Many Bitcoiners have seen or shared around the images that show Labour Compensation (wages and other benefits) diverging from Labour Productivity since 1971, particularly from sites such as Rejoining me today is Gene Epstein to break down why this chart is flawed! We also talk about broader issues around CPI, whether inflation is over or undercounted, and cost of living pressures that so many people are facing today. The conclusions will surprise you!

We talk:

  • Labour Compensation and Productivity
  • Nominal dollars and issues with price indexes
  • Is CPI overstated? 
  • Are we poorer than we used to be? 
  • Cost of living crisis
  • Can you make it on a single income these days? 
  • The real problems



Stephan Livera links:

Podcast Transcript:

Stephan (00:00.514)
Hi, everyone. Welcome back to the Stephan Livera podcast, a show about Bitcoin and Austrian economics brought to you by Joining me today is Gene Epstein. He is the founder of the Soho forum and he was a long time editor, economics editor at Barron’s and he’s rejoining me on the show today. We’re going to be talking about lots of interesting things. Gene, great to have you back.

Gene Epstein (00:22.883)
Good to be back and of course, good to get the opportunity to promote my solo form for among your millions of fans, Stephan. And you get a free ticket. We charge twenty four dollars plus eight dollars for the party afterwards. We’re having Jay Bhattacharya on Sunday, December 17th, it’s going to be a matinee. And tickets are on sale for that.

Stephan (00:33.747)
Not quite that many, but yeah.

Gene Epstein (00:53.104)
And in February, we’re having a debate on the Israeli-Palestinian conflict. And if you go into, tickets are on sale for all our debates through March.

Stephan (01:14.402)
Yeah, of course.

Gene Epstein (01:16.003)
the successful case that he helped bring against the Biden administration for censorship. And he’s gonna be debating a lawyer and there’ll be a Sunday matinee. In addition, I wanna emphasize that we have a twofold mission at the Seoul Forum to have a debate, one-on-one debate of interest to libertarians, but hopefully to the larger community, but then to have a party afterwards where people can commune. Most of the time my debaters attend, in this case, both debaters will be at the party

the issues afterwards, that’s part of the show. People meet each other, they form friendships, careers, romances, they have sex afterwards. This is part of our mission, to get people together.

Stephan, so if you’re passing through New York, you, your wife, and your nine month old on December 17th, you want to come to our debate. Your many listeners should be coming as well. There are lots of things to do in New York in December 17th, but as I say, there’s the debate and the party afterwards. So is where you should look. All right, Stephan, I’m through. I’m done. That’s it. I’ve got, no, let’s get to your questions. But I want to, I want to.

Stephan (02:21.899)

Stephan (02:27.398)
Well, okay, so let’s talk a little bit about what we were planning to talk about. Now the reason I wanted to chat with you again is I know you have a specific critique of a particular idea that seems to be prevalent right now. And that idea, and this is relevant for Bitcoiners as well, because I think a lot of Bitcoiners are aware of the website WTF happened in And at the top of that website…

Gene Epstein (02:50.67)

Stephan (02:56.53)
is this infamous chart, which basically shows, basically, the idea is to try to show, oh, wow, look, look at the divergence between labor productivity and labor compensation. And so if people can see on the chart, we can put it up on the video or of course, you know, there’ll be a link in the show notes. But Ajean, I know you have a very strong disagreement with this and you have a, I think, and I think a lot of people.

who don’t know you might sort of initially think, Oh, wow, is this just like some lefty person who’s sort of disagreeing? No, actually, Gene is a free market guy. And he’s critiquing it for his for a different reason. So Gene, I know you have a very specific framework to outline around this. So do you wind outlining some of your thoughts there?

Gene Epstein (03:33.316)
But yes.

Gene Epstein (03:39.423)
Yes. Well, as a matter of fact, bear in mind that I’ve made few friends with this critique of mine, as you call it. Few because, as you probably know, Bitcoiners and other free market types like to argue that the government has so screwed up the economy that

this divergence between productivity gains and wage gains actually did occur, and so many of them dated from the early 1970s, because for them it’s because the vest whatever vestiges of the gold standard

were retained up until then were abandoned, as you know. For foreigners, the dollar was redeemable in gold. And then Nixon, as the phrase goes, closed the gold window. And a lot of free marketeers said, I say, ah, that’s why productivity kept increasing, but wages barely followed, lagged far behind.

Indeed, I was just speaking to another interviewer and I was saying that, you know, most people are doing better than their parents did. On all levels of income, things are improving and I get a lot of pushback. So it’s not just from the left, it’s from the libertarians, the free market people that get this pushback. Now ironically,

My critique is so simple that one might say it almost defies belief. And I did an interview, I’ll mention, with Bob… I’m sorry.

Gene Epstein (05:42.263)
Why am I forgetting Bob’s last name? It’s Bob Murphy, right? And some people said, you got a little bit too quickly into the statistical weeds and I lost you, you know? And it’s a little bit hard to convey these points in just such a discussion. I did a, I hope you actually link to it. I did a lecture at the Mises Institute about a year ago, two years ago actually by now, in which I…

Stephan (05:44.046)
called Murphy, yeah.

Gene Epstein (06:10.935)
threw up some slides so that the graphs are fairly simple and I had plenty of time to explain it. But really, the whole point is quite simple. It’s quite simple. And I want to begin it this way. There’s nominal dollars. There are nominal dollar measures of productivity and of labor compensation.

I should say, because labor compensation includes benefits. The Kakamemi chart you sent me from the Economic Policy Institute seems to include benefits as well. So, we don’t have to get into that argument. Benefits mainly medical benefits, pension benefits, and so on. That’s part of your salary. It would be money you’d spend out of your salary if the benefits weren’t provided. So that’s compensation. Okay. So.

take compensation and take the measure of output per worker hour, both of them measured in nominal dollars. Now, what are nominal dollars? Nominal dollars are simply a measure of what business sells the output for.

It’s always selling it in nominal dollars in 1972, 73, 74, 97, 98. It’s always selling its output in nominal dollars, and it’s always paying compensation in nominal dollars. Now…

If you then take output per worker hour in nominal dollars each year, take compensation in nominal dollars each year, you’re lining them up each year together. That means then that you’ll simply ask a question like, well,

Gene Epstein (08:10.671)
Did the increase in nominal dollars paid workers in compensation track the increase in nominal dollars in the output per labor hour? Did they track each other?

