The Great Antidote

Jeremy Horpedahl on The Real Cost of Thriving Index

September 15, 2023 Juliette Sellgren
Jeremy Horpedahl on The Real Cost of Thriving Index
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The Great Antidote
Jeremy Horpedahl on The Real Cost of Thriving Index
Sep 15, 2023
Juliette Sellgren

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Jeremy Horpedahl is the director of the Arkansas Center for Research in Economics and an associate professor at the University of Central Arkansas . Today we talk about American Compass’s Cost of Thriving Index (COTI), what it says and why it is wrong.

The COTI shows that Americans today have a higher cost of thriving than ever before, but in a paper with AEI’s Scott Winship, Horpedahl corrects the index and shows that the cost of thriving has instead decreased. Some of the corrections are essential to the average American’s life, for example accounting for changes in taxation in the past few decades. Listen in to hear more about the cost of thriving today, why it has decreased, and how I cannot pronounce COTI for the life of me.   

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Jeremy Horpedahl is the director of the Arkansas Center for Research in Economics and an associate professor at the University of Central Arkansas . Today we talk about American Compass’s Cost of Thriving Index (COTI), what it says and why it is wrong.

The COTI shows that Americans today have a higher cost of thriving than ever before, but in a paper with AEI’s Scott Winship, Horpedahl corrects the index and shows that the cost of thriving has instead decreased. Some of the corrections are essential to the average American’s life, for example accounting for changes in taxation in the past few decades. Listen in to hear more about the cost of thriving today, why it has decreased, and how I cannot pronounce COTI for the life of me.   

Never miss another AdamSmithWorks update.

Follow us on Facebook, Twitter, and Instagram.

Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliette Sellgren and this is my podcast, the Great Antidote named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www Adam Smith Welcome back. There's been a lot of talk recently about the condition of America, or questions then attempts to answer them like, are we really better off now than at other times in history? Isn't there that article that says that my generation, the Zoomers, are going to be the first to be worse off than our parents today on July 7th, 2023? I'm excited to welcome Jeremy Horpedahl to figure this out. Jeremy is the director of the Arkansas Center for Research and Economics and an associate professor at the University of Central Arkansas. Welcome to the podcast.

Jeremy Horpedahl 

Thanks, Juliette. Glad to be here.

Juliette Sellgren

So before we get started, what is the most important thing that people my age or in my generation should know that we don't?

Jeremy Horpedahl (1.16)

I think for me, as I've become a little bit older, the thing that I found has been very useful that I didn't think before was it's really important to cultivate a good relationship with your parents. And I think there's a number of ways you can even force yourself to do this, but I think for a lot of people, including myself, we found doing a weekly phone call with your parents at a minimum is really helpful. I think this is something that is useful in a lot of ways. It's something that though you do have to work at, I mean all relationships you have to work at to build them. But this is something I didn't realize when I was younger. When I was in college, I didn't do that weekly phone call with my parents. This wasn't something I discovered until a little later in life.

But I think exactly how you build that relationship with your parents will be up to you. But I think it's really important to build that relationship because you'll find as you become an adult that this is actually one of the most important relationships you have in your life, both for understanding where you came from and your background, but also for helping you as you start to go through all the same life moments as your parents did. So my one piece of advice to young people is call your parents once a week. I found that Sunday night is a great night to do it. There's usually not any social events in your calendar. It's a great way to end one week and start the next week. And it doesn't have to be a whole long thing, just call 'em some nights is five minutes, some weeks it might be a half hour, but cultivate that relationship with your parents and I think you will find as you get older that this is extremely valuable and rewarding thing to do for both you and your parents.

Juliette Sellgren (2.53)

This is great and it's also such an original new piece of advice. I love asking people this question, but this is kind of the first time in a while where I've been truly surprised, serendipitously surprised, if I'm using that word correctly. 

Jeremy Horpedahl 

Also, start saving when you're young. There's another piece, right? I'm sure you've heard that one before, but yeah.

Juliette Sellgren (3.14)

We've done whole interviews on that one, but I still struggle. So it's good to be reminded. It's easy to spend when there are a lot of things you like in the world. So let's jump in. You and AIE’s Scott Winship recently wrote a report at the American Enterprise Institute called The Cost of Thriving has Fallen: Correcting and Rejecting the American Compass Cost of Thriving Index. It's kind of a mouthful of a title, but it encapsulates a lot. Can you first place this paper in the current debate that's taking place on the right and can you also tell us what the cost of Thriving Index is and what it measures?

Jeremy Horpedahl (3.57)

Yeah, absolutely. So as you said, there's a lot to get into here, but the cost of Thriving Index is a measure that was produced by Oren Cass at the American Compass think tank. It's an attempt to look at how people are doing today compared to 1985. And as you said, I was looking back at the past, when do you start? Why he started in 1985, and I think that's just based on the data availability from what he wanted to look at. It's also roughly one generation, so we're kind of taking that as given. But he produced this index from 1985 to 2022 and what his index, the headline result of that is that for five measures of things that people would want to buy, things like healthcare, education, transportation, food, that the cost of those goods according to the index that or Cass has produced, it is impossible for the median male worker to buy those today.

In other words, you would have to work 62 weeks in a year to buy them. And of course, as we all know, there are not 62 weeks in a year. There are only 52 and or Oren Cast says that today it's impossible to buy these five goods at the median male salary, but in 1985 you could buy them. In fact, it would've taken about 40 weeks of work, four zero. So 40 weeks of work to buy these in 1985 and today, 62 weeks for the median male earner and meeting, of course, that is impossible today, and that's gone up quite substantially. That's a 50% increase or so since 1985 in the cost of what he calls thriving. So this index he puts out just to contextualize it comes in among this debate about is this generation better off than the last one? Are wages keeping up with inflation?

