The Money Illusion: Could a 'New Dollar' Solve America's Affordability Crisis?
Americans have a long history of turning grocery prices into national drama. In 1916, housewives boycotted "egg speculators" for charging 36.5 cents a dozen. By the 1970s, with eggs nearing 80 cents and beef over a dollar a pound, suburban mothers marched with banners like "Save Our Sanity." Today, TikTok videos lament $13 burgers and $5-a-dozen eggs, continuing this tradition of price outrage.
Political Responses to Perceived Affordability Issues
Politicians have responded predictably. President Donald Trump has proposed $2,000 stimulus checks funded by tariffs and floated 50-year mortgages. Democrats champion "affordability" with calls for rent freezes and public grocery stores. Yet, the numbers tell a different story.
Overall price growth in America is unremarkable by historical standards. Annual grocery inflation runs at 2.5%, and rental inflation is under 3.5%—below long-term norms. Since 2019, hourly pay for non-supervisory workers has risen faster than rents, food, and overall inflation, reversing the 2010s trend where rental costs outpaced earnings.
Measured against purchasing power, rent and groceries are more affordable today than before the pandemic. So why is consumer sentiment near record lows?
The Psychology Behind Price Perception
The answer lies in the "money illusion," a term coined by economist Irving Fisher. This cognitive bias makes people react to nominal prices rather than real purchasing power. Behavioral economics research confirms its pervasiveness.
In 1986, Daniel Kahneman and Richard Thaler found workers deemed a 7% wage cut with no inflation unfair, but a 5% raise amid 12% inflation acceptable—even though both left them worse off in real terms. Later studies by Eldar Shafir, Peter Diamond, and Amos Tversky showed similar distortions in housing decisions, where people preferred nominal gains over real losses.
People anchor on old nominal prices because they are salient. During high inflation, these anchors become misleading, fueling anger even when real affordability improves.
Current Political Fixes and Their Limitations
Popular solutions include the "abundance agenda" to boost supply and selective tariff repeals. However, these won't lower nominal prices. Short of deflation, absolute price levels rarely fall. Politicians remain stuck with sticker prices voters resent.
A Radical Nominal Solution: Redenomination
What if America simply changed the numbers? History offers precedents:
- France introduced the "heavy franc" in 1960, lopping off two zeros for a psychological reset.
- Mexico's 1993 "nuevo peso" replaced 1,000 old units, making prices look sane instantly.
- Poland's 1995 reform replaced 10,000 old zloty with one new unit, stabilizing inflation expectations.
Even Europe's euro adoption showed people react to digits: inflation barely budged, yet Germans felt prices jumped because numbers changed. Redenomination alters nothing real but makes a big psychological difference.
The Case for a 'New Dollar'
Housing illustrates why this matters. A Brooklyn one-bedroom renting for $4,000 today could hit $8,000 in a generation, then $16,000, sparking outrage. Americans have never tolerated ballooning numbers. A "new dollar" knocking off a zero wouldn't make life cheaper but would give voters the cheap-looking prices they crave.
This purely nominal fix addresses the money illusion directly. While real solutions like supply boosts are crucial, redenomination could calm public sentiment, offering a respite from the affordability theater that has defined American politics for over a century.