Gene Epstein (08:28.571)
The answer is, however you measure the productivity and the compensation, according to the website of the Bureau of Labor Statistics, which is the official arbiter of these numbers, the answer is yes. The two tracked each other.

in the 40s, 50s, and 60s, and in every decade since, up through the present. Not exactly, not precisely, but they attract each other. Yeah.

Stephan (09:04.18)
Okay. Yeah, so just to make sure everybody’s following along, basically what you’re making, yeah, you’re making the point that when you put everything into nominal dollar terms, productivity and labor compensation have actually, in fact, tracked each other, and that there’s another reason for this supposed divergence on this chart, which, yeah.

Gene Epstein (09:25.175)
Well, yes. Well, see, what I’m trying to do is bring it down to earth. What I’m trying to say is that I’m not exactly saying anything very sophisticated here. I’m not massaging numbers, really. Although I will tell you that the Bureau of Labor Statistics, when they post their numbers, the agency posts its numbers, it takes a little bit of manipulation to put

numbers in nominal dollars. I mean, it’s not like it’s—I’m not exactly a statistical wisp. I can do it because I’m familiar with the numbers, but you have to do a little bit of a manipulation, and it’s simple enough, nominal dollars. And my point is that the rest is bullshit. The rest is

How do these fanatics take nominal dollars if the bureau of liberties would only say dollar for dollar each year? And again, I emphasize, why does it make sense? Well, business sells in nominal dollars and people are paid in nominal dollars. So why are we messing with this? We want to match one with the other. Why do we have to inflation

these numbers when we’re comparing nominal dollars with nominal dollars. And by the way, there are other, it’s a, any sophisticated person, and now I have to use the word sophisticated, should know that.

price indexes are a bit of a can of worms. We can argue about them endlessly. They’re very gross approximations. Murray Rothbard, an economist I revere, wrote in his Man, Economy, and State, the book that was my gateway to libertarianism, that price indexes are all bullshit. Although Murray Rothbard—

Gene Epstein (11:40.491)
whenever he needed to use a price index, did use it, so he was a little bit hypocritical. In this case, we don’t need to use a price index because we’re comparing the dollar in the nominal dollar value of what was made with the nominal dollar value of what was paid to workers. We don’t need to use a price index.

So that should be the end of it. We don’t have to bother with this anymore. We then have to unravel why people like the Economic Policy Institute folks have turned this thing into an entangled mess with price indexes, or why the Bureau of Labor Statistics does it as well. We only have to ask

What is wrong with these people that they can’t think in simple terms? I believe that in the case of the beautiful heavy statistics, it’s a combination of a very strong sort of left-wing tradition that they use price indexes when the price indexes only confuse, they do not clarify. In addition, it’s a kind of a bureaucratic inertia.

I got to know some of those people at the Bureau of Labor Statistics, and they sort of like the idea of showing that there’s a huge divergence between productivity and compensation that started in the early 1970s. Okay. I hope—now, if you take away nothing else from what I’m about to say, it’s what I’ve just maybe belabored. The nominal dollar measures.

which are easy to come by, which I post over and over again, anytime I’m asked. And the beautiful statistics has different, you know, by the way, it’s, it’s actually the fact that they line up is almost like, I almost regarded as miraculous because these numbers are to some degree statistical sausages. I mean, if you, if you actually unravel the standard measure of compensation, usually the preferred measure.

Gene Epstein (14:04.107)
is non-farm productivity and then non-farm wages. And I could get into non-farm compensation, I should have said wages, compensation. I’d get into the complications there, but they do line up. So case closed, who cares? Now, you sent me the graph of the Economic Policy Institute, and of course,

The main thing to say about that graph, although the other things to say about how screwed up it is, but the main thing to say about that graph, as well as all of the others that are posted, is that they’re dealing in two sets of books. What do I mean by that? They’re using two different divergent price indexes for compensation versus output.

That’s the only reason why they get that result. They’re using, for compensation, they use typically the consumer price index. I’m not sure it says that in the graph that you just sent me, but I’m sure that’s what they’re using, the consumer price index. And in the case of output, they’re using something called the Impristed Price Deflator, a very different measure.


Those two indexes sharply diverged starting in the early 1970s.

Gene Epstein (15:40.947)
If you want to make something of that, that if you believe the implicit price deflator as a way of measuring the real output per worker hour versus the CPI versus the real wage, that’s fine. If you want to say, well, something interesting happened, the value of the output

was priced differently from what workers had to pay in order to make ends meet. I don’t know if I’ve lost you there. My point is that the price indexes diverged and somebody could say, well, but that’s the reality, if you believe in the price indexes. Price indexes, as I say, are statistical sausages. They’re very screwed up. I happen to believe a—

along with the Brookings Institution that the Consumer Price Index still overstates price inflation by nearly one percentage point a year, but that’s not important in this case. The point is that if you want to say that the value of the output increased because of the different price index faster than the cost of living based on our price index, you could say that.

and you could make something of it, you could discuss it. But that evades the question. The question is, was business exploiting labor? Was business paying labor so much less than the value of the output? That question is answered through nominal dollars.

As a guy I know who’s got a lot of experience with the BLS and with the Bureau of Economic Analysis, Bureau of Economic Analysis, they throw out these numbers and they don’t realize if this is really the case that the exploitation rate just really hit the moon, that productivity soared and compensation barely followed.

Gene Epstein (18:01.019)
profits must have been going through the roof. The fact of the matter is that profits did not go through the roof, which is, by the way, another interesting story in itself. But they don’t ask, my God, the windfall must have done— but they don’t trace it out. But again, they’re not curious about it because they’re happy with their results. So again, back to square one. If we want to ask, was business—

exploiting the workers? Well, that question is answered in nominal dollars. No, they increased compensation pretty much in line in nominal dollars with the value of the output in nominal dollars. So, no, there was not some big break. There was no great departure.

starting in 1971, where labor was suddenly getting exploited and not getting paid the nominal dollar value of their output. Again,

Stephan (19:09.834)
Yeah, okay.

