COTI captures economic trends as they affect the typical family
NEW YORK, NY — Economic data suggest that things have never been better in America: households have attained unprecedented prosperity and wages are holding their own against prices. But many families’ experiences bely this feel-good story, as many jobs that once could support a family no longer do. According to a new report by Oren Cass, executive director of the newly formed American Compass and former Manhattan Institute senior fellow, the explanation for this seeming contradiction is that inflation fails to measure affordability. Cass proposes a new measure to better capture economic trends as they affect the typical family, which he calls the “Cost-of-Thriving Index” (COTI).
According to Cass, economists and families have fundamentally different vantage points in understanding their economic choices and constraints. Three key assumptions illuminate this difference:
- Quality Adjustment. Products and services that rise substantially in price but in proportion to measured quality improvements can become unaffordable, while having no effect on inflation.
- Risk-Sharing. New products and services can increase costs for the entire population yet deliver benefits to only a very small share, while having no effect on inflation.
- Social Norms. Society-wide changes in behaviors and expectations can alter the value or necessity of a good or service, while having no effect on inflation.
Like a traditional inflation index, the “Cost-of-Thriving Index” tracks a basket of items over time, but instead of adjusting for various quality improvements, simply tracks the cost. By comparing the cost of that basket and a median weekly wage, the COTI indicates whether economic trends are easing or compounding the challenge of making ends meet for a family of four. In 1985, the COTI was 30—it would require 30 weeks of the median weekly wage to afford a basket of major items—and by 2018, it had risen to 53. In other words, a full-time job was insufficient to afford these items, let alone the others a household needs.