Tuesday, June 14, 2011

Regional Inflation

Since I'll be moving from DC to West Virginia, I've become very keen on differences of cost of living, or what I think of as regional inflation (as opposed to the more common temporal inflation, or just inflation). The reason why I refer to it as a type of inflation is (a) it is a type of inflation (an increase in the price level) and (b) it reminds us we should adjust for it as it's just as important as conventional inflation.

For example, Matthew Yglesias argues Houston is growing isn't because they are wealthier but because they have room to build new houses. Here's his chart showing that a place like Boston, which is crowded, has a higher average income. If it's higher, why aren't people moving there (captured as more new housing)? "These days most people work providing services to other people, so it’s generally advantageous to be providing those services someplace where incomes are high. But people can’t move to Boston, on net, if it’s not possible to build houses in the Boston area." says Yglesias.

No, not that simple at all. Fundamentally, average wages in Houston are higher than in Boston. You have to adjust for cost of living. And the cost of living is 43% higher in Boston than in Houston (I can't get a permanent link to my inputs; I use Houston-Sugar Land-Baytown TX Metro - Houston TX as my comparison metro area but each of the three choices gives you about the same result). In the above graph, Boston has an average income of about $53,000. Houston's income's about $44,000, but in Boston terms (i.e. you move from Houston to Boston and your standard of living is the same), it's $63,224. Adjusted for cost of living, Houston's 18.9% wealthier than Boston.

Houston has more housing starts than Boston because it's growing. And it's growing (I'd wager) because it's wealthier than Boston.