Are wages keeping up with measures of price increases? And there have been lots of papers that have tried to look at this, lots of different ways of trying to measure it. One of the big things that he does that's different from a lot of other papers is instead of using a standard inflation adjustment, which I'm sure you've talked about on the podcast before, he says, let's not do that. Let's just look at the actual prices of the goods in 1985. And these are food, transportation, housing, healthcare and education. Let's look at the actual cost for those in 1985. See how many weeks it takes the median male to buy them, and then let's look at the actual price of them in 2022 and see how many weeks it takes to buy them. So then we don't need to do any inflation adjustment. It doesn't matter to use the CPI to use the PCE to use whatever else, it doesn't matter because looking at the number of weeks, I actually do like this approach in a number of ways.

I use this time to buy things in a number of other analyses that I've done. So I don't think that that part of it is necessarily wrong, but I think there are a lot of problems with it. As you mentioned in the mouthful of a title we have, we think that there's a lot of corrections that need to be made, and I think there is also a fundamental problem with the approach he's taken, even if I think there is a lot of value to what he did and looking at it this way. But I think ultimately he's wrong. And in our paper we show again, our headline result is that actually the median worker today could purchase these. It takes about 45 weeks of work, and that's actually slightly less than it was in 1985 after making our corrections, we found it's fallen by about one week worth of work at the median, and that's not accounting for any sort of quality improvements in the index scoring cast says, I want to ignore those.

Those are important, that goods are better, that houses are bigger, but still you have to buy what exists today. You can't go back and buy the lower quality good from 1985 because those maybe just don't exist. You have to buy the houses that are available today. You have to buy the healthcare that's available today. So the quality adjustments Q says, for the purposes of this index, we're going to ignore them and say, you want to buy a minivan today versus a minivan in 1985? Well, that minivan's a lot nicer today, but maybe if you can't afford it, that's not so great. Maybe you would like a one that doesn't have all the fancy features that it has today. Because if you really truly could not afford it, if the median worker could not afford it, that's really bad. That means for someone who's below the median, of course it's even harder. So that's kind of where this fits into this debate, and those are the headlines of what he says and what we say. I've already thrown a bit of numbers at you, so I think for readers it might be helpful to pull up the paper that we've written while you're listening this if you're not jogging or whatever, but to see all the data. But he says there's been about a 50% increase in the cost of thriving over this time period. We say it's actually fallen slightly even without doing any sort of quality adjustment.

Juliette Sellgren (8.56)

And we're going to get into inflation adjustment and all of the different adjustments that you made and in final, the rejection. But first I kind of want to get at this question of what is the cost of thriving? I know I haven't been around that long, especially in the think tank academic econ space, but I have never heard of that. What is this notion? Is it new? Is it replacing something else? Is it something we should have?

Jeremy Horpedahl (9.26)

Yeah, so he's, of course, Oren Cass is trying to have a different approach. So he is got to give it a new name and cost of thriving. The closest thing that he's kind of playing on here would be the cost of living, right? This is a phrase that you've probably heard many times it's used in the popular press. What's the cost of living? How does that compare to the past? But the thriving, the reason I believe he's using that word is he says, well, we don't just want people to live. That sounds just like you're getting by. You're barely alive, right? You're not dead. We want people to thrive. We want people to do well and to thrive. He would say that first of all, you should be able to buy these five core basic things, and also it shouldn't consume all of your income because you want some of your income to go to other things, the pleasures of life.


So for people to truly thrive, we need to be able to buy these things, these basic goods and services, and then not spend all of our income doing that. Also kind of built into this is throughout his index, he just uses median mail earners, so that's going to eliminate the possibility of dual income households. I think what a lot of conservatives and many on the left as well are concerned about or think might be true is that today you need a dual income household to support a family. And you would say, and they might say, well, that's not really thriving, if that's necessary, I think most would say, well, that's great if a family wants to have a dual income and then have more money to spend on lots of things. But if you can't even support a family with one income, that's a problem, and maybe we should try to address that with public policy. So thriving in this index is an attempt to put a new spin on an old idea of the cost of living, but to think about it in a way that is unique and may add something to this debate, which has been ongoing for a long time.

Juliette Sellgren (11.20)

Okay, so this is maybe a silly question. What do you refer to it as in passing? Is it the COTI?

Jeremy Horpedahl 

I call it, COTI but I guess I think that's how he refers to it, or Cass who created it. So I just go with that

Juliette Sellgren

Or the Cass Index.

Jeremy Horpedahl (11,42)

Yeah, Cass index. But yeah, we debated. I mean, it's just all on paper, right? How do you pronounce someone's name if you're just reading it? But that's when I refer to it on audio. Kota is how I call it, but whatever

Juliette Sellgren (12.02)

You want. My biggest irrational fears pronouncing things wrong, as I mentioned to you earlier. Okay. So I kind of want to look at this broader question that I'm starting to kind of understand, learning a lot about economics and kind of dealing with the policy implications of the way the economy is doing and how people care about that and gauge that. But for people who aren't as deep in the econ, why on earth are economists so obsessed with indices? Why are indexes indices? I don't know. I feel like indexes makes more sense to me, but I know that that's wrong. I don't know. Why is it so important? Why is that the method?

Jeremy Horpedahl (12,49)

So for a lot of things, we're trying to measure things over very long periods of time, and developing an index that tries to consistently measure something over time is something that economists spent a long time doing, particularly for the 20th century. There's a book, I forget the authors, but they wrote a couple of years ago and they titled it the First Measured Century, and it was about kind of the economic history of the 20th century. We have all this data. People have been collecting data since we have as far back as we have writing. But the 20th century is the first century went about lots of things, economic things, health things, education. We tried to measure things, but if you want to compare, have things gotten better over time, how much better have they got? You need some sort of index to consistently measure something over time, and what goes into that index?

