Living standards: The CPI vs BU dorms

In this post I am going to argue that college dormitories provide a better way of estimating real income than the CPI.

Each year I get more like my dad, who was a reactionary liberal.  He voted liberal but always complained about how easy things were for the younger generation.  Every time I drive into Boston I think about him as I pass by a 3o story tower with large floor to ceiling plate glass windows.  There must be fantastic views of the Charles River, Cambridge, and downtown Boston.  The newest Trump Tower?  No, it’s the newest Boston University dorm.  And it’s not unique, nearby are two more towers that are slightly older, slightly lower, and slightly less elegant.  I can only imagine what it would be like to live in one of those high rise towers.  Imagine the parties; students strolling around with martinis in hand, discussing all sorts of fascinating topics.  What a life!  Here is a picture if you don’t believe me.  (Here and here are some views.)

And it isn’t just BU, which is an above average university.  The new dorms at Bentley are also much nicer than the old ones, and I’m told this trend is going on all across America.  When I ask my colleagues why students need such fancy digs, they tell me that things are different now.  (I first entered the UW in 1973.)  Our generation often grew up in modest ranch houses with one bathroom.  We doubled up with bunk beds.  Now students grow up in 4 or 5 bedroom houses, each kid has their own bedroom.  There might be three or four bathrooms.  Granite counter-tops, big screen TVs.  Two car garages.  Many students now drive their own car to high school. 

I’m told colleges have to do this or they will lose students to other schools.  My colleagues say “Times change, just deal with it and stop being such a reactionary.”  (Well the last sentence I made up; my younger colleagues are too polite to say it, but that’s what they are thinking.)

On the other hand David Johnston claims that if we deflate incomes by the CPI, it seems like were are living in a poorer country than we inhabited in 1973:

America grew and grew during this era. GDP, adjusted for inflation and increased population, was up 227 percent. But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century. … Millions are out of work, and the jobs they once held are … not coming back. And even if the Great Recession is coming to an end, we face years of jobs growing more slowly than the working-age population, which could radically transform America’s culture, work ethic, and sense of progress.

I don’t know what to make of these arguments.  I find it hard to think of a single area where American living standards aren’t obviously much higher than 1973:

1.   Houses are bigger and have more baths.

2.  Electronics are so much better it is ridiculous.  100 times as many TV channels.

3.  We take jet vacations to Disney World or Europe, not car trips to a state park.

4.  Granite counter-tops vs. Formica.

5.  Thai or sushi restaurants vs. meat and potatoes “supper clubs.”

6.  Better medical care and longer life expectancy.

7.  Cars with paint that doesn’t rust out in three years.

8.  For the lower middle class: Wal-Mart vs. K-Mart.

9.  No more purple shag carpets.

10.  U2/Radiohead vs. Dylan, the Beatles and the Stones.

OK, pop music is an exception, but nine out of ten ain’t bad.  And there is lots more I could point to.  We have much cleaner air and water.  Less racism, sexism and homophobia.  Much less violent crime.  Is the composition of college students different?  Yes, but that actually strengthens my argument.

So what do you guys think?  Do you agree with me that dorm quality is the best proxy for living standards?  Or are you going to take what has been the intellectually fashionable position since ancient times—that things were better in the old days?

PS.  Don’t try to tell me I am ignoring the poor.  There are also far fewer Americans that live in shacks that lack indoor plumbing.


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44 Responses to “Living standards: The CPI vs BU dorms”

  1. Gravatar of wm tanksley wm tanksley
    2. January 2010 at 19:24

    I agree that we’re better off now than we were before… But college dorms seem like a sloppy measure in general, because educational expenses are so heavily subsidized and generally treated specially.

  2. Gravatar of Doc Merlin Doc Merlin
    2. January 2010 at 19:39

    Mostly, but not completely, I agree. Dorms are often financed by heavily subsidized borrowing. However, I do agree that things have gotten so much completely better and anyone saying otherwise has been smoking too much crack.

