Manuel H. Johnson Center for Political Economy at Troy University Archives

Economists debate whether typical Americans are better off now than 50 years ago. The debate concerns the reliability of the Consumer Price Index (CPI). The Cost of Thriving Index (COTI) from American Compass and Oren Cass think tank contends that middle class prosperity is becoming unaffordable for American families.

Cass gained attention with the publication of “The Once and Future Worker.” He voices the frustration of many conservatives with free markets, particularly emphasizing how markets leave many Americans without jobs capable of supporting families.

The dollar loses value with inflation, making dollar amounts not comparable over time. Economists adjust dollar values using the CPI, yielding “real” as opposed to nominal values. Between 1985 and 2022 the CPI increased 142% and men’s median earnings 145%, leaving real income basically unchanged.

The term “thriving” is deliberately chosen, as the COTI measures the cost of a changing “middle class” life. By contrast, the CPI tries to measure the cost of the same items – a typical market basket – at different times. Cass contends that being middle class in 2022 does not mean having the same things as in 1985.

The cost index has five components: food, housing, health care, transportation, and education. The COTI compares the dollar value of income and costs in each year and reports the weeks of work at the median wage needed to afford the middle-class life. The COTI stood at 39.7 weeks in 1985 versus 62.1 weeks in 2022. (The cost and weekly earnings were $17,500 and $443 in 1985 against $75,700 and $1,219 in 2022.)

Similar results hold for women’s earnings or earnings by education attainment.

In his book, Cass argues that “without access to work that can support them, families struggle to remain in tact or to form in the first place, and communities cannot help but dissolve; without stable families and communities, economic opportunity vanishes.”

This is an important consideration. Families transmit values in society, which is why progressives seek to undermine the family. Men with low earnings are less likely to marry and their marriages tend not to last. Remember that these are averages and do not deny that happy families with Mr. Mom.

Competition from imports has devastated many American industrial towns. Free market economists often argue for unrestricted imports and government assistance for those losing their jobs. Cass points out though that a life on the dole ensures family disintegration.

Cass further points to regulation in the offshoring of manufacturing. When high labor costs drive jobs overseas, this is efficient since highly valued and paid American workers can take other jobs. This is not the case when regulations increase the cost of manufacturing here. Free trade evades regulations but devastates communities.

Does the COTI prove that middle class living has become unaffordable?

Economists Scott Winship and Jeremy Horpendahl challenge this claim for the American Enterprise Institute. They criticize the measurement of some costs and consider quality improvements.

The healthcare component uses the full cost of employer provided health insurance, including cost paid directly by the employer, but does not add this to earnings. Although this might seem to cancel in comparisons over time, the cost of healthcare has risen much faster than inflation, biasing the measure.

Education uses in-state tuition for public universities. But very few students pay the full tuition price; net tuition, or tuition minus any institution-granted scholarships, better measures cost. Sticker price tuition has increased significantly faster than net tuition, overstating the cost increase.

Winship and Horpendahl further address quality improvements, a major source of economists’ concern over CPI accuracy. Expenditures today purchase bigger houses, more reliable cars, and better medicine. They estimate that a properly measured COTI has increased by 4 weeks since 1985, not 22.

Oren Cass rightly focuses attention on the economic requirements of strong families. The debate over whether American families are better off now than a generation ago is vital. Economists’ difficulty conclusively answering this question is telling, as I doubt there was disagreement in 1922 about whether families were doing better than in 1885!

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H.
Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

The United States faces potential default in June as we run up against the debt ceiling, currently at $31.4 trillion. Whether the debt ceiling is good policy depends largely on one’s attitude toward Federal spending.

Is our national debt sustainable? I will defer to the judgment of financial markets. Interest rates compensate savers for being patient and for bearing default risk, the risk that borrowers may not repay the loan or interest payments.

The “risk free” interest rate is what investors would charge a borrower with no default risk. When default risk increases, investors will first demand a higher interest rate and then stop lending altogether.

U.S. Treasury securities have long been viewed as the risk-free investment. The inflation-adjusted (or real) interest rate on 10-year U.S. Treasury securities, courtesy of the St. Louis Fed, stands at 1.3%, over two percentage points higher than at the start of 2022. But this interest rate hike is widely attributed to the Fed’s tightening of monetary policy to combat inflation.

The debt to GDP ratio stands at historically high levels. But economists Jason Furman and Larry Summers argue that real interest payments as a percentage of GDP better measures indebtedness. This measure is not at record levels, suggesting that Washington has untapped credit.

Nonetheless, our current budget situation is troubling. The Congressional Budget Office (CBO) estimates this year’s deficit at $1.5 trillion, the third largest ever and seventh largest since 1962 as a percentage of GDP. Yet the economy is not in recession, we are at peace, and the COVID-19 pandemic is over. This represents a structural and not cyclical deficit.

Deficit projections depend on future policy choices so let’s consider entitlement spending. The CBO projects that Social Security and Medicare spending will increase from $2.3 trillion this year to $4.2 trillion in 2033. The deficit will increase significantly unless we cut spending or increase taxes.