Of course, as we're talking about this specific one here, what goes into that is going to in some ways drive your results, which is why you want to carefully explain to people how you constructed it, and then other economists or other researchers can either accept or reject your index. But that is what we're trying to do. So the most common one, which your listeners are probably very familiar with is GDP, Gross Domestic Product. Officially, we don't start measuring this until the 1930s, but economists have then constructed indexes which go back before that. So they're say, well, what if we were measuring this in not just 1929, but 1829? Can we develop an index which consistently measures this over time? And as with anything in academia, there are a few people that specialize in this and dedicate their life to making that measure as good as possible.

Then for the United States, there is kind of a consistent index for gross domestic product that goes back to 1790, an annual index that goes back to 1790, that we can then say roughly today, gross domestic product per person adjusted for inflation. We've got an inflation index that goes back to gross domestic product per person adjusted for inflation. Today is about 20 times higher than at the start of this country, 20 times two zero, not 20%, 20 times greater. We can only say something like that if we have these indexes, an index for gross domestic product, an index for inflation adjustments, and of course an index for population, but population, we actually have fairly good data going back to 1790. So by developing these indexes, we hope we can say something about the past, and then as we zoom forward though to the last 40 years or so, we want to say then, okay, we can definitely say we're way better off than 1790, but are we better off than 1985?

We need some sort of index to measure that. If you use a standard measure like gross domestic product per capita adjusted for inflation, we're a lot better off. It's maybe double or so when it was in 1985. If you look at something like even median family income, this hasn't doubled since 1985, but it's up about 30%. Even if you look at median family income for families with just one earner, that is also up about 20% since 1985. So lots of measures suggest we're better off than 1985. How much better off? Well, it depends on the index that you want to use, but his index is one of the kind of major ones that has come out saying that we're not better off. So we developed these indexes to try to understand the past, but also to think about carefully public policy. Is public policy supporting this growth?

Is it public policy hindering it? Does public policy not matter in some cases? That's another thing we're trying to do with these indexes. And then we need an index to measure public policy. So we have measure indexes that measure things like economic freedom. There are several indexes which measure those things because when we say policy, right? You've talked about public policy a lot in your podcast, but how do we quantify that? How do we compare that across time? How do we compare that across countries? We need some sort of consistent way to measure it, and that's what economists call an index.

Juliette Sellgren (17.00)

I like that you've made it make a lot more sense.

Jeremy Horpedahl 

Well, good. 

Juliette Sellgren 

I don't know why this is not more in the forefront of teaching about economics personally. Maybe that's just my personal take. You've kind of mentioned some of the stats about how we're doing compared to COTI. I still can't do it, but what are the other major indices we use and how do they compare making this comparison more clear, I guess?

Jeremy Horpedahl (17.31)

Yeah, so I mean the most common measure to use because it's readily available every year for every country is gross domestic product per capita. That has a lot of good features to it. It's also not the only one we want to use. First of all, it's an average. So as you know, a median in some cases might be better or at least some indication of the distribution. An average could be pulled up by outliers can also be pulled down by outliers, but it's more likely to be pulled up. So various measures of median earnings. So we have median hourly wages, we have median weekly wages. That's the one that's used in COTI median weekly wages. We have median household income, median family income, and we might start to say, well, what's the difference between a household and a family? We can get into that a little bit, but the basic difference is that a family is a group of people living together that are related, and a household is a group of people living together, whether they're related or not, including a household could be just one person, a family in the way it's defined by the Census Bureau cannot just be one person.

So we have these different measures, which sound the same in casual conversation. You might interchangeably refer to families and households or wages and income, but there are lots of different ways we try to get at this. If you go back to 1985 and you use most of the standard measures of inflation, all these measures are higher than they were in 1985. Some show more growth than others, but it's hard to find an index up until this one came out that suggested that families are worse off, especially as he says, being 56% worse off than a 1985. 

Juliette Sellgren 

That's a big number, especially we have Netflix nowadays. I'm sorry, that's a big deal for me. Right?

Jeremy Horpedahl (19.23)

No, no, but what he would say though, or Cass, I think, I don't want to put words in his mouth, but I think what he would say is that, well, yes, but now families feel like they need to buy Netflix, right? A family in 1985 wouldn't have felt like they needed to buy Netflix. It didn't exist. And that just makes it harder today for parents to support a family because their kids want Netflix and their kids want a cell phone, and their kids want the minivan with the heated seats, and they want the things, and that's a reality for parents. And part of parenting is trying to tell your kids no sometimes, but the fact that we have all these things, Oren Cass, again, don't want to put words in his mouth, but he has clearly said that yes, the standard of living is better today.

We have better stuff, it's higher quality. But what he says is, but also it is harder to buy it for a single earner family. So yes, I think he would agree. Netflix is great, that it's great that we have these things and a cell phone. Think about a cell phone. At some point in history, it didn't exist at another point in history, it was kind of a luxury. Now, it is somewhat of a necessity. If you want to get a job, hold a job, be in communication with friends, it's almost a necessity today. So that's not in the index that he's produced, but he would say that you need some extra income to buy these things, which are becoming necessities, and that's just harder and harder to do.

Juliette Sellgren 

But there's also stuff like flying cars where when Back to the Future came out, we all wanted a flying car and we don't have them still. And most people, I don't know. I don't think about it super often, but I would say if I had the choice to have a flying car, I would probably want one

Jeremy Horpedahl 

Or at least want the option,

Juliette Sellgren (21.11)

Right? And so I don't know, it just seems almost like a little bit of a superfluous argument where it's like, well, I want it because now I can have it. Well, hypothetically if it existed, you wanted it when it didn't. I don't know. I don't know if that makes sense.

