The affordability crisis looms large in today’s policy discussion. Is life becoming less affordable? If so, what can government do about it? And could the poverty line really be $140,000 a year?
I will apply economic statistics, which are aggregates. Aggregates do not reflect the economic conditions you face. The Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS), tracks over 8,000 prices. The prices of the things you buy could easily increase more than the CPI.
Prices do not increase equally across the nation. Over the twelve months ending in November, prices rose 2.2 percent in the South region versus 3.0 to 3.1 percent in the Midwest, Northeast and West. The inflation rate over the same period for 28 metro areas ranged from 0.7 percent to 4.5 percent.
Still, the CPI is valuable. Psychologists warn that humans are vulnerable to confirmation bias; we might remember the rising prices and forget those which fell. The 2.7 percent increase in the CPI over the past twelve months provides an objective baseline. Inflation, the rate of increase in overall prices, has slowed since 2022.
The statistic best measuring affordability is real or inflation-adjusted income. Real household income has continued to grow, although slower since 1975 than after World War II.
Valid comparisons since 1945 require two adjustments. First, the U.S. household size has fallen, due to factors like increased divorce and later marriage. Second, benefits increased from 13 to 30 percent of total compensation, making total compensation and not just wages relevant.
With these allowances, real compensation increased 49 percent between 1975 and 2015. This is down from the44 percent between 1957 and 1974, but still healthy growth.
Real income, however, did poorly under President Biden. Analysis from Unleash Prosperity shows that real median household income grew $550 under Biden versus $6,400 during President Trump’s first term. Households at the 25thpercentile of the income distribution – lower income households – saw real income fall during these years.
What about the cost of big-ticket items like housing, energy, and healthcare? We live in a world of scarcity. Producing goods and services uses scare resources. No government can repeal scarcity, and disguising high prices due to scarcity using tax dollars does more harm than good.
Governments – from cities to Washington – significantly increase the cost of housing, energy, and healthcare. Economist Enrico Moreti’s research shows that restrictive zoning boosts housing costs. Government pays for 45 percent of healthcare through Medicare and Medicaid and highly regulates the sector. State renewable and green energy policies increase electricity rates.
Financial analyst Michael Green argued in a November Substack post that the poverty line for a family of four may be $140,000 instead of $32,500. Mr. Green identifies, What Mr. Green calls participation costs in today’s economy are one source of financial stress for many American families today.
Consider his example of phone service. In the 1950s, a landline phone cost $5 a month, or $58 in today’s dollars. Today families need smart phones and cell service for work, banking, doctor’s visits, and basically life. Cell phones and service run $200 a month, with no $58 a month option.
The biggest participation costs arise when a second spouse works. These include daycare and a second car. Taking his cars example, the least expensive new car model increased by a factor of ten between 1955 and 2025, which is basically inflation. Needing a second car doubles costs. As Mr. Green observes, participation costs absorb much of a second income.
Economic statistics cannot describe every American’s circumstances. Assessing affordability is complicated. Hopefully the brewing political pressure can be focused on government policies unnecessarily impacting affordability. We should also be aware of how rising participation costs create affordability pressures for many Americans.
