Most of Us Really Are Not Fabulously Rich
The notion that government statistics vastly understate personal wealth is absurd.
Bloomberg, June 4, 2018
The first time you see a dubious economic claim, you may not take much note of it. The second time, your neck hairs should stand on end. The third time is the clue that a purposeful attempt is underway at pushing a misleading meme.
I take it as my personal obligation to rebut false tropes and debunk nonsense.
Case in point is an article with the headline “The Canard About Falling Incomes.” It asserted, among other things, that the consumer-price index is obsolete and thanks to so-called hedonic-quality adjustments — a result of technological improvements — we are all individually wealthier than ever and that stagnant wages are misleading.
These claims are nonsense. The author conflates issues that are best analyzed separately. So let’s consider each in turn:
• Wage gains: The data show that the middle class has made only modest gains since the financial crisis; indeed, this is a pattern that dates to the 1970s.
The issue, which has been dismissed by some, is that the top 10 percent, 1 percent and especially top 0.1 percent have captured almost all of the gains that the economy has produced.
There are well-established reasons for this: the combination of reduced union strength; the impact of automation and technology; globalization leading to a labor arbitrage between developed and developing nations; and a tax code that has become less progressive since the 1980s, favoring capital over labor. Note that this is not a critique, but a mere acknowledgement of facts.
• Technological innovation: There’s this tired trope that gets trotted out whenever the issue of middle-class income stagnation comes up — we have iPhones and Netflix, anti-locking brake systems and ride-hailing apps. It’s all so wonderful! Why the ingratitude to the tech overlords for this bounty?
But as I first explained a decade ago, and have been repeating with some regularity since, progress is humanity’s default setting. That the relentless march of human ingenuity eventually makes its way to all of society is a wonderful thing.
It also means that we now pay for lots of new things: internet access, mobile phones and data services, Netflix, Amazon Prime, tablets, cloud storage, ebooks are all part of the family budget today — all of it stuff that did not exist 30 years ago.
While I believe having access to these things is wonderful for me, none of the above means that large swaths of the economic strata are seeing actual wage gains. These are two different issues; being able to hail an Uber ride from your iPhone is not very meaningful if those services can only be paid for by sacrificing something essential.
• Inflation: The good news is that flat-panel televisions, tablets, tech gadgets, toys — many of the things we want and enjoy — have tumbled in price as a result of widespread adoption and economies of scale. The bad news is that costs for health care, housing and education have consistently been rising at rates much faster than the CPI.
We have deflation in the things we want, but inflation in the things we need.
For a different take, consider the Massachusetts Institute of Technology’s Billion Price Project, which tracks all sorts of prices found online. If anything, it shows that the official CPI basket of goods in recent years has been understating the rate of inflation.
This is not a bug but a feature. It was created in part by that same hedonic-adjustment process. There’s a backstory here: In 1995, the Boskin Commission1 was charged with revising the Bureau of Labor Statistics inflation measure. The unofficial goal was a backdoor way to lower inflation readings to reduce cost of living adjustments (COLAs) for Social Security and other government spending. No surprise that the committee found several dishonest ways to claim CPI inflation was overstated. One was substitution, the idea that people switch to less expensive chicken when beef prices rise; the other was the aforementioned hedonic adjustment.2
How much middle-class wages rise or not is a separate issue from whether some items cost more or less than they once did.
The misleading argument mentioned in the article cited at the start of this column seems to come up with startling regularity theses day. The poor and middle class have it so good, but they just don’t know it! Why the average person living today has it better than Louis the XIV ever did. They have great indoor plumbing, centrally heated housing and flat-panel TVs galore! If they only would just enjoy their smart phones, we all would be better off by virtue of not having to hear their whining.
Someday, maybe writers will stop making these silly comparisons. But I’m not going to count on it.
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1. Formally, the “Advisory Commission to Study the Consumer Price Index.”
2. One other thing about hedonic adjustmentss: the proponents of this line of argument only want to look at it in one direction; they never want to discuss all of the time-sucking and frustrating ways in which hedonics flow in the other direction. On hold forever with your cable company? Trying to change a flight? Need service from any company? Best of luck finding these losses and inefficiencies in any official data series.
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I originally published this at Bloomberg on June 4, 2018 . All of my Bloomberg columns can be found here and here.