Jeremy Horpedahl (21.28)

No, it does make sense. And flying cars and cell phones are not in his index, but I think he would say that for the best, whatever the best technology is today, people feel like they need it. In many cases, you can't go buy the old one, so you can't go by, in many cases, people talk about in housing, the missing middle, if you've heard of this concept, the missing middle is the types of houses that families might've bought in 1985 or 1965, the size of those houses. It's just not available. Many of the cases that's due to zoning regulations and other policy measures. But that's something that houses are bigger today, but if you want to buy a new house or a new house that's been built in the last 20 or 30 years, the size of houses you might want, they're all bigger than a lot of people want. So some cities and counties are trying to address that by modifying their zoning rules. But he would say that, yeah, it's great the houses are bigger, but wouldn't it be nice if there was an option for a more modestly sized house? And to that, I would agree. I wish there were more options, but I think that you do need to say the houses are bigger. Of course, they're going to cost more. And so we would argue, Scott Winship and I, that you need to address that in some way.

Juliette Sellgren (22.46)

Yeah, no, this is a good point. Something that I just started thinking about is that, I mean, it's been a thought that I've been having is that as a young woman that's entering the labor force, I'm kind of baffled by the current obsession about the state of male workers and the idea that the American dream is achieved by having a full-time male worker supporting the family. And I know there are alarming stats about male workforce participation and deaths of despair and awful things like that. But I would think that we've moved past this idea of the American dream being dependent on a one income earning household, and that income earner will be a man. Obviously, if that's your choice, I respect that, and I think you should be able to have that. But I guess why is that the focus of COTI?

Jeremy Horpedahl (23.52)

Well, I mean, that is a great question and that is a question that we push on in the paper. So one of the additional corrections in addition to correcting the data, which maybe we'll get into a little bit, but is we say, well, you got to include women too, and you got to include those median female earnings. Now we're still saying just look at just a single earner family, but you got to look at how much women's earnings have increased. They've actually increased a lot more than men have since 1985. They started from a lower level. So that is one of the corrections we make in the index is to include both male and female workers as well as to include, he only includes workers 25 and older. We say, you got to include all workers as long as they're a full-time worker, right? There are some 18 year olds supporting a family.

You got to include them too. So one of the corrections we make, and this is agreeing with you, that we should be thinking more broadly than just about male workers, is we include all workers that are full-time workers, both men and women, young, old, as long as they're full-time worker, we include their wages in our calculation. But I think your question broadly is very good. There are a lot of concerns, I think about male workers, but it does seem to get a lot of coverage today as we're recording this. On July 7th, 2023, the Bureau of Labor Statistics just released the latest monthly update to employment data, and today, the employment of population ratio for working age women is the highest it's ever been in US history today. Of course, it's been increasing throughout the 20th century, but it kind of leveled off about 20 years ago, but lately it's been increasing again, and so it's the highest it's ever been.

We have more working age women that's 25 to 54 more working than ever before. Now for men, it has fallen since 1985 or it's been falling actually for longer than that. And so for men, it's not at a historic high, and I think there are reasons to be concerned about that, but I think that a lot of what's happened is that women have now, thanks to both social and political changes, have been able to work and earn a good living and work in the same types of jobs that men traditionally used to hold. And so that means that some families choose to have the woman be the only worker. Some families choose to have the man go back to college, so they won't be in the labor force a period of time. So the decline in the American male worker is something which gets a lot of press. It's been studied a lot, and I think there are a lot of concerns. You mentioned deaths of despair that primarily hits men at working age. So there are a lot of concerns, but I do agree with you that we got to consider women in this picture, especially since there are a lot of women supporting families, either as single mothers or as married couples, or only the woman is working, and we need to include that in the analysis, and we try to include that by broadening the said workers that we look at.

Juliette Sellgren (26.56)

So this is one of the things that you and Winship take into account. What else is kind of inaccurate or outdated or wrong about the way that COTI works? You mentioned the ignorance of inflation adjustments. Could you kind of explain that in a little bit more depth, possibly in a way that listeners who aren't versed in the absolutely fascinating measurement debate will understand?

Jeremy Horpedahl (27.27)

Yeah, no, absolutely. Yeah. So I mean, there are some technical things we do, but lemme give you a few examples that we think are just clear errors that need to be corrected. So number one is healthcare costs. So yes, healthcare costs have increased a lot since 1985. I think we all know this. We also know that healthcare is a lot better. A lot of the procedures that are available today, a lot of the drugs available today just didn't exist in 1985. My brother recently got a double lung transplant. He was born in 1986. That procedure was developed in 1986. The first successful double lung transplant was the year he was born. If he'd been born a generation before, that procedure was just not available. So healthcare is a lot better and more expensive, but how do we measure it? Right? You got to buy it.

You can't buy the healthcare of 1985 if you've got to buy the healthcare of today. One of the major areas we think that he makes or in Cass in his report is he includes the full cost of healthcare, including the part that your employer pays, right? So for most people, the way you get your health insurance is you get through your employer, you pay a part of it, and your employer pays a part of it. He's subtracting both of those from your wages. But the part your employer pays, it doesn't come out of your wages. It may affect your wages, right? If your employer is paying you healthcare, they may not pay you as high wages as if they weren't giving it to you. I think there's strong evidence of that, but we shouldn't additionally subtract it from the wages. This is not something that when you get your paycheck every week, they don't subtract the part that they pay that's already baked into your wage.