Gene Epstein (19:10.651)
I keep beating the same dead horse because I found that when I started by saying, oh, well, they’re using different price indexes and getting people into the weeds, they get a little bit confused. So maybe we want to go over it again. But again, I hope I’ve made the point that it’s simple enough. It’s all bullshit.

Stephan (19:28.586)
Yeah, no, I think I’ve got you. So let me just summarize. Yeah.

Gene Epstein (19:33.875)
It is not even anything to say that I’m respectfully challenging these people. I am saying they have their heads up their asses. I am saying that they have such an ideological stake in this result that it doesn’t occur to them to say, let’s do it in nominal dollars. Now, there are more subtle problems.

Stephan (19:45.361)
Ha ha.

Gene Epstein (19:58.595)
with the EPI measure. And again, because I think they have a particular stake in their result, but I’ll interrupt myself again and say that probably if I were talking with an EPI person and I said that…

the API President’s policy. But look, the price indexes are the price indexes. So the price index of productivity diverges and so productivity is taken off. And so the real value of the output took off and the real value of the compensation didn’t. I’m sure that I would never convince that kind of hardhead that that’s an interesting story itself, but it doesn’t address the

Stephan (20:48.174)
Gotcha. Yeah, I’m with you. Yeah. So I think this is an interesting one for Bitcoiners because a lot of Bitcoiners have been making this argument. They’ve been out there saying, look, the Federal Reserve and closing the gold window and all these typical arguments. Now, there may be arguments that are correct, but maybe just not this particular one about labor exploitation.

Gene Epstein (20:48.263)
The nominal dollar issue addresses it. I don’t think I could have a better idea of that. Excuse me?

Stephan (21:14.43)
I think as Austrians, you can definitely make the argument about the Kantian effect, right? This idea that those people who are closer to the money printer, they are winning and the savers are losing in this fiat inflationary system. And I think those arguments still apply.

Gene Epstein (21:26.499)
Well, well, there’s lots of things. There’s lots of things. But I mean, the argument about the connection between this exploitation, essentially, neoclassical economics, not just the Austrians, but neoclassical economics also says the standard mainstream economics also says that labor as a.

as a whole will be compensated, that increases in compensation will pretty much pace the increase in the value of the productivity of labor. This will be a strong tendency year to year. It’s not perfect, but it will happen. And so indeed, this—

departure, this huge divergence indicates something very dramatic happened to American capitalism. The left wing likes to say it’s the decline of unions, I guess, that did it, among other things, or that maybe later on the idea that there was a competition from cheap labor abroad.

My fellow Austrians and free marketeers, I think a little bit incoherent about it, because I’ve never really heard any convincing argument, maybe you could give me one, about the causal connection between the closing of the gold window and the takeoff of price inflation and this huge divergence. How was it in a competitive labor market that

that workers were suddenly not, that compensation suddenly was so far lacking increases in productivity. You know, Ludwig Mises and others explain it much, pretty clearly that.

Gene Epstein (23:16.835)
that if labor is really getting, that it is usually underpaid in a particular sector, then competition will bid the wage up because I can take all your workers from you because they’re producing so much more. I can make a huge profit by just bidding up the wage. So that’s the standard argument against unions. Even Joseph Stiglitz, this progressive economist, others point out.

that unions only cause different differentials in wages. Unions don’t lift wages. Productivity lifts wages. There’s pretty much of a consensus about that. So this is a

Stephan (23:53.826)
Right. Yeah. And I’m saying I’m agreeing with you on this particular, on that particular point about, you know, I think this notion of the disconnection between the labor productivity and labor compensation is not correct, as you’re saying, because when you put it in nominal, it’s all the same. But I think maybe the point where other, where maybe there’s still, you know, I’m curious to hear your views on this as well, is I think a lot of people would argue that CPI is understating inflation.

Gene Epstein (24:09.24)

Stephan (24:22.618)
and that actually people are, you know, there’s a cost of living crisis and that’s, and I’m sure you’re seeing this as well, but I’m curious to hear your view on that.

Gene Epstein (24:27.167)
Okay, well, excuse me. Okay, we can get into that. Okay, all right. As you said, we’ve sort of kissed off the issue about this exploitation phenomenon, that the whole idea that compensation tends to

Gene Epstein (24:51.547)
abrogated that tendency, something, and we know that this is simply not true. Okay. I could mention, by the way, that the EPI likes to—

take their own construction, the Economic Policy Institute, so I’m referring to the left wing institute, they like to tell, to take their own construction and they like to make it the wages and benefits of production and non-supervisory workers. In other words, they don’t take the entire compensation figure that is posted by the Bureau of Labor Statistics, they take out this portion that they get for

production and non-supervisory workers. And there’s another more subtle scandal in that number. The Bureau of Labor Statistics itself repudiated that figure years ago, the idea that you can actually track production and non-supervisory worker payouts. Maybe that’s an interesting thing to get into, but it looks like maybe you’re not that interested in it. The fact is that…

There’s a slight scandal going on. In my book, Econo Spinning, I quoted a landmark statement from the Bureau of Labor Statistics that was posted, I guess it was in 2005. They said that they were discontinuing the series on wages of production and non-supervisory workers. They said they were discontinuing it.

and they explained why they were discontinuing it. And then lo and behold, they brought out the larger figure for all workers, but they decided not to discontinue the production and non-supervisory workers number. And they didn’t discontinue, I’m sorry, what?

Stephan (26:54.722)
I see. Yeah, so as I understand then, this kind of comes down to how you count what kind of workers. And so I think that’s, is that the point you’re making around the supervisory workers versus the all employees number?

