In my latest Guardian piece, I argue that, unless we pay attention to the purchasing power of wages, talk about the “cost of living” is like the sound of one hand clapping

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The policy debate about the cost of living is among the most confused and confusing in recent memory. All sorts of measures to reduce the cost of living are proposed, then criticised as being potentially inflationary. The argument implies, absurdly, that reducing the cost of living will increase the cost of living.

The issue here is that the “cost of living” is an essentially meaningless concept, rather like the sound of one hand clapping. The problem isn’t the cost of buying goods, but whether our income is sufficient to pay for those goods. For most of us, that means the real (inflation-adjusted) value of our wages, after paying tax and (for homebuyers) mortgage interest.

Photoshopped version of a Getty image

In the famous Harvester decision of 1907, Justice Henry Bournes Higgins of the Arbitration Court determined that a family of five could live in “frugal comfort” on 42 shillings ($4.20) a week, less than the price of a cup of coffee today. On this basis, he set the basic wage at 42 shillings a week, or about nine cents an hour for the then-standard 48-hour working week.

Looking back over the past century or so, the cost of buying a basic bundle of necessities (and some modest luxuries) has risen almost continuously. But, fortunately, wages and other incomes have risen much faster. So while people complain about the cost of living today, few of us would want to go back to the frugal comfort of 1907.

Looking at more recent history, the consumer price index rose faster for much of the 1980s than it has done over the last few years. Inflation was a significant problem for macroeconomic management and financial markets. But the “cost of living” was not a big issue because wages were indexed under the Prices and Incomes Accord. Some small reductions in real wages were compensated for by the reintroduction of Medicare and improvements in superannuation.

The Accord, focused on real wages, produced a gradual decline in inflation rates, while maintaining standards of living. By contrast, the current discussion of policy in terms of the cost of living has produced incoherent policies and declining living standards.

The natural policy response to concerns about the cost of living is to seek reductions in prices that are politically sensitive (such as petrol, electricity and basic groceries) and to provide ad hoc relief to groups seen as “doing it tough”. This has included wage increased to offset inflation for particularly “deserving” groups (minimum wage earners and aged care workers), even as the real value of most wages remains far below pre-pandemic levels. Labor estimates the value of their 2022-23 cost-of-living relief package at $14.6bn.

In the neoliberal context, any benefits given to one group of wage earners or welfare beneficiaries must be offset by costs imposed on another. The ad hoc nature of policy responses to the perceived cost-of-living crisis reflects the incomplete and inadequate nature of this framing of the issue. But it is not the worst consequence.

The crucial problem with “cost of living” thinking is the implication that the problem will be resolved by reducing the inflation rate, ideally with a rapid return to the Reserve Bank target range of 2-3%. In this way of thinking, the worst thing that could happen is for wages to rise enough to offset past inflation. Such an adjustment, it is claimed, could set off an inflationary spiral.

A rapid reduction in inflation, achieved by holding real wages below their pre-pandemic level suits the institutional interests of the Reserve Bank, which are centred on its primary objective of price stability. But Australian workers would be better served by a gradual reduction in inflation, without real wage cuts, as was achieved in the 1980s under the Accord.

If the decline in real wages wasn’t bad enough, the Albanese government has made matters worse by eliminating the low and middle income earners tax offset (LMITO), introduced in 2018 by then treasurer Scott Morrison as part of a tax reform program designed to culminate in 2024-25 with stage three, massively skewed towards high-income earners.

LMITO was supposed to expire in 2020, but the Morrison government repeatedly shied away from raising taxes on middle-income earners at a time when real wages were failing.

Jim Chalmers and Anthony Albanese had no such qualms and scrapped LMITO from 2022-23 onwards. Over the government’s remaining term, the resulting increase in taxes will more than cancel out all the cost-of-living relief trumpeted in the last budget. Meanwhile, the stage-three tax cuts will ensure that high-income earners are returned to the lowest average tax rates in recent history, last seen under the Howard government’s final package of tax cuts.