So we say that he's essentially, because for most people it's a 50-50 split for your employer, roughly, he's essentially doubling the cost of healthcare. And that means not only does it look higher and more expensive today in his calculation, but that means he's dramatically overstating how much it has increased over time. So the number of, he likes to put it in this index in terms of how many weeks would it take to buy these various things. There's a dramatic overstatement of how many weeks it would take of earnings to buy your annual healthcare costs. Again, healthcare is expensive. It has gotten more expensive over time, but by making that one correction, that causes a big change. So we say, yes, you got to include healthcare. You got to include what it costs today, but you shouldn't also subtract what the employer pays. That just didn't make sense to us why he's doing that.

Another one, education for anyone. What he uses in the index is the cost of public. Four year college uses the average cost for public four year college and then looks at saving for that over a number of years. What he does, the error though there is that for anyone who has looked at college or gone to college lately, knows what we call the sticker price, the list price of college. Virtually no one pays that. The list price of college before scholarships, Pell Grants, institutional aid, all these other things that subtract and reduce the cost of higher education. We understand this is a very complicated thing if you are shopping for colleges to know what it's going to actually cost. But if we look at what it does actually cost, and we look at what's called the net price, that is after subtracting all the AIDS students get on average, and we do that for both 1985 and 2022.

We also find he has dramatically overstated the increase in the cost of getting a college education. So that is, again, college is expensive. You're in college, that the price of college has gone up a lot, but by not accounting for all the aid that's available today, and we're not talking about student loans, we're talking about actual aid that reduces the price of college for you. When you include that, it's much lower than it looks like if you just include the list price. I'll give you one more example of something in this case, which he doesn't include at all, but we really think he should have, and that is the cost of taxes. So taxes of course, are a very important part of you thinking about the things that come out of your paycheck. Healthcare comes out, but taxes come out too. So we got to look at how much taxes are.

So we say, well, in some sense, maybe you didn't take out enough stuff. Maybe it actually takes more weeks to thrive because what's the cost of taxes? But a very important part of the picture for taxes from 1985 to 2022 is that the taxes that a middle income family with children pays, those taxes actually have gone down a lot since 1985. I think a lot of people might not realize this, but there have been a number of major tax changes since 1985. There's a big tax reform in 1986, which lowers tax rates. But the biggest thing actually driving this all is there's something today called the child tax credit, which if you don't have kids or you don't study this, you probably have never heard of. But if you do have kids, you very much know about this. This is a $2,000 per year credit that families with children get.

So for a family with two children, that's $4,000 year that the federal government gives them. Now, I think it's useful to debate how effective is this, is that the best use of taxpayer money and so on and so forth. And there's a lot of debate about this, but we say, you've got to include this. Credit did not exist in 1985. If we're talking about public policy, that'll help families. It does exist today, and this greatly lowers the cost of taxes. It's actually pretty dramatic if you look at the dollar. So for the median male earner, the wage that he wants to use with two kids, a married median male earner with two kids in 1985, they paid $3,700 in taxes. In 2022, they paid almost the exact same amount, $3,700. They might say, oh, well, that's the same, but no as a percent of their income, that's way lower.

I haven't adjusted that number for anything. It's $3,700 in both years. Federal taxes including payroll taxes and federal income taxes, taxes are, they kind of froze them essentially. I didn't really do that, but it ended up working out that way that they did that. So Cass doesn't include this at all in his index. It's a big change. That tax, that $3,700 was a lot of money to someone in 1985. So you got to include that. And so one of our corrections that we say you got to include, this is taxes. And he actually has, I mean, we've talked with him about this a number of times, but he has said, yeah, he has admitted I made an error there. In our next version of the index, we will include a tax calculation. So this is how this academic conversation can hopefully make these indexes better as people put them out to the world and get feedback and hopefully make the next version better.

Juliette Sellgren (34.15)

That's awesome. Another problem though with the original COTI, I'm going with it now, is that there was cherry picking of items that have become more expensive over time. So can you give us some examples of where that's the case?

Jeremy Horpedahl 

Yeah, absolutely. So again, the items are food, transportation, housing, healthcare and education. If you look at, and there are lots of nice charts you can find online in this. If you look at what categories of prices since 1980 or 2000 have gone up, the big ones are things like housing, healthcare, and education. These things have gone up a lot and people know it and people feel it. Food and transportation haven't gone up as much, but those are a smaller part of the index today that he's produced than the other items. Housing and healthcare are by far the biggest, constituting over half of the cost that he's looking at. He's only, not only, but he's primarily including the cost of things that have gone up. The nice thing about something like the consumer price index, which is a measure of inflation, the most commonly used one, the nice thing about it is it includes everything.

It includes the things that have gone up and includes the things that have gone down. So by narrowing in on these five items, which sounds good, I mean these sound, these are the things that people need to live right by only including primarily items that have gone up in price, he's ignoring the things that have gotten cheaper and what has gotten cheaper. Well, the things that primarily have gotten cheaper are goods, consumer goods. So he's included food and transportation, but all the other goods, electronics, household items, clothing, think clothing's a necessity. You should have at least included that. So by not including all these goods, which have gotten a lot cheaper since 1985, some of them even cheaper in nominal terms, like a TV today in nominal terms is cheaper than 1985. If you look at entry level base model TV that a middle class family might buy, they're actually cheaper than 1985.