Gene Epstein (27:10.119)
Yes, the beautiful episode, I quoted the statement in my book, but maybe best for me to summarize it. The scandal about that number was that it started, the production numbers started back in the 1940s, and it conjured up what was a reasonable demarcation that you send a questionnaire to a factory, an establishment that is a factory, and it probably can fill out.

the pay it gives to the production workers versus the workers that are supervising, versus the foreman. But then what increasingly happened, of course, over time, was that we’re not really sending out questionnaires to the production versus the supervisor, we’re sending it out to service industries. And they found that…

the respondents were leaving that part blank. As I jokingly said, I work at Barron’s, and when I wrote about this in my column, I work at Barron’s, and I can guarantee you that whoever fills out the form that is sent by the Bureau of Labor Statistics, what did you pay your non-supervisory workers? They do not spend a whole lot of time.

worrying about whether Gene Epstein is a supervisory or non-supervisory workers. They don’t know. Because do I supervise some people? Yeah. Am I supervised by others? Yeah. Well, the fact of the matter is that they were finding that the vast, that so many companies were simply leaving that part blank. And they had to, the Bureau of Labor Statistics then had to deal with very skimpy returns.

on that part of the question, because increasingly companies were simply saying, this doesn’t mean anything to us. The further joke is that when you looked it up at the Bureau of Labor Statistics glossary, they said people who are non-supervisory are people who are not in a supervisory position, meaning then they defined it in a circular way. So the whole thing became a left-wing joke. And

Gene Epstein (29:30.499)
What I added to the insight was, why was it that this wage figure for non-supervisory workers was so flat? Why was it lacking other wage figures that were coming from other sources? My theory, which I originated in my book, was that because the companies that paid people best,

average worker stock options that were giving raises to people, that were mixing it up, these were the companies that were paying the best. And so, the companies that were being missed in the survey was the increasing share of the better paying companies, who had no such definition anymore. Okay. Yeah. So,

Stephan (30:13.474)
Right. Yeah. Yeah, okay. Yeah, I see you. Yeah, okay. So I think, yeah, I think that’s, yeah, that’s probably more into kind of the statistical weeds. But I think it’ll be more interesting to hear your views on CPI and how you think CPI is actually understating inflation. Sorry, I think, sorry, most, I think most, you know, people are probably thinking CPI rather is

Gene Epstein (30:27.424)

Gene Epstein (30:38.708)

Stephan (30:43.046)
understating inflation and you actually believe it’s overstating the perceived inflation. I’m curious why you believe that.

Gene Epstein (30:47.758)

Gene Epstein (30:52.211)
Well, I guess I could… Well, let me give one broader statement. This might shock you, but the CPI, given the way the formula works, completely missed the Walmart effect and completely missed the Amazon effect.

Gene Epstein (31:21.447)
I would be getting into the weeds in order to explain why, but when Walmart came along, and especially in the grocery area, came along in all the other goods areas, Walmart specialized in selling name brand goods and then in selling food at huge discounts. And the CPI, the way it was technically set up, just linked

to those numbers, I’ll put that in quotes, linked to those numbers and never registered the huge discounts that were brought. And so there was no decline in prices that was ever recorded from this. Same thing with Amazon. Amazon brought about huge discounts in books and other things, made it possible for people to buy things for less. That too was missed. So

Those are two sort of major events in discounting that they simply were unable to handle because of the way the formula works. So that in itself should be a little bit of a shock. Now, what else is involved? They tend to come, I guess, if you look at the history of…

Well, let me give the other dramatic example. They didn’t know how to handle the smartphone. The smartphone revolution was really extraordinary in that it hit hard during the Great Recession, 08, 09. People were suddenly throwing away those clip phones that became sort of collectors items or niche items.

and they were suddenly buying smartphones.

Gene Epstein (33:19.535)
The smartphone replaced so much. Most young people I know don’t own watches. I mean, maybe the clip on phone was keeping, no, I guess it wasn’t keeping time. Most people I know, they don’t own flashlights. They often don’t even, they don’t use a desktop computer or a laptop. They just use their smartphone as a computer. There too,

all of the many goods and services that a smartphone provided were simply not reflected in the numbers. Now again, if I would explain it further, I would be getting into the weeds, but you recognize that the smartphone had a huge deflationary effect since it substituted for so many goods and services.

And then of course, they obviously admit you no longer needed to use a landline. Most young people I know don’t own a landline phone anymore. Obviously, the camera, don’t buy a camera anymore. All of these goods and certain goods that are part of the CPI suddenly become sort of like lame ducks.

Stephan (34:26.581)
Right. So.

Gene Epstein (34:40.191)
And it’s all encapsulated in the smartphone. A huge, and of course the smartphone was pricey, but the bundle of goods that it brought was a huge disinflationary effect, and the CPI missed it.

Stephan (34:54.114)
So, I mean, look, granted that the smartphone and the internet and some of these things had it were… Yeah, well, I’m not an American, so I’m probably not as familiar with that, but yeah, sure.

Gene Epstein (35:01.761)
and Walmart, and all the discounting that was brought about, and Amazon, you want to grant that as well. All of those.

Stephan (35:09.642)
Yeah, of course. I think, yeah, of course those are, yeah, certainly. I agree with you on that, but do you not, I mean, I’m sure you also hear a lot of people who are also complaining about the cost of living that, you know, gross like meat prices have risen so much in the recent years and, you know, there are these alternative indexes. So as an example, the Chapwood index is one example, but I’m curious, do you, do you see like, how much can you account for that with the, as you said, the Walmart effect, the Amazon, the smartphone effect, but

How much, I mean, you can’t, I can’t eat my smartphone, right? Like there’s a certain amount of cost of food and cost of, you know, petrol for the car or things.

Gene Epstein (35:45.876)
Well, I just got through to say, Stephen, let’s slow down a second. I’m sorry. I just got through explaining to you that Walmart, I know you live in Dubai, maybe you’re not aware of the Walmart is major in the food business, in the grocery business. There was a major paper published about how Walmart started to discount groceries in a major way.

Stephan (35:49.622)

Gene Epstein (36:11.743)
I live in Manhattan, so I don’t experience it, but when I’m on the road, the stunning grocery stores that they run, the supermarkets, that’s food. They discounted it substantially. So let’s make sure that I’m talking about necessities as well. Now…

So you might say, look, I’m giving a few anecdotes. I can’t give you a chalkboard demonstration of why the CPI misses it. I’m only giving you some major examples. And food is indeed a major example of that because Walmart is major in food. Of course, it forced discounting from other grocery stores, other supermarkets as well. But…

Stephan (36:43.822)

Gene Epstein (36:58.867)
Let me get to the Chapman, the Chapwood index, which I actually, in my ignorance, I’d never heard of, but I looked it up. I thought there’s another guy, I forget his name. These alternative indexes have a certain reductio ad absurdum nature about them.

