poor people were able to enjoy at least some inflation now and then, but doggone it, even that’s out of reach too! When considering rising housing prices, it is important to look at the costs of other things people who have less money have to buy. The conclusions of the study are important, even though the Atlantic article, or at least the headline, misses the point. 

The study released by the Center on Poverty and Social Policy at Columbia University is titled, “The Costs of Being PoorInflation Inequality Leads to Three Million More People In Poverty.” Even that headline is a bit confusing. Inflation is inflation; prices go up when goods are scarce and those prices are the same for people whether they are rich or poor. In one sense, there is no way in which inflation is different, that car for example is $15,245 but what’s different for a poor person is that he has fewer dollars compared to someone who is wealthy. That’s not worth writing a report about; it’s just a fact about poverty. 

But the study makes a good point, one that John Maynard Keynes makes in his General Theory, about the uneven way that wages and prices interact. Keynes in the opening pages points out the difference between money wages and real wages; money wages is the money in a person’s paycheck, but real wages the buying power of those wages. When it comes to housing, the enemy of poor people isn’t the greed of landlords but the lack of supply that stokes higher prices.

The study does what Keynes suggests, “a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages.” The authors looked into retail data from 2004 to 2015 and found that, “prices for goods that wealthy people buy are actually decreasing relative to the prices of goods that lower-income families purchase.”

The report is suggesting that prices for things that people with less money spend more of dollars on are going up. 

“Price changes faced by the poor may be fundamentally different from the prices and price changes faced by the middle class, which in turn may be fundamentally different from the prices and price changes faced by the rich.” 

As I have pointed out before, quantitative measures don’t always align with the way the economy feels. Measures other than nationwide inflation or production work like an economic “wind chill factor,” tracking how lived poverty is worse that what is on the national economic thermostat. It always makes sense to challenge measures. When it comes to housing, there is lots of talk about a “crisis,” but there is no quantitative measurethat tells us how to measure a crisis. We need something better than hype. 

I am dubious of the conclusion the report makes that, “companies have increasingly catered to families with high incomes, driving down prices for the goods they buy, and further increasing real income inequality.” Intuitively, if not quantitatively, it seems that rich and poor alike buy most of the same basic items. Yes, rich people might buy more organic spinach than a poor person; but isn’t that a classist assumption? Wouldn’t it be possible that a person who makes less money might be willing to spend more on higher quality food too? 

I have urged using a residual income model for measuring housing affordability and so I appreciate what the study is trying to do, measure how much prices and lagging wages are really affecting people with less money. This kind of methodology might show that while a household is getting a housing subsidy, life is still a struggle because prices for other things are getting higher. 

I’ve pointed out before, a family taking home $19,000 a year with a new baby “might spend as much as 7 percent of their gross monthly income on diapers. Is that too much, just right, or too little. The bureaucrats have yet to establish a normative standard for what families should spend on diapers.” This overall problem of having less money is why cash is more sensible than building a few expensive units with a fixed rent; a cash benefit allows households to manage their all their expenses based on price.

Poorly written headlines aside, the study offers a look beyond housing prices to consider other necessities with rising prices. Even if local governments took their foot off housing supply, it is important looking at all the other ways inflation consumes stagnant wages of people with less money.

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