Right Now. People say, oh yeah, TVs are cheaper, but healthcare is more expensive. Well, yes, but the point of the CPI is you include them, all, right? You include all the things that people buy, you weight them for what percent of the average family's income goes for these things. And that's why economists like these things. The consumer price index or other things, like there's something called the personal consumption expenditures price index. That's another commonly used one, and there's some differences in them. But the key here is we're going to include all the things people buy, not just five things we've selected. It sounds like, well, it sounds like these are the important things to my life. So I think that is a fundamental problem with the index. And in our paper, we not only do the correcting of what we think his index should be, so change the numbers where they're wrong or where we think they're wrong, but also we ultimately kind of reject this approach of just focusing on these five goods because if you only focus on the things that get more expensive, well, it looks like life's gotten harder. It looks like it's gotten harder to support a family, but you got to include the things that have gotten cheaper and then take the full picture of what's going on. But

Juliette Sellgren (37.27)

It's also, and I know I dropped the ball on this earlier. I was a little preoccupied with this kind of more existential question in my mind of what do they think about me as a woman and where my job is going to go? And it does worry me a little bit the way that that narrative goes. So I jumped ahead to that thoughts, but on the question of housing, it has gotten more expensive, and obviously there's this question of the missing middle, but what we forget is quality, and especially if COTI doesn't take into account quality changes, then I guess what are we taking for granted?

Jeremy Horpedahl (38.07)

No, absolutely. And other ways to look at this. So other people taking a similar approach, I've done this too for housing and said, okay, let's look at the cost to buy a square foot of housing, right? Adjust it for square footage as well, because houses are, they're not twice as big as 1985, but they're maybe almost a thousand square feet bigger at the median house, so that's a lot bigger. So if you look at cost and look at hourly wage or weekly wage, how many weeks of work does it take to buy a square foot of housing that's actually pretty consistent over time. So one of the things, this house has gotten bigger. They also have a lot more features. So it would be highly unusual today to build a house without air conditioning. It would be extremely unusual, especially if you're in the south, but I mean really anywhere in the country.

In 1985, they were still building houses that didn't have air conditioning, and some people got it after the fact, but that's something additionally you have to pay. So if we're looking at the cost of housing today, you have to look at what amenities are you getting with that? What does the house include? How big is it? Does it have air conditioning? Does it have a attached garage? All these sorts of things that we might take for granted today, right? You're not going to build a house today without air conditioning in a garage, and you're not going to build a house that's a thousand square feet. And maybe in some sense, we might wish that if some of that is due to zoning laws, we might wish that someone did have the option to do that, to build it, but we have to take account of the fact that houses just have a lot more things than they did in the past.

And if you want to try to ignore that, you're missing a big part of what it means for people's lives to get better. Part of what it means for someone lives to get better is okay, even if let's say wages were totally stagnant over the course of all American history adjusted for inflation, they haven't gone up one bit. That's not true. But let's say that were true. If everything was better though, if the food is higher quality, if the cars had airbags, if the houses were twice as big, we might say, yeah, we're better off. Even though adjusted for inflation, it looks like we're not better off the quality of goods and services. I mean, my goodness, services, healthcare, personal services, these are much better than in the past. And to kind of ignore those we say is a category error. It is just ignoring what we're trying to do when we think about improvements in people's quality of life, standard of living. If people couldn't actually buy that, if that were true, that would be a concern. If everything was just so good that no one could afford it, that would be a concern. That is not the case as we've tried to show the paper

Juliette Sellgren (40.59)

And something I think about with the fact that these things are more expensive, some of these things that cot looks at is I guess what needs to happen to make it decrease if that's what they want, if they want the cost of thriving to decrease, what needs to happen for those things like housing to become more affordable,

Jeremy Horpedahl (41.26)

We don't want, what has to happen is they have to get worse in quality. We don't want them to get worse in quality other than perhaps we might like them to be smaller. But I think I've mentioned a few times zoning and other land use reforms. This has been kind of an off the radar thing. That was a niche academic thing that a few people studied 10, 20 years ago. But zoning laws now with where a lot of cities are at in terms of how much they've grown is really putting price pressure on a lot of housing in a lot of areas. It used to just be like, oh, California housing's expensive, can't build houses in California, can't build apartment buildings. Now it's spreading to almost every mid-size. Major city has this being a problem that people want houses of a certain size and quality, but if you want to be near to a city center, there's only so many locations that are near that.

And so traditionally, the way you have more people close to a city center is you have density, you have taller buildings, you have smaller lots, you have apartment buildings, you have less space available for cars. You might have mass transportation due to zoning laws, which were put into effect really a hundred years ago, where just now in the last 40 years, and especially in the last decade, really starting to see the effect of those. So on housing, we might say that one of the things that you need to do is to relax some of those laws. I mean, some might say just junk zoning altogether and start over, but certainly relax some of those to allow for more dense housing, which would allow more people to live in the places that they want to live at a price they're able to afford. Right? I live in Arkansas.

I can't tell you the number of people that sell anecdotal, right? I hate anecdotes, but I also love them. The number of people that moved to Arkansas from places like California recently, because they said, it's just so unaffordable there, and at least I can sell my house and I can come to Arkansas and I can buy a house for cash and still have a lot left over. But as lots of people leave California and people leave Oregon and people leave New York City, that starts putting price pressure everywhere. And we're really starting to see that in a lot of places that the price of housing is increasing everywhere. So that's one reform I would suggest. And I think one reform that probably Oren Cass would be amenable to as well. You think about education, that's another big one. That is the field that I'm in. Of course, I'm in the business of educating and trying to convince people to come to college, but I think there are a number of things we can do on education to reduce costs.

I think if you look at a modern university today, it includes a lot of amenities that a college wouldn't have included in 1985. The dorms are much nicer, the food is better. All this is a big part of the cost of college. But even ignoring housing and food, the cost of tuition has gone up too. A lot of that though is because education is kind of a weird business in that most of the money goes out to pay salaries. So really the way to reduce the cost of higher education is to either reduce the number of employees at a university or reduce how much you're paying them. This is a challenge, but I think it's something that a lot of universities are starting to look at, because I don't know if you've talked about this before in the podcast talking about education policy, but over the next 15 years, there's going to be a huge shrinking in the number of 18 year olds in the country.