In the end, the “cost of living” isn’t about the prices on grocery shelves, it’s about the distribution of income. In Australia, income has shifted from wages to profits and from low- and middle-income earners to those in the top 10% of the income scale and, even more, to the handful of “rich listers” whose growing wealth has outstripped that of ordinary Australians many times over.

I’ve been working a bit on inflation and the highly problematic concept of the ‘cost of living’ (shorter JQ: what matters is the purchasing power of wages, not the cost of some basket of goods). As part of this, I’ve been looking at how particular prices have changed over time, focusing on basics like bread and milk.

One striking thing that I found out is that, until quite late in the 20th century, the standard loaf of bread used to calculate consumer price indexes in Australia weighed 4 pounds (nearly 2kg). That’s about as much as three standard loaves of sliced bread. Asking around, this turns out to be the largest of the standard sizes specified in legislation like the Western Australian Bread Act which was only repealed in 2004, AFAICT.

Going back a century or so further, the Speenhamland system of poor relief in England specified the weekly nutrition requirements of a labouring man as a ‘gallon loaf” of bread, made from a gallon (about 5 litres) of flour, and weighing 8.8 pounds (4kg). Bread was pretty much all that poor people got to eat, so the amount seems plausible.

But why one huge loaf rather than, say seven modern-size loaves? And turning that question around, why are our current loaves so much smaller?

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The New Year has barely started, but the world of academia seems to be back to work, and sending me a variety of gifts, some more welcome than others. Coincidentally or otherwise, it’s also the day I’ve moved to semi-retirement, a half-pay position involving only research and public engagement.

Most welcome surprise: an email telling me I’ve been elected as a Fellow of the Society for the Advancement of Economic Theory. In the way academia works, some friendly colleagues must have proposed this, but I had no idea at all

Most culturally clueless: A request for a referee report, due in three weeks. This is January in Australia – only the most vital jobs get done

Most interesting: An invitation to join the editorial board of Econometrics, an MDPI journal in which I have published an article of which I am quite proud, though of course it has received almost no attention. MDPI is a for-profit open access publisher, which regularly deals with accusations of predatory behaviour. A search reveals that the existing editors have resigned, something which is happening a bit these days.

I’m in n>2 minds about this. I think that journal rejection rates in economics are absurdly high, in a way that damages intellectual progress. Eric has expressed the same view regarding philosophy, which is closer to economics in cultural terms than any other discipline (Macarena’s post is highly applicable to econ).

On the other hand, I’m always dubious about the motives of for-profit firms (that includes the “reputable” firms like Elsevier and Wiley).

And on hand #3, I’ve just semi-retired, and I don’t feel like taking on a fight in which I have no dog.

So, I’ll probably stick with the plan of spending more time at the beach, working on my triathlon times, and trying not to get too depressed about the state of the world, at least those bits I can do nothing too change.

To all my readers. Best wishes for the festive season and for a better 2024

My latest piece in Crikey, responding to Bernard Keane’s argument that Labor should stick with the Stage 3 tax cuts. Also available at my Substack blog

That’s the title for my latest piece in The Conversation, reposted at my Substack blog. Comment here or at Substack.

My latest Blogstack

My latest, published in The Conversation and on my Substack

Within pretty broad limits[1], I’m an advocate of historical ‘presentism’, that is, assessing past events and actions in the same way as those in the present, and considering history in relation to our present concerns. In particular, that implies viewing enslavers, racists and warmongers in the same light, whether they are active today or died hundreds of years ago.

Protesters pulling down a statue of slave trader Edward Colston in Bristol, England, during a demonstration organized to show solidarity with the Black Lives Matter movement on June 7, 2020.

William Want/Twitter/AFP

A common objection to this position runs along the lines:

Suppose that at some point in the future, the vast majority of people are vegans. They will judge you in the same way as you judge past enslavers, racists and warmongers. In anticipation of this, you should suspend judgement on people in the past.

I don’t buy this. There are plenty of vegans around today and I have heard and rejected their arguments. While I condemn cruel farming practices, and try to avoid buying food produced with such practices, I don’t accept that there is anything inherently wrong with killing animals for food. Animals raised for food live longer and, with humane farming practices, happier, lives than their wild counterparts [2]. They aren’t aware of their own mortality, and have no life projects that are foreclosed when they die.