Credit markets are voluntary; nobody must purchase Treasury bonds. At some point credit markets will say no more Federal borrowing. We would be wise to keep some credit for emergencies. Imagine financing World War II without any borrowing!

Now let’s turn to the debt ceiling, beginning with its history. Congress enacted the ceiling in 1917 to keep from having to approve each issuance of Treasury debt. The ceiling has been raised over 100 times since World War II and suspended on several occasions. Fiscal conservatives use the ceiling as leverage to push spending cuts, like the 1985 Gramm-Rudman-Hollings Debt Reduction Act and the 2011 budget deal.

The ceiling creates policy uncertainty for our economy. Uncertainty is unavoidable in life and especially business but hurts investment.

Government affects business in many ways, so uncertainty about government policy increases overall uncertainty. Failure to raise the debt ceiling will delay the repayment of bonds, drive up the Federal government’s interest rate, and potentially also other interest rates. A long-term budget agreement would be better than a fight over the ceiling every other year.

Evaluation of the ceiling depends mostly on how one views current Federal spending, not creditworthiness. If avoiding default were paramount, a deal could be done easily.

Republicans could agree to big tax hikes or Democrats could agree to freeze discretionary spending. These are not solutions due to their impact on spending.

The Biden Administration is considering challenging that the debt ceiling violates the 14th Amendment. I am not a constitutional lawyer, so I will not weigh in here. Fiscal conservatives have voiced opposition to this tactic, but we are a constitutional republic;
the constitutionality of any law can be questioned.

The inability to reach a compromise reflects our increasingly divided nation.

Legitimate government reflects the consent of the governed, meaning all Americans, because we recognize the equal moral worth of all citizens. Today both sides want to
force their preferred policy on the other by any means necessary. This is a tell that
many now view their fellow Americans as subjects, not fellow citizens.

The Federal Housing Finance Agency (FHFA) is imposing fees on mortgage applicants with high credit scores to assist applicants with low credit scores and small down payments. The 2007 housing crisis illustrated the potential costs of “helping” people buy homes they could not afford. The proposal offers insight on the politics of government favors.

The FHFA new rule will charge the strongest applicants up to $60 per month. Over the term of a 30-year mortgage, this would be over $20,000. Subject homebuyers will qualify for smaller mortgages.

The measure arguably addresses credit score racial disparities. According to Newsweek, average credit scores are 727, 667, and 627 in white, Hispanic, and Black communities. Yet such differences are not evidence of discrimination, since credit scores are based on things like missed bill payments. And Blacks and Hispanics with high credit scores will face reduced home buying opportunities.

The mortgage fees are an example of cross-subsidization, where the government, through regulation, makes some consumers pay higher prices so others can pay less. A cross-subsidy is economically equivalent to a tax and direct government subsidy. The seminal paper by Richard Posner on this was titled “Taxation by Regulation.” To see the comparability, the Biden Administration could ask Congress to impose these fees as taxes. Congress could appropriate the revenue to subsidize home buyers with low credit scores.

Why cross-subsidize instead of tax? Public choice economics offers an explanation. Politicians get credit or blame only for actions voters attribute to them.

Politicians will publicize giving people things. But politicians try hiding the taking of money from people.

Politicians calculate that voters are less likely to notice higher prices than taxes.

And if they notice, they may forget the policy hiking prices. Or politicians could blame
higher prices on corporate greed or Vladimir Putin.

Politicians can also honestly deny the existence of a government subsidy, or a payment by the government to an individual or business. Vehemently denying a subsidy might help voters miss the cross-subsidy.

Cross-subsidies are one component of a public choice debate over the “efficiency of democracy.” The debate has implications for potentially ending government policies benefitting some Americans at the expense of others.

One side sees the hiding or disguising of assistance as crucial to the programs’ continued existence. Consider the Federal government’s price support programs for agricultural crops. The Department of Agriculture sets target prices and buys surplus crops at this price. This drives up the market price, since farmers will not sell on the market for less than the USDA pays.

The price support is a costly way to help farmers. To get government money, farmers must plant crops using tractors, fuel, fertilizer, and labor. They might get $50,000 net of expenses from the USDA. Send the farmer a check for $50,000 could let these resources be used for other purposes.

The price support helps disguise the transfer to farmers. The program can be billed as ensuring America an adequate supply of food. If voters knew what was happening, they would put a halt to these programs.

The other side of the debate holds that government may still be helping the farmers or low credit score home buyers in the cheapest way possible. No less expensive, legal way to benefit farmers or borrowers exists. Congress cannot simply give designated individuals $50,000. The details get very complicated, but one implication is that politicians are not trying to hide these programs from voters. Enough political support exists to keep them going.

As a public choice economist myself, I believe that the assistance must be disguised to persist. Elected officials know what voters will not accept and incur the cost of disguising the programs because they must.

Our governments – local, state and Federal – have many programs favoring some Americans at the expense of others. This might seem depressing. But it is also encouraging.

Elected representatives must hide favors because the voters ultimately hold the power. We the people have the power to rein in favors and cross-subsidization, we just need to use it.

Daniel Sutter is the Charles G. Koch professor of Economics with the Manuel H.
Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.