Reconsidering Yardsticks
A review of two key policy tools we're still using from the early 1900's
If you’re following along, you’re probably aware that I’m currently focused on stabilizing the cost of housing and creating capacity for the future economy.
I want to talk about outdated policy and why the old units of measure aren’t keeping up. Specifically, we’ll touch on AMI (Area Median Income) an CPI (Consumer Pricing Index). I will work hard to keep this out of the realm of politics - but it won’t be easy. It’s very clear we need policy change and better units of measurement.
Lets start with AMI.
AMI was created in the 1960s as a standardized measure to make federal housing subsidies more consistent. Based on metro regions, Housing and Urban Development (HUD) calculates median income, and then scales it - low 80% of AMI, very low - 50% of AMI or extremely low - 30% of AMI. The intent was simplicity and fairness.
It’s an important function, but AMI is a blunt instrument in a world that needs precision. It averages too broadly, ignores the wealth gap, and has drifted out of sync with the realities of working households.
We can pick it apart more, but the point I’m trying to get across is that it masks the missing middle, it hasn’t adjusted to divergence of wage and housing costs, and it ignores wealth inequality. A household earning 80% of AMI but without savings, no access to credit, and high debt is far more precarious than the measure suggests.
It just doesn’t tell a complete story.
As a result, projects get built that don’t match ‘real’ affordability, cities claim (with good intentions) progress on ‘affordable housing’ while middle and working class households continue to lose footing, and policy continues to treat affordability as a static calculation rather than a human-centered challenge. There are other options to explore.
Residual Income Standard- Instead of capping a percentage of income, what if calculate what households need to cover essentials (transportation, childcare, healthcare) and then determine what’s left for housing? It flips the script.
Don’t like it?
What if we created Local Cost Indexes. We could tie affordability to actual local cost of living metrics, not just income. We all know people can spend like crazy. What if we knew the local cost of living and worked backwards from there?
Because we can’t agree?
How about we do what we’re doing at Pathway Communities and use Mobility-Linked Housing Standards. We (in part) consider housing affordability relative to upward mobility (does this occupant/owner have the ability to save, invest, and move toward complete ownership?) We’re linking stable wage with stable housing, and then providing the financial literacy training to improve standing over time.
You know you like that one - but maybe not?
What if we dive deeper into the future economy and borrow a page from our tech bros? What if we created a Dynamic Affordability Model that used real-time data (like wage growth vs rent inflation) to adjust thresholds more regularly - monthly, quarterly, or annually rather than static AMI?
Something has to give.
Even older than AMI is her friend (or nemesis) CPI. Consumer Price Index is one of the most influential economic measures in the U.S. It drives how we calculate inflation, cost-of-living adjustments, Social Security benefits, wage negotiation, and even monetary policy at the Federal Reserve.
What’s wild?
It was developed in 1919 to measure how prices changed for working-class families during the first world war. It was expanded after the second world war to include ‘urban consumers’ and it now covers the vast majority of the US population. It purports to represent the ‘basket of goods and services’ that are meant to reflect a typical household’s spending. I don’t think they’ve considered drone-delivered Macha or same day parcel delivery, let alone insurance and groceries. Good, bad, and otherwise - CPI is our official measure of inflation and it’s analog AF.
Not only has the basket not been updated, but the items IN the basket no longer make up the recipe. If my household is any indication, spending habits shift way faster than are being reported - especially with technology, healthcare, insurance, and child/eldercare. Taxes, fees, quality of life, debt - none of that is in the basket.
There are a bunch of reasons CPI is outdated - the wrong basket, housing distortion, healthcare waylays, underestimating ‘essentials’, even hidden inequality because of it’s method (averaging). It’s flat-out biased.
So policy makers are making decisions on interest rates and fiscal policy based on ‘data’ kept with pencils on paper. Cost-of-living adjustments for Social Security just means higher taxes on wage for the rest of the working class, and businesses are using this outdated model for contracts and escalations - which perpetuates the gap between measured inflation and lived inflation.
My businesses are struggling to calculate this accurately, but it’s NOT 2.5% or 3.1% as advertised. That’s for SURE. Please, ask me more.
So what might work? What should we EXPLORE?
Chained CPI - which is basically algo thinking that allows us to adjust our basket more frequently to reflect consumer substitutions. “Steak prices were nuts at the store so I bought chicken” IF/THAN process. Sure, it’s controversial but at least it’s responsive. A quick search revealed PCE which is Personal Consumption Expenditures used by the Federal Reserve. It captures a broader spectrum of spending and adapts faster than CPI but it still feels inadequate and sluggish. We could use Real-Time Cost Indexes like a bunch of enterprise retailers use dynamic pricing. We could pour in rents from Zillow and groceries from the weekly Piggly Wiggly flyer to reflect changes in real time. Any way we slice it - we need to get more dynamic and redefine ‘essentials’ with modern circumstances.
New Yardsticks & Distorted Reality
Both AMI and CPI were created as practical tools. I can hand dig fence posts or I can rent an auger. Fact is, both methods will fashion me a posthole. AMI gave policy makers a simple way to define housing affordability. CPI gave economists and governments a way to track inflation across the economy. Both share the same flaw: they flatten complexity into averages that don’t match real life.
The result is circular. We use AMI to decide who gets help with housing, but that help is priced using CPI adjusted thresholds. 🐥 or 🥚?
Policy chases policy and both measures drift further from the grounded truth of family budgets. If we want to restore meaning to ‘affordable’ or ‘inflation’ we need new yardsticks that are human-centered, dynamic, and rooted in actual household money.
The future of stability depends on replacing yesterdays averages with today’s realities - oh, and putting the bullshit aside.
This was inspired by Peter Drucker’s book: Landmarks of Tomorrow
I’m Chris Moeller, and I help build #ResilientCommunities. Ask me how. #TinyGiants