What is that reductive, that absurd in nature? It’s that if you apply, and actually I looked it up, I’m not the first one to make this critique, or the only one, it’s an obvious enough one, that if you apply the Chaplet index, and if you believe in it, we have not had an economic expansion for the last 10 years. We’ve had nothing but contraction.

know why? Because obviously, if you then take it out, of course, maybe you’re not going to believe in nominal GDP. If you take nominal gross domestic product and then you apply any version of the Chaplin index to it in order to turn it into real gross domestic product, you get a continual contraction because nominal gross domestic product never rose more than 4%, 5% at most.

and the chapel is rising at more than 5% consistently. So we’ve had nothing but contraction. Now, I’m able to meet people who say, yeah, well, that’s right, we’ve had nothing but contraction. We are poorer than we used to be. Well, the problem with believing that

that gross output or whatever amount of measure you want of output has been contracting is that there are so many other independently derived numbers that contradict that, mainly employment numbers. We have universal accounts of employment from unemployment insurance claims. We have other accounts of the actual quantity of goods.

Gene Epstein (38:56.531)
sold and manufactured, we have reasonable verification of the fact that there has been economic expansion. And the difference between the Chaplin index and the nominal GDP is now so great that it’s just impossible to believe the Chaplin index has any basis in reality for that reason alone. So that’s why…

These alternative indexes are deeply unimpressive. I’ll go back to the obtuseness. Again, these are arguments that are so silly. For me to belabor the refutation almost dignifies such arguments. Now, with respect to my more subtle point about the idea that the CPI still tends to overstate

inflation. Now, that’s a little bit more subtle. I’ve made only a few general points about where it makes mistakes. But more broadly, the problem with any price index is that if you have an entrepreneurial economy where discounting happens, where fortunes are made from discounting,

If you have an entrepreneurial economy where new products are coming out, it’s very hard for a price index to keep up with it. And by the way, I, as you know, I began by saying that to whatever extent you can avoid using a price index, I would avoid using it.

Gene Epstein (40:45.341)
I would tell you, by the way, that you can take wages as a share, compensation as a share of output. That’s much better because that’s a nominal versus a nominal. I would not use a price index for wages. I prefer not to. So I want to avoid price indexes to whatever is necessary. But price indexes at times become…

unavoidable. Let me make a more general point as well about what I believe is the psychology of the way people perceive prices. There are two issues. Number one, in the life cycle, as people get older they tend to buy more expensive goods. They tend to buy, so they become sort of more aware of the fact that things seem to cost more than they used to. That’s part of it. But secondly, I believe

people will tend to notice a price hike more quickly than they’ll notice a price decline or more quickly than they’ll notice a flat price. They’ll become aware of price hikes more easily than they will of price declines. So I think that’s the reason why there’s a kind of bias that people tend to suffer from with respect to…

to their perception about what is happening to prices. I guess, again, I mean, I’ve never done a survey of that, but I think it’s fairly compelling.

Stephan (42:13.522)
Yeah, so I think it seems interesting to me because we’re seeing people who are, you know, there’s a lot of people talking about even the same item, you know, let’s say, ribeye steak, or something like that has, you know, that has gone up more.

Gene Epstein (42:21.947)
Oh, okay. Well, look, I mean, again, rib eye steak. I mean, we could get into another subtle issue, but the question is, I mean, certainly the CPI, well, let me just look it up. I mean, the CPI certainly shows that steak and meat is a lot more expensive. It’s not like it doesn’t.

I mean, that’s not a difficult item to track, except, as I say, they missed the discounting that Walmart was opposing. But still, they definitely show an increase.

Stephan (43:00.662)
Yeah. So I guess at the end of the day, it sort of comes down to what’s in your basket. And of course, everybody’s basket is different in terms of the real goods and services that you actually purchase. But I guess does that in your view, does that, does that then explain, because we’re seeing a lot of people who are saying, Hey, I can’t make ends meet. It seems that, you know, and we seem like we seem to be seeing a lot more conversation about cost of living crisis. Do you put that all down to that effect that you were saying that just basically people notice increases more than they notice decreases? Is that

Gene Epstein (43:04.525)

Gene Epstein (43:11.704)

Stephan (43:30.73)
Is that the main factor that’s going on here?

Gene Epstein (43:31.359)
Oh, just a moment. Yeah, okay. As I say, the additional point is that there’s a certain life cycle issue.

where people going from their 20s to their 30s, they want more things. They have trouble making ends meet because their expectations rise. They buy more expensive items. I was going to look up meat, but I guess there’s no point. The CPI definitely shows a huge increase in meat. And, of course, let me emphasize, I posted a tweet just the other day.

where I took the CPI because the CPI over the last, you know, just uniformly, I took the CPI, which is the official measure that Bureau of Labor Statistics takes. And then I took this Bureau of Labor Statistics measure of not the average hourly wage of the production supervisory workers, which is, as I’d mentioned, a screwed up number, but of all workers, which is what they’ve been tracking. And I found that-

If you compare the real hourly wage in October of 2023, last month’s number, the most recent number, that is now inflation adjusted by the CPI, and then the same CPI inflation adjusting over the last seven years, and then compare October of 2023 with February of 2020.

44 months ago. Why did I take February of 2020? Because it’s the month before the lockdown started. It’s the month before the US, the governments of the states shut the economy down. The last month when there was a, when something was happening in the economy and then, and then the lockdowns occurred. So compared to February of 2020, 44 months ago, according to their official numbers,

Gene Epstein (45:33.443)
The average hourly earnings are up by just four cents. Four cents. Now take the same 44 month periods in 2019, 2018, 2017, and the rise was about 40 cents.

So I make that point because there are a whole lot of cheerleaders out there, Paul Krugman among them.

for the Biden economy. And I began this tweet by saying, well, maybe this is a reason why people aren’t too excited about the Biden economy, about the performance of the economy. There’s just been, according to the official numbers, a 4 cent increase. Now I do think the CPI is understating, but bear in mind that I’m making a comparison according to the same, I mean, overstating rather, but according to the same CPI measure, it used to be 40 cents.

over again over 44 months, not four cents. So even if I’m correct, by the way, by the way, I’m just saying the CPI overstates by a little less than one percentage point a year. So inflation is running four or five, six percent as it has been.