That's just due to the fact that there were fewer people born 18 years ago. So every college in the country is thinking about this. Do we have too many employees? Did we build too many dorms when student populations were high? So I dunno if there's a public policy, fixed education, but I think a lot of universities are now seriously looking at this. How can we reduce our costs and how can we then pass that on to students? Because it is a competitive industry. There are almost 4,000 colleges and universities in the US and you can pick and choose wherever you want to go. So it's pretty competitive, and I think hopefully we'll see that level off. Healthcare is a big one. How do we get healthcare costs down? It's a great question. Again, in some sense, we don't want to, because we do want all the modern drugs, and we do want all the modern procedures.

But again, for healthcare, just like education, a lot of the cost is in salaries that you're paying people. And a lot of those, I'm going to have physicians banging on my door after I say this again whenever I say this, but physicians are just paid way too much in this country. If you look at our peer nations, even high income ones with expensive healthcare, they just pay doctors a lot less. And the doctors will say, but it's so expensive to go to medical school and you need this money to pay off your medical school debt. All that is due to much like housing. It's due to supply restrictions. So there's restrictions on the number of people that can get residency slots that are set essentially by public policy. There are restrictions on building new medical schools. There's lots of things that are constraining the supply of doctors, much like there are things constraining the supply of housing.

And so loosening some of those restrictions to get not only more doctors, but more nurses, more medical technicians. Again, we don't want to, we're not going to cut doctors' wages by 50% overnight, but if we can slow the growth of those wages over time in ways in which it's still affordable to be a doctor, in which case medical school gets cheaper, and things like that, focusing on how do we reduce the salaries? And to the extent it is Congress that is setting the number of residency slots, in a sense they are. You have to do it and Congress funds them. That's something I think would be, if you haven't done it yet, talk to someone who's an expert on that. I think that's a huge thing because it's such a huge part of what people spend money on, and it's such a huge part of what the government spends money on healthcare is that reducing those costs. The real big thing you have to do is, from what I've looked at in the data, is you just have to slow down the growth of salaries in healthcare.

Juliette Sellgren (47.52)

Interesting. I have talked to Michael Cannon, go check that out multiple times about the different ways that our healthcare system works and how they're all fighting against each other to make this mess that we have that's hard to understand and hard to pay for and all of that. But I haven't talked so much about wages, which I think is a good idea, and I will do that something

Jeremy Horpedahl (48.19)

I would trust Michael Cannon on this 100%. But yeah, I think that is another avenue to explore.

Juliette Sellgren 

I think something else, and this might apply to healthcare, but it definitely applies to education, is a lot of salaries in higher ed actually aren't even going to professors so much as they're going to administrators. I think at Yale, they have six to one administrators to students, or maybe it's the other way around. I don't know. There's an absurd amount of administrators that I can guarantee you probably don't need. And so I'm sure we probably see that sort of stuff everywhere. And so figuring out how to deal with this private administrative bloat, especially if the number of students consumers drops, that would be key.

Jeremy Horpedahl (49.05)

No, absolutely. And I think to the extent some of those administrators are there to comply with, say, federal laws, that's something where public policy could address it. Do we really need them, all these administrators to comply with all these federal laws? Maybe some you do, maybe some of you don't. But I think a lot of it is just private growth. When you've had the good years in higher ed, it's naturally you spend the money on something and you spend it on perhaps more. Not that everyone has to be professor at the university, we need support staff, but you spend more money on non-pro professor salaries. And I think there will be, though, over the next 15 years, this kind of natural process where schools are going to have to reduce that because that'll be the reality of you can't really sell back a dorm if you built the dorm. It's a capital investment. But do we cut a professor's job or do we cut administrators? I think if you want continue to have a college that delivers education, in most cases, you're going to have to say, we're going to cut the administrator. And so there will be, I think, somewhat of a natural process as colleges deal with this shrinking enrollment problem.

Juliette Sellgren 

So not to bring it back to this women thing, but to totally do that because not only does it really concern me and my future, but also, I mean, I don't know the exact percentage, but 50% of the population I feel like I can safely say around…

Jeremy Horpedahl 

A little more, I think. Yeah, a little more.

Juliette Sellgren 

Yeah. Especially if you think about colleges, the percentage of women to men is like there are more women than men in colleges compared to in America.

Jeremy Horpedahl (50.42)

And that's been true for, that's been true for over 40 years. This is not a new thing that happened just last week, right? It's been true for over 40 years that more women than men have been going to and graduating from college.

Juliette Sellgren

So when I was watching this event at AEI with Scott Winship and Oren Cass, they were talking about these measurement issues, and Scott said something that I have been thinking about and that I'm still a little confused about, which is that if Cass is correct, then the only way to reduce COTI is to reduce the number of dual income families. What does that mean? Why is that the case?

Jeremy Horpedahl (51.24)

Right? And Scott is my co-author on this paper, but I still don't want to put words in his mouth, but let me tell you what I think he meant by that, because we've talked about this point is part of what's going on with people buying bigger houses and such, and people being more likely to send their kids to a nice college. And so part of the cost pressure on those things is it demand side pressure? We've talked about the supply side pressures with housing. Those are the zoning restrictions. But the demand side is more people wanting to buy it as there are more dual income families. And as the dual income families have higher incomes, they're going to spend that on something. Their demand is one thing that's driving up the cost of housing. It's not just a supply side issue. So what Scott is saying with that line that you're remembering is that, well, if we say banned women from working, or at least we strongly discouraged it, so there were fewer dual income families, well, that would effectively reduce the demand for things like housing and education and so on.