Vegans reject these arguments and judge me and others harshly for making them. Perhaps they are right. And they might, in the future, convince a majority of people. But if so, members of the future vegan majority would be just as entitled to condemn my views as are vegans alive today, and to view me in the same light as they would the remaining minority of non-vegans. The fact that I would by then be a “person of my own time” is neither here nor there.

I’ll qualify this a bit. No one can think deeply about everything so, most of the time, most of us go along with whatever people around us think. So, it’s unfair to pass judgement on ordinary Confederate (or Nazi) soldiers for fighting for a cause everyone around them said was right.

But that doesn’t excuse Calhoun, or Jefferson, or Locke, any more than it excuses Hitler. These are people who had been made aware of the evil they were promoting and profiting from, and promoted it anyway. And, if the ethical case for veganism is correct, then I am wrong, regardless of the fact that, at present, most people agree with me.

fn1. As examples of those limits, I don’t want to criticise people who failed to support equal marriage at a time when hardly anyone thought about it. And going back before the modern era (say pre-1600) the difference in world views is so great that it’s hard to make any kind of judgement on most issues.

fn2. Not to mention, happier than the lives of most people.

More discussion at Substack. Based on that, I expect most of the comments here to be about the merits or otherwise of veganism, and only a few to address presentism. This reinforces the point that veganism is not an example on which anti-presentists can lean to support their case. Feel free to provide better examples.

With corrupt crypto king Sam Bankman-Fried as its most prominent representative, the Effective Altruism movement is not particularly popularly these days. And some other people associated with the Effective Altruism movement have bizarre and unappealing ideas. But the worst form of ad hominem argument is “someone bad asserts p, therefore p is bad”[1].

Whether under this name or not, most economic research on both welfare policy and development aid takes the premise of effective altruism for granted. The central premise of effective altruism is simple: if you want to help poor people, give them what they most need. The practical force of this premise arises from a lot of evidence showing that, in general, what poor people need most is money.

(Image generated with DALL-E)

The starting point for the premise is some version of consequentialism. It is most directly opposed to the idea that altruism should be evaluated in terms of personal virtue. To take a typical example, effective altruism would say that someone with professional skills that are highly valued in the market should not volunteer in a soup kitchen, they should spend the time working for high pay and then donate their pay to the people who are hungry. [2] And there are plenty of highly popular interpretations of personal altruism that are even less effective, such as “thoughts and prayers”.

Coming to the question: why give people money, rather than addressing their needs directly, I will quote from my book Economics in Two Lessons which presents the issue in terms of opportunity cost.

What would a desperately poor family do with some extra money? They might use it to stave off immediate disaster, buying urgently needed food or medical attention for sick children. On they other hand, they could put the money towards school fees for the children, or save up for a piece of capital like a sewing machine or mobile phone that would increase the family’s earning power.

The poor family is faced with the reality of opportunity cost. Improved living standards in the future come at the cost of present suffering, perhaps even starvation and death. Whether or not their judgements are the same as we would make, they are in the best possible position to make them.

There are plenty of qualifications to make here. Maybe the most important is that family heads (commonly men) may make decisions that are more in their own interests than in those of the family as a whole. Giving money to mothers is often more effective.

And sometimes delivering aid in kind is the only way to stop corrupt officials stealing it along the way.

In addition, there are some kinds of aid (local public goods) that can’t be given on a household basis. If people in a village don’t have clean drinking water, then the solution may be a well that everyone can use.

Nevertheless, whenever anyone advocates a policy on the basis that it will help poor people it is always worth asking: wouldn’t it be better to just send money?

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[1] Ad hominem arguments aren’t always bad, as I’ve discussed before. If someone is presenting evidence on a factual issue, rather than a logical syllogism, it’s necessary to ask whether you are getting all the facts, or just those that suit the person’s own position .

[2} Contrary to the SBF example, it doesn’t suggest stealing money to buy an island in the Bahamas, then covering up by giving some of the loot away