That’s not a huge difference in terms of overstatement. The only main issue about the overstatement of the CPI has to do with the very long run. That if you can look at 15, 20, 30 year periods, a 1%, a nine tenths of 1% difference makes a difference. But not over 44 months, not so much over 44 months. Why do I make that point? Because I’m trying to, of course,

Gene Epstein (47:20.811)
point out to you that I’m hardly ignorant of the fact that price inflation has taken off. It’s been punishing a whole lot of people. The gains over the last 44 months, according to the CPI, have been a mere four cents. Even if I’m right about the overstatement, it’s been maybe five cents or five and a half cents over 44 months when it used to be over 40 cents.

So that’s been bad news. And indeed, there too I get, I’m really sounding like a curmudgeon, forgive me. I’ll slow down, calm down a little bit here. But there was a huge explosion in the conventional measure called M2 that began in early 2020.

by anybody, an explosion that completely dwarfed the last time there were spikes in the 1970s. There were spikes in the 1970s that connected to the price inflation then. Then the increase in M2 greatly slowed. And then starting in early 2020,

M2 exploded on the upside. M2 is the measure of the money supply adopted pretty much by the Chicago monetarists. It’s a broad, it’s a measure of cash plus checks plus a lot of near monies like savings accounts. It’s the well-accepted measure of the money supply and it exploded.

Big news, hardly surprising that price inflation took off. And now M2 has greatly slowed its increase. So.

Gene Epstein (49:05.351)
much of the only reason why my, again, as I mentioned, the only reason why my idea that the CPI overstates inflation matters is because of using it as a long-term measure, not in the short run. So people have a right to complain about, although again, I was just interviewed by somebody who claimed I was being a Pollyanna by even suggesting that the average hourly earnings are up by four to five cents over the last 44 months.

that there has been some modest increase, a very modest increase, but hard. But if people are used to 40 cents, then a lot of people are hurting. A lot of people in their own life cycles are hurting. So indeed, not so good. I should also put, yeah, yeah.

Stephan (49:49.034)
Right. Yeah. And I guess I think one, and one other idea that I’m curious to get your view on it. This is like another, I guess, pop culture thing. We’re seeing people talk about this idea that, oh, it used to be possible to be a single breadwinner and have, you know, the wife and kids at home and this kind of thing. And would you put that down to people’s expectations has risen so much that they believe it’s not possible to do that anymore or?

Do you think there’s some genuine, you know, uh, something, something wrong there that it used to be feasible? Where are you at here?

Gene Epstein (50:27.592)
You know, I’m turning 79 in a few days, so just bear with the fact that I’m sounding like a real curmudgeon. I apologize for sounding so insulting toward my intellectual adversaries. But of course, here too, I would say the same thing, you know, people with expectations. Look.

The fact is that I do have the advantage of being 79, that I grew up in the 1950s and early 1960s. And certainly it’s also possible to show that, that…

If you want it to support a family on a single income, according to the standards, a living standards of 1960, if you’ll take that year, that’s a decent year, then you’ll never make a long distance phone call. You won’t own, you’ll own a house. If you’re gonna live in a house that’s like half the size of the house you’re in now, you won’t have access to air conditioning. You’ll never fly on a plane. Your diet will be much more restricted.

There’s air conditioning, there are planes, what else is there? The diseases like leukemia will kill you. Leukemia is no longer a death sentence. It certainly was in 1960. And so the whole basket of goods and the whole expectation of how people live in 1960 was so much different. And I guess…

people have expectations. So they, because

Gene Epstein (52:11.547)
It is true that there are so many double income families. Women enter the workplace and their husbands are working. And so they’re used to living on those two incomes. But if they want to live the way their parents lived back in 1960, then they can afford to do it on one income. It’s, you know, of course, obviously you’ll be disconnected. You’ll own a black and white TV that will be on the fritz half the time. You’ll have to smack it in order to get it to work.

you will not, your car will rust out. You won’t have any air conditioning in your car when you’re in a hot day. You won’t have any, you’ll go to the movies or to the beach in order to escape the heat because amazingly the movie theaters were able to bring out air conditioning early on through some technology. That’s where people fled during the heat waves. There’s no air conditioning on the subways where I am, so a very different standard of living. People got by.

But again, it just shows ignorance of history that people can actually talk in those terms that used to be able to support a family on one income. And indeed, obviously the wife did stay home and oftentimes didn’t have a job, most of the time didn’t have a job. And now oftentimes the wife does even when the kids are going to school. So basically that’s…

That’s the answer to that question. It is indeed also based on ignorance.

Stephan (53:41.356)

Stephan (53:44.91)
So I wonder then, is it also just a factor of social and cultural expectations, right? Maybe in years gone by, you might have had kids and not every kid had their own bedroom, right? Like that was, you know, whereas nowadays it sort of seems the expectation almost seems, oh, every kid has to have their own bedroom. Like as just as an example, right? That’s one example of where families needed much bigger houses, or at least.

Gene Epstein (54:03.736)

Stephan (54:13.102)
you know, today would need a much bigger house to have a big family theoretically under that, you know, if you follow that, I don’t necessarily agree with that. I, you know, I only have one kid, but I’m, you know, once I have multiple kids, I’m, I’m okay with them sharing rooms, especially when they’re younger. But, uh, you know, but I think that’s an example of a social difference.

Gene Epstein (54:28.511)
Well, every kid needs his own smartphone, indeed. And there are more cars than there are people. I mean, every kid needs his own car. Yeah, indeed, obviously. It is the revolution of rising expectations, pretty much. I guess what people think is that if you and your wife both have a job, both work, you

And then if you think about how would you live if only one of you were working, you’d have to cut back. And then the logic then goes that, well, then you can’t support a family on one income anymore. But of course, as I said, it’s almost impossible. Ironically, it’s almost difficult to replicate the way people lived in 1960. Because, of course, part of the subtle issue here, I guess, is that…

if you don’t own a smartphone, if you don’t own some kind of, if you’re not connected to the internet, you’re not a part of society anymore. And so therefore, you might say that in a way, what I’m arguing is sort of academic because it’s like you’re obliged to do it, you know. But of course, that’s a, am I right? Yeah.