    CPI ignores things improving as it just looks as prices, this is how it should be. We need a way to look at consumer prices outside of quality effects. Particularly as quality effects are incredibly hard to quantify, and if you were to use a measure that held quality constant we would see very intense deflation. Because of this CPI is more useful for monetary policy than dorm rooms, if not for actual wealth comparisons.

  3. Gravatar of q q
    2. January 2010 at 19:41

    i’d certainly add increased selection of food in grocery stores to your list, plus availability of media on demand and for delivery by mail. i grew up in the 70s in a town with no good bookstore and would have loved amazon.com.

    but a question in response.

    if you compare 2000 and 2010, the differences in the items in your bullet point list are (obviously) much smaller. in fact, many of these things had completely settled by 2000.

    however, i’d guess (i don’t have any personal knowledge here) that college dorms are quite a bit more expensive in 2009 compared to 2000.

  4. Gravatar of FredB FredB
    2. January 2010 at 19:44

    I prefer to think that this is creative abundance. Life should be getting better.

    I found the phrase creative abundance in a horoscope today. It is to me a more positve expression of Schumpeter’s creative destruction. Economists are such a dismal bunch.

  5. Gravatar of Peter Peter
    3. January 2010 at 03:09

    Except I would be willing to bet the dual income family of the magic yesteryear (post-WWII to abaout 1970) had had higher PPP than today. We grew up that way because often we lived in single income households (good for our values, bad for our materialism) whereas today your spoiled youth* grows up in a McMansion which is provided by two middle class incomes.

    What I would like to see is a CPI and PPP comparison of two equal income middle class households; would be willing to be you were better off back then. (Also remember luxory goods like vehicles, fuel, air, electronics, etc etc are cheaper now adjusted for inflation). My gut guess is a that dual income middle class family in the 1950′s also had the 1950′s version of a McMansion.

    Also you are measuring better by material wealth, as I posted over the economist.com I simply am not convince a hundred channels are better than five, two people slaving away for a hundred hours a week ignoring their children or outsourcing their raising, or bigger tv’s are *better*; I think you are falling in the fallacy of thinking people in the past were unhappier or stupider because they didn’t have these things so must have been worse off; my grandmother was quite happy growing up on radio and I remember my great-grandmother telling of the time before that with socials and she didn’t seem any worse off.

    Lastly I think what you are really seeing is the increasingly common shifting of a university from a place of education at the undergrad level to a continuation of parenting outsourcing and babysitting from high school hence the need to improve quality of life and make campus a lifestyle. Peoples have been learning in spartan conditions since the big universities were setup in the Middle Ages for none the worse; it’s truly sad that funds that could be used to improve education (smaller class sizes for example) are being wasted on dorms, though to be honest I am annoyed dorms exist at all and I find them a colossal waste of funds. I remember my university had optional dorms and it chaffed me every day when I went home to my rent college townhouse with three roommates that my overpriced tuition was paying for dorm princesses that were incapable of functioning as adults and managing their own finances hence had to live in a dorm like a child.

  6. Gravatar of OGT OGT
    3. January 2010 at 05:24

    You’ve stumbled onto one of my current obsessions, the cost of college. I think the current college costs are a bit of a bubble actually given the deviation of college tuition and expenses from CPI, and, more importantly median incomes. It probably has a bit to do with having a fifteen month old, so I am talking my own book.

    College costs have been significantly outpacing CPI and income for decades, it’s no accident that the only three sectors to gain jobs in the last ten years are government, health care and education.

    The conundrum has to do with the fact that instruction costs have not significantly deviated from inflation, instructor pay divide by pupils plus basic overhead. Class sizes are not getting smaller and, as far as I know, college professor pay is not sky rocketing.

    The culprits seem to exactly things like those BU dorms, which I agree are a bit ridiculous, and rock climbing walls and the like. Also, it’s my understanding that most grad programs are subsidized out of undergraduate tuition, so we’re taxing undergrads to subsidize graduates students.

    In any case, on your main point I agree CPI doesn’t capture living standard changes over long term, though I thought they tried to do hedonic modeling for quality changes.

