Bubble, CPI and CEO Bonuses

Mike Hudson has scored the cover story in the May Harper’s: “The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse.” Our hapless middle class real estate speculators, or innocent homebuyers, pursue the dream of “economic freedom,” taking on ever greater debt to snap up appreciating real estate. But eventually, when appreciation reverses while interest rates rise, they will wind up in turn pursued by the dragon of “negative equity.”

To put off the dragon, new Fed Chair Ben Bernanke hints at easing the upward ratcheting of the Fed Funds rate. After all Consumer Price Index increases are only running around 3.5%. So what’s to worry?

The US Bureau of Labor Statistics constructs general, regional and specialized consumer price indices by pricing typical “market baskets” of goods in different regions of the US. As Mason Gaffney has pointed out, the BLS biases these “market baskets” downward by omitting the price of housing-substituting a “rental” estimate. Denying_Inflation–Who_Why_and_How_12_2005.pdf.

But it’s worse than that. According to Ricardo Reis of Princeton, the “market basket” method itself is outdated and misleading. It does not allow for substitution: the fact that if the price of one good rises consumers will switch to another; and if they expect a price to rise or fall, they will accelerate or postpone purchases. Reis constructs a “dynamic price index,” or DPI. The DPI is forward-looking. It answers the question: “by what percent must my net worth change so that I will be just as well off next year as I am today?” The most important influences are housing and bond prices. While the DPI roughly tracked the CPI over the last thirty years, in recent years it has sharply diverged. In the four years to 2004, the DPI rose an annual average of 7.4%, while the CPI rose only 2.3%. See

Note that over a 10 year period, an annual percentage increase of 2.3% comes to about 26%. An annual percentage increase of 7.4% comes to about 104%. President Bush may have failed to “privatize” Social Security, but the BLS statisticians quietly gnaw it away in the background.

Meanwhile, in “A new gilded age,” Martin Wolf of the Financial Times reports recent research on growing concentration of income and wealth. Curiously, “the share of non-wage income in the incomes of the top 1 per cent of income recipients has also been falling. In 2001, it was 50 per cent, down from 61 per cent in 1966. For the top 0.1 per cent, it fell from 72 per cent of incomes to 60 per cent.” 76def9b0-d481-11da-a357-0000779e2340.html.

Has the property share of top incomes truly fallen? Or has property income merely ducked out of sight in tax loopholes and unrealized capital gains? And should the obscene pay packages of top CEO’s really be counted as labor income, or as income from control of property?

Of course following 1929 they all collapsed together: house prices, CPI and CEO bonuses.

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