Stephan (55:43.63)
Right, like that it’s not feasible to actually go back to the 1960s. Yeah. Basically you’re saying you could sort of make this argument that it’s not feasible to actually go back to that standard because today you sort of have to have a smartphone to sort of operate in certain, in many jobs or many contexts.

Gene Epstein (55:52.952)
Yeah, yeah.

Gene Epstein (56:00.057)

And maybe, I mean, can you find a car that rusts, can you find a car like the cars in the 90s? Can you find a car that has no air conditioning? I mean, again, I guess that’s part of the point, although I guess you agree with me that while all that, I think it’s been even called something back kind of something like the neighborhood effect, which forces you to have a higher standard of living if you’re going to become a part of society.

Stephan (56:13.742)

Gene Epstein (56:30.517)
I think it’s a significant point to make. On the other hand, I imagine you agree with me, at least it’s a very different kind of point from the one people are usually making, which is that, you know, like I’m poorer than my parents were, they could support a few, could support a family. In those days, they’re thinking in different terms. On the other hand, there is a certain reality to their point in the sense that we’ve just explained.

Stephan (56:54.35)
Right. And maybe another angle is around regulation, right? That maybe, as an example, maybe there’s government regulations that stop houses below a certain size or cars without certain functions or, you know, some of these government regulations may even impact licensing and your ability to get a job because maybe they say, oh, you’re not allowed to be a babysitter until you’ve done X, Y, Z, this regulation, that regulation, whatever. Whereas maybe historically, people just had, you know, the kid next door be the, you know,

Gene Epstein (57:06.628)

Gene Epstein (57:17.976)

Stephan (57:22.926)
babysitter or something, you know, I’m just making an example, but the regulations that impact occupational licensing, maybe that’s also a factor that we’ve just seen this big bloat over time. And that’s also what’s driven the cost and the affordability up or down, let’s say.

Gene Epstein (57:39.147)
Well, you struck a responsive chord in me.

When I say that, there has been an explosion in occupational licensing, and it’s all 99% corrupt. It’s affected a lot of low-level industries. I don’t think there should be occupational licensing. I don’t think there should be restrictive licensure, even for medicine. You know, when Milton Friedman in 1962 published Capitalism and Freedom, his first book on the free market,

licensure, he chose medicine as his example, because he said, if I can convince you that there should be no restrictive licensure in medicine, then I imagine you can accept the other categories as well. That, of course, we want certification. We want agencies and we want private sector agencies telling us this is a legitimately trained doctor recognized by his or her peers, but restrictive licensure is something else. It has taken off. Just to become a funeral

assistant or a beautician or a manicurist, difficult to get those jobs. I think it is, unless you go through training, and that of course is just the corruption of the guild system, or to become a florist.

There’s never been any good explanation as to how they perform a service. There’s no question we’d always want, again, we’d want certification, but not restriction. That has caused, that has exacerbated income inequality. And although…

Stephan (59:07.118)

Gene Epstein (59:13.811)
Although even if you have a job, even the poorest paid people are doing better than the poorest paid people did 30, 40 years ago. But another crucial part of it, since you struck a responsive court in me that’s even more important, is the explosion in the restriction on housing, on the building of housing in high-wage areas that started in the 1960s. And interestingly, while the New York Times will invade against it, that housing is not

so expensive and that in New York and San Francisco and LA because of the zoning restrictions imposed by government and other restrictions imposed on the ability to build, they don’t connect the dots and recognize that has a huge effect on wage distribution because if you are in the 40 to $50,000 a year category, then your ability to move to a high wage area is very restricted.

because of the cost of housing. If you’re in the 100,000 plus category, the housing will pinch, but you can afford to take advantage of the high wage jobs in the high wage areas. So that too has been a major contribution to the maldistribution of income, the greater inequality of income among workers. And those are the two forms of inequality that we free marketeers, we libertarians also object to.

Not specifically because it causes inequality, but specifically because it is unjust and it causes, it denies people economic opportunities that they deserve in a free market.

Stephan (01:00:50.03)
Right. Yeah. This is, yeah, this is another point that we’re seeing now, because a lot of we’re seeing like this generational conflict, let’s say, right, like not kinetic, but just they’re sort of politically arguing, there’s arguments in different parts of the world saying, Oh, look, you know, as an example, Millennials are arguing against boomers saying, Oh, look, see these boomers, they had it easy, or easier. And maybe they’ve then sort of raised the ladder up.

behind them because maybe they’ve, to the point about property, maybe they’ve engaged in quote unquote, nimbyism to block development of new housing, which in turn kind of keeps the house pricing high, which kind of locks or kind of keeps people unable to access property. Right. That’s kind of an argument that we’re seeing.

Gene Epstein (01:01:39.651)
Yes. Well, to clarify again, you said NIMBYism. I always wanted to find out NIMBYism stands for not in my backyard. For those of your listeners who aren’t familiar with the term, but I always want to emphasize that it is true, of course, that the average homeowner favors the NIMBYism, but you can only do it through the power of your government.

The government is the agency through which you can do this. And that’s why I want to say, I’m not blaming it. I can blame it on the people, but I also want to emphasize that it is basically a government imposed restriction. And then to update your point a little bit, what’s also happened, again, because of the runaway price inflation, that…

Stephan (01:02:21.774)
Of course, yeah.

Gene Epstein (01:02:32.967)
that was truly a scourge and is still eating into the salaries of people, even though, as I say, the average is four cents higher. No, it’s not lower, it’s a little bit higher. I was wrong about expecting a recession this year. It’s been a very slow expansion, but there has been some expansion. The other part of it, of course, is that the huge hike in the mortgage interest rate, the

in a matter of months has meant that there are people with 3% mortgages.

And then now suddenly the young people who want to buy their first home are facing 7 to 8 percent mortgages. And that’s been a huge wrench in the economy due to the price inflation that the Federal Reserve brought about, although it was of course the Treasury and of course it had to do with the lockdown. The lockdowns meant that the US Treasury started to spend trillions of dollars that

Gene Epstein (01:03:41.869)
worth of debt, and that debt was bought through printed money by the Federal Reserve. That caused an explosion in M2, which brought the price inflation, and people of limited means are paying for it. And so that’s been the story.