  7. Gravatar of q q
    3. January 2010 at 06:28

    hmmm, so kids go to college based on what they can consume when they are there rather than what they can invest when they are there.

  8. Gravatar of scott sumner scott sumner
    3. January 2010 at 09:22

    tanksley, Good point. But does that affect the level of college amenities, or the rate of change? If it is just the level that is increased, my results still hold.

    Doc Merlin, Good point.

    q, The weird thing is that I have never noticed a living standard change over any of the 10 year periods of my life. But over longer periods it is obvious. It’s like day to day my daughter doesn’t seem to be growing, but over a few years . . .

    Fred, Economists aren’t dismal–just realists.

    Peter, That is the argument I expected. A few comments:

    1. Nobody is forcing people to have dual incomes, so I consider that change an improvement, since it is undertaken voluntarily. Even the worst case statistics show real wages to be roughly flat since the 1960s, so families could still have the wife stay at home if they wished.

    2. I don’t think children are more spoiled today. They seem equal well (or badly) behaved as 1970s college students, maybe a bit better. I’ll bet statistics would show lower crime rates among college students than in the 1970s.

    3. I didn’t claim people are happier, only that living standards are higher. I have no idea whether people in America are happier than those in Bangladesh. All we can say is that most people act as if they prefer modern American living standards to those of Bangladesh, and also to the traditional family living environment of the 1960s.

    OGT, I agree, although I should say I wasn’t trying to make a moral judgment. My “reactionary” comments at the beginning were half kidding. I often feel that way, but there isn’t really any reason to if this is what people want today.

    q, yes.

  9. Gravatar of Greg Ransom Greg Ransom
    3. January 2010 at 09:29

    But there are cases like this.

    The parents lived modestly while the current generation were kids. They saved money, invested, and became extremely wealthy, with more than solid savings.

    The kids grew up and did not live modestly, they spent well beyond their means, and are now in bankruptcy, loosing their home and cars and furniture.

    The kids lived a higher standard of living than their parents as young adults, but they won’t as mature adults.

    And it’s hard to guess what will happen with the next generation ..

    And I’m not writing this as a metaphor for the country.

  10. Gravatar of Jon Jon
    3. January 2010 at 10:27

    Scott: I don’t necessarily disagree–but its easy to focus on a few things that have become much cheaper (electronics) and ignore areas that have become much more expensive, such as health care… so I do not have a firm mind on this issue. I think there is a lot of information to integrate.

    My more pressing concern about your discussion that I’d rather discuss is this: Your entanglement of wealth and income. Its certainly possible for wealth in durable goods to accumulate even as current income (net of depreciation) stalls or declines.

    Such a society is clearly comfortable in the luxury of past glory… but it isn’t obvious that it has the capacity to regenerate itself.

    A second concern involves certain types of workers. As billions join the global workforce and can build ever more goods (as skills disseminate), the factory-worker class must be averaging down. (As an aside, I strongly believe that an element of the genius of China is how they’ve gotten us to teach them everything we know about manufacturing and paid only a very minor ephemeral price for it…)

    The off-spring of these workers are surely not going to BU. Johnson seems to be claiming that particular wage-earners are worst-off now than before. Your evidence is really challenging a straw-man rendition: than all workers are worst off individually.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. January 2010 at 12:17

    Scott is exactly right, and some of his critics are misunderstanding what he’s saying; standards of living are much higher than adjusted median income statistics say. Robt. Gordon recently has pointed out that the median size of newly constructed residences is about 40% larger than in 1973. If median income hasn’t risen at all, who is buying them?

    My anecdotal evidence is from two years ago. I was roped into coaching my neighbor’s ten year old’s LL baseball team. I was astounded at how the kids lived compared to my half century old LL career.

    They had their own batting machines and cages, video cameras, cellphones, toys I could have not even dreampt of–jet-skis, motorized bikes and trikes. We couldn’t play games, nor make-up rain-outs during spring break–aka, Easter recess–because so many kids were out of state vacationing; in Hawaii, at destination ski resorts, charter fishