Insurance and Government

EYE ON THE PIE: Cost-of-living is with us, not in the stars

January 2, 2006

"I saw your column last week about the cost of living and I think you are a fool." That was among the kinder messages on my mental answering machine, the one that records the thoughts I imagine readers have after reading my columns.

All I had done was explain that the major differences in living costs in different places are related to housing. Housing prices reflect income levels, the benefits of living in different places, and the limitations on building in those places.

Another anonymous "caller" said, "Everybody but you, baboon, knows full well that different places have different taxes and that's a clear part of costs-oflivin'."

Ah, yes, but are taxes independent of the quality of services? Do places with high taxes offer higher-quality services than places with low taxes? Or do places with higher taxes have higher costs of government services because of local conditions like heavy snow?

You may think that places with high taxes are dens of waste, inefficiency and corruption, but what you see as negative government behaviors may be viewed by others as justifiable income-redistribution programs. You say that the locals are crooks. Others will claim that elected officials are not bound by your particular, narrow moral standards; they reward loyalty and friendship, which are as honorable attributes as efficiency and closedbid systems.

Another correspondent (a real one) chided me: "Before you knock rural living, consider this: 1. Most areas now have cable and broadband access. 2. If you have a good home-entertainment system, who needs a movie theater? You can pay for it with the savings on movie theater food alone. 3. Who needs a famous steakhouse when you can buy better meat, better prepared, at about one-third the price? 4. Yes, you still have crime, but not at wholesale rates. 5. When you walk outside at night you can actually see the stars and the silence is almost deafening."

That reader thought my remarks defamed rural areas. You, the careful reader, know that I merely was reporting what we see expressed in the marketplace. People prefer urban areas and are willing to pay premium prices to be there.

Certain locations do involve higher heating or cooling expenditures. But that differential is being reduced as we develop new technologies. Today, we insure against the differential risks of living in certain places. Fire, theft and other hazards of life differ by location. In the future we may include wide swings in energy expenditures among our insurable risks.

To get some idea of the differential risks of living in different places, I asked my friendly insurance agent for his firm's rates to insure my car and my house in five different Indiana cities. His is a very large firm with considerable experience, so its rates would be accurate reflections of risk.

To insure my car in Evansville or Crown Point would cost about 13.5-percent more than in Indianapolis. It would cost 3.2-percent less in New Castle. To insure my Indianapolis house would cost 1.2-percent more in Logansport, but 14.6-percent less in Crown Point.

These differentials are city-specific. They reflect the likelihood of loss, holding the value of the property constant. But would my house be valued at the same level in New Castle or Logansport as it is in Indianapolis? And there we come back to the stars, to the value that I and others place on seeing them in the night sky. There we come back to commuting time and the value that I place on being home from the office in 20 minutes vs. 60 or more, if I lived out where the stars are bright but worked in the big city.

The cost of living is nothing more than a reflection of how we and others wish to live.

Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to
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