I’m often walking a tightrope where I sound like a Pollyanna and I want to make sure that people recognize that I do understand all of the injustices that are imposed mainly by government on people. And as a free marketeer, of course, I believe that the

Stephan (01:04:18.702)
Of course.

Gene Epstein (01:04:25.059)
that 99% of the goals of progressives are best realized through a free market. And that in a free market, we would have less income inequality and less wealth inequality. The trillions that were printed by the government made a lot of people very wealthy, including Jeff Bezos, because Amazon became so important. Amazon played an important role during the lockdowns, if the lockdowns had to happen, but it certainly greatly enriched him. And the lockdowns never really did have to happen.

in my view.

Stephan (01:04:56.302)
Right, of course. Yeah. And I think to clarify, yes, certainly, I agree with you about the government being the issue in many of these cases, where, you know, even this intergenerational conflict, some of that argument is also because they’re sort of saying, well, hang on, look at you, this generation above us who controlled the government and used the government to sort of make it harder for other, you know, to sort of make it easy for yourself and, you know, live for today and push the cost off to the younger generations. That’s, you know, that’s part of the argument, I think.

Gene Epstein (01:05:04.502)

Stephan (01:05:26.126)

Gene Epstein (01:05:26.699)
Yeah, you know, you know, you’re such a… I’m fascinated by the… You know, we have… We’ve had a huge… We have a huge surplus of office space, and I’m fascinated by the potential for the office space to be converted to residences. And, oddly, you know, one of the limitations that I almost never read about is the rule that every room in an apartment has to have a window.

You know, I was speaking to you from an office without a window. I live in a loft apartment with my wife and we have and my wife bought the loft apartment in 1981. I married her years later. She’s an artist and one of those rooms does not have a window. You know.

hopefully we won’t get arrested. Is it possible for people to actually, when you mentioned regulation, you can’t live in a place without a window. I mean, I’m in an office without a window. A window is very nice, but it just doesn’t matter to me that much. And offices, so the point is that that’s a good example of the way regulation just screws things up. Windows are nice, but for somebody of limited means, if you can live in a nice, decent neighborhood

that has very few windows, just turn the lights on. It’s not such a terrible life. And yet the regulation will not allow it. And I’m curious as to what extent is it making it more difficult to convert office buildings to apartments? Yeah.

Stephan (01:06:54.798)
Right, I’m sure there’s probably plenty of regulations that might impede that conversion because maybe some regulation about toilets and plumbing and you know, whatever else that that might pose some kind of barrier. Of course, as you said, it seems that there’s also been some discussion about what’s happening with commercial real estate, especially with people, maybe more people working from home. Now that maybe commercial real estate, maybe there’s not as much of a business case for it as they used to be. And maybe there’s a structural difference now.

Gene Epstein (01:07:04.674)

Gene Epstein (01:07:24.119)
Well, indeed. Yeah, yeah. No, no. And it seems as though it seems though it’s here to stay that I mean, I don’t I mean, I don’t regard I mean, I think it if this was the lockdowns were a huge humanitarian tragedy. The one the one thing I like I liked about the lockdown is that the teachers unions behave like such pigs that parents rebelled and there’s been there’s been a huge turn away from

away from teachers’ unions dominated public schools to homeschooling and to charter schools. That’s been one good result. If the other result is that the laptop class, obviously a lot of people do have to go to work, that likes to stay home and commercial real estate is no longer viable, then to what extent can we convert that real estate to residences? That’s the logical alternative. Although, by the way, I know a number of people who

who are not too happy working at home and they don’t, you know, that’s been another fallout where businesses are not maintaining offices and they miss the social. So maybe there will be a little bit of a turn back to working. But if indeed a lot of people want to work from home and not commute, that in itself is nothing that you and I can object to. We can only hope that government gets…

They’re providing tax incentives for commercial real estate to convert to residences, but I rarely hear what you and I were just talking about, the easing of regulations that make it possible for people to have the options. Look, I’ve opened up a building and it’s tiny apartments and—

and half of them don’t have windows. But obviously my rents are very low. Do you want to live there? It’s not such a tragedy to live in a apartment without a window. But apparently, from the standpoint of the regulators, it’s not permitted. So that’s part of the problem.

Stephan (01:09:28.014)
Yeah, well look, I think it’s probably a good spot to finish up here, Jean, but we’ve spoken about a lot of things. Your critique…

Gene Epstein (01:09:34.267)
If you had this other question, how should one try to get ahead in today’s day and age? We haven’t covered that, I guess, some other time. And I managed to talk about the Soul Forum enough. Go into In March, by the way, I’ve done nine debates at my Soul Forum. We’ve had 87 debates since our inception in September of 2016.

I’ve done nine of them. One of them with a socialist has gotten 6.3 million YouTube views and socialist Richard Wolf. I’m proud of that one because I think it’s partly he must be the celebrity who’s brought it up to 6.3 million. This is an amazing figure. Some other debates we’ve had about 100,000, 200,000, but nothing like 6 million. I’m debating…

a journalist named Jonas Serra in March, he wrote a book against the lockdowns, but his argument is that capitalism was a big reason why the lockdowns were imposed. That once again, when in doubt,

blame it on capitalism. So I’m debating him on that issue. I don’t really think capitalism is to blame for the lockdowns, but this is a popular book and I thought I’d debate him on it. So that’s gonna be me in March. So Stephan, I hope to see you in New York and at the after party with your wife and your nine month old son.

Stephan (01:10:51.534)

Stephan (01:11:27.758)
So look, I think that’s a great spot to finish up. Gene, thank you for joining me. I will put the links in the show notes. So just a reminder, that’s for people who want to catch Gene and check out some of the debates. I recommend them. I’ve seen some of them online. I have not, sadly not been in person, but I hope to someday. So Gene, thank you for joining me on the show today.

Gene Epstein (01:11:32.899)

Gene Epstein (01:11:50.287)
Thank you for your perceptive questions that brought out my iron, but hopefully we gained some insight. Thanks again.

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