Thursday, August 2, 2012

Seven Cities, One Century

I found out this morning that FRED has Consumer Price Indes data for metropolitan statistical areas (MSAs) -- that is, a city and its environs -- dating back to 1914. And since I find this sort of thing very interesting, I was able to calculate a relative cost of living in seven major cities over almost 100 years.

I took the top five MSAs by 2011 population -- New York, Los Angeles, Chicago, Houston, Philadelphia -- and added two smaller ones, Boston and Detroit, because they had been relatively larger and more important for most of this period.

I did this by taking the CPI data for a given city and considering it as a fraction of the national CPI. All of the city CPIs and the national CPI are indexed to 100 in 1982, and therefore the relative cost of living is indexed to 1 in 1982. When a value is higher than 1, it means that the relative cost of living in that city is higher than it was in 1982; when it is lower than 1, it means that city is relatively cheaper. It is important to emphasize that these measurements do not reflect absolute cost of living, and that the CPI measures the price basket of the average urban consumer.
With this method, I found that New York City is the most expensive it has ever been relative to the rest of urban America, with a 10 percent increase in the relative cost of living since 1982. Boston, also, has a far higher relative cost of living than it did three decades ago, although this has been waning gradually over the last decade. Philadelphia and Los Angeles have also seen slight increase in relative costs of living, and that's a mirror image to Chicago's moderate decrease in the cost of living. Detroit and Houston have seen highly significant declines in their relative costs of living of 7 and 11 percent respectively since 1982.

Historically speaking, New York City has experienced the highest relative costs of living quite consistently over the last century, and Houston has always been been comparatively cheaper than the average urban area. New York's prices, in other words, have nearly always gone up faster than the nation's, as have Houston's risen more slowly.

There's a tremendous amount of information buried within the relative costs of living data. We should start from Econ 101 by saying there are two influences on price, in this instance the relative cost of living in a given city: supply and demand. The interpretation comes quite easily from that, and I would suggest that the two biggest determinants of the supply function among cities are the cost and use of fuel and the cost of housing.

New York City is highly supply-constrained, given high population density and the natural limitations on land posed by Manhattan. An interesting question also comes out of the NYC data: the city reversed a seemingly inexorable decline in the early 1980s, and at this time it experiences a brief moment of relatively low costs of living. To what extent was the city's recovery powered by low rents and a lifestyle which avoided spending big bucks on energy?

Boston has been revitalized since 1980, drawing strength from its universities and an emphasis on knowledge industries. It makes intuitive sense to me to think that demand for Boston living has increased, though I don't have a good sense of how flexible supply is.

This might be my own priors showing about what cities I find livable and desirable, but I don't see Philadelphia or Los Angeles as highly rated in either category. Maybe slightly they are more so than your average, and thus smaller, city -- that would explain the behavior of their relative costs of living. I'm pretty sure the decline of relative costs of living in the early 90s for L.A. has do to with the Rodney King riots.

Houston has ample supply and can accommodate demand easily. Since housing will always be cheap, the one vulnerability is gas prices. It makes sense, then, that this city had a moment of relatively high cost of living in the late 70s.

And then we have Detroit. I posit this is almost entirely a demand story, as its industries have declined, its population has moved out, and its urban cachet has evaporated. Low relative costs of living may draw price-sensitive residents to the city once more, however; I've heard recently about a hipster scene emerging in Detroit, just like it did in the once-abandoned districts around New York.

2 comments:

  1. I wonder how much of Houston's temporary increase in CPI circa 1980 can be attributed to the 1979 oil crisis.

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  2. In the recession of the early 90's, California took a much larger hit than the rest of the nation. The decline in defense spending impacted a large swath of the CA economy, leading to a period of out-migration. This probably had a larger effect than the Rodney King riots.

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