And Scott is not at all suggesting this. He's saying this seems like an implication of the paper, is that okay, there's more dual income families, women are earning more, that puts more pressure on prices upwards because of the demand side. If you were to cut that back, well, you could reduce some of these prices and it might be easier for a male by himself to support the household. But that's not a world that I think anyone wants. And it, Scott kind of says it in jest. He knows that's not the world or wants, he does not. Neither of them want that, but that seems to be a kind of logical implication. Part of what's going on with things getting more expensive is well, people have more incomes. I mean, if you are doubling the number of women in the workforce, which kind of roughly happened over, I don't know exactly what time period, but over a 50 or 60 year time period, you've doubled the number of women in the workforce as a proportion of the workforce. Well, that's going to mean all that extra income's got to go somewhere. And as it goes somewhere, the price of things that they buy is going to go up. You could reduce that by reducing number of women that are working, but I think we all recognize that there's really no good way to do that. And also, even if you could, it's a dumb idea. So I think if that maybe clears up what he was saying there.

Juliette Sellgren (53.39)

Yeah. Do you think that this narrative or these ideas, do you think that that's something that I should be genuinely concerned about and just women generally, even men? I think that it presents kind of this new change, which is interesting because coming from conservatives, I don't know, is it something to be concerned about?

Jeremy Horpedahl 

I think of course it is. I think these issues are always important to think about. To maybe give another example. It seems a little off topic, but I think it's very similar. If you think about immigration either into the country or into a city, new immigrants into a city are going to push up the price of housing as they increased demand. We could say that, well, we can keep housing prices down by keeping out immigrants, but there are all these other benefits we're ignoring. There's lots of other benefits of immigration. It has this one effect on housing, but it has all these other benefits for us, including benefits that will increase our actual real earnings even though housing is more expensive. So I think to me, it's kind of a similar argument here that Winship was making about women is that yes, as more women are working and earn money that pushes the prices, but there are all these other benefits of women working socially, economically.

We just cannot ignore those. And so I think you are right to think about this and be concerned about it. And I think it's an argument that needs to be made, right? I think a lot of people do think that, well, one income, the male income should be able to support a family. If a family wants to have a woman working, that's great, and she should be totally socially and legally allowed to do that. But that should all be extra income that will spend on fun things. And I think that some people think that that's how a family's income dynamic should work. But I mean, I don't personally think that that's the way you should think about it. I think that first of all, working is about much more than just earning an income. The work itself is in many ways fulfilling not for everyone every hour of every day at your job. It's not always fulfilling, but I think in large part, people gravitate towards jobs that they find to be fulfilling. Not everyone, especially people from lower income and other ways, disadvantaged backgrounds might work jobs that they actually hate their whole life. But many of us increasingly in the world today are working at jobs that are beneficial for us and for our families in ways beyond just the economic part of it.

But I think you are right to think about how these things interact with the gender dynamics of family income too.

Juliette Sellgren (56.19)

I do think you point out a funny irony that it's often the left and the right more than, well, I guess that's a lot of the percentage of people, but talk about how work should be dignified and you should find purpose in your work. And yet there's this where work is not being treated as that, but instead a way to pay for life. I think that's an interesting tension that this brings up. And also, I'm not all that worried because here you and Scott Winship are correcting the record and fighting for economic flourishing. Thank you so much for taking the time to be on the podcast and for sharing your wisdom. I have one last question for you. What is one thing that you believed at one time in your life that you later changed your position on and why?

Jeremy Horpedahl (57.17)

So I used to think in my younger days of being interested in politics and economics, I used to think that you could convince people that you're right just based on some sort of intellectual argument. So for example, you could convince people to say, become a libertarian just by convincing 'em that taxation, theft, it's basically the same thing as theft. So therefore it's immoral because we agree that theft is immoral and therefore we should have much lower taxes and that you could convince people of this through an argument like that. I've, over time, through my own experience and observing others become increasingly convinced that that is not going to convince people, especially adults who are not already on board with your ideology. And I use libertarian because I'm a libertarian of sorts, but whatever your ideology is, I think convincing people that you are morally right about something is extremely difficult to do.

People come to their moral beliefs through a variety of channels, but they essentially get solidified at one point. They're really hard to change. So what I've shifted to, and this paper is an example of that, is trying to convince people based on evidence, trying to convince, if you want to convince people of a particular position, make an empirical case for it. An empirical doesn't have to always mean numbers, doesn't have to mean regressions always, but it can. Trying to convince people of that not challenging. I think this is why it's so hard if you tell someone that their moral understanding of the world, their moral understanding of how humans should interact and what government should do, if you tell them that's wrong, they just have a reaction to it where they're just going to shut down. But if you try to tell them that, well, I'm not going to question your beliefs about the world, but I'm going to try to convince you that on this particular point you have the data wrong and the data is actually driving your belief about this.

It's not that you're wrong about the world. It's not that your morals are wrong, it's that you have a misunderstanding of the data. Lemme try to show it to you. Lemme try to explain to you why I think I have a better understanding of the data. This does not always convince, we have not yet convinced or cast to come to our view on this, but I think reasonable people, and he's a reasonable person, reasonable people will change their views on particular parts of it. So just on this example I mentioned that not including the cost of taxes, he admits I was wrong to exclude that. Thank you for pointing that out, and that is important. So I think I have increasingly in my life tried to the extent I argue with people or discuss with people, really never focus on the kind of what we might call the consequentialist or rights-based argument. Even though I think all that is very important, and I think it's great that we have political philosophers, some of my good friends working on this. I think that is really hard to convince people about, but people will be convinced in some cases by data.

Juliette Sellgren (1.00.18)

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great Thank you.

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