What is this thing, “affordability?” Greg Ip, in his Sunday Wall Street Journal piece, correctly noted that it’s more than just the inflation spike of the Biden administration or an outcome of that spike.
What started as a serious but short-lived spike in inflation from 2021 to 2023 has evolved into something broader and more amorphous. Like the climate crisis or the crisis of democratic legitimacy, the affordability crisis has become an umbrella term for countless loosely connected phenomena.
As a campaign issue, such amorphosity is useful. For us average Americans, though, and for those charged specifically to solve the problem, that’s a useless characterization. A problem needs a specific definition, or its constituent pieces each need a specific definition. That’s where Ip made his own error. He was suitably specific, but in the wrong way.
Strictly speaking, affordability means having the resources to pay for goods and services at current prices. By that standard, the simplest metric is real (i.e., after-inflation) incomes. Real incomes fell behind when inflation shot up, then recovered as inflation receded and wages caught up. Real personal income was up 2.3% in the year through August, and real hourly wages climbed 0.8% in the year through September, both in line with the 19-year average.
None of us spend these mythical “real” dollars, though; they only exist in overall measures of economic questions. “Real” dollars also exist, especially in Ip’s (and my) context, only as a nationwide calculation. All of us, wherever we are in the real (not “real”) world, spend the dollars in our pockets—nominal dollars, the dollars we receive in our paychecks or welfare payments. That’s a fairly steady level for employees of national companies, but it varies widely from region to region for the smaller employers that fit into the “mid-sized” company category; the mom-and-pop wages vary from locale to locale.
Neither do any of us face the nationwide price level that is the outcome of inflation (or deflation); we pay the nominal prices that occur in the specific area where each of us lives. That’s true even for the goods and services that are sold nationwide rather than regionally. California’s prices for energy, for instance, isn’t the same as New York’s, or Texas’, or Nebraska’s, or….
What each of us does do is pay those local or regional nominal prices with the nominal dollars we have. Thus: affordability—usefully specific and accurately defined affordability—is regional and nominal: the relationship between the dollars each of us has and the prices each of us faces in the locale or region in which we live. The military gets at this with the Cost of Living Allowances it adds to members’ paychecks: that’s an addendum intended to cover some of the gap between the nominal dollars servicemen and women receive and the nominal prices they actually face where they’re stationed. Social Security payments get annual adjustments related to the “cost of living,” but those adjustments are nationwide, based on the national inflation rate; they are not adjusted according to where any of us live. Some make out like bandits in their local market places and prices, others are still left well short, most see only most of the gap filled.
Until that is understood, what to do about affordability—if anything—cannot be determined. When real affordability gets addressed, any solutions will have to be at least as finely done as regional. “Affordability” is another area where one-size-fits-all doesn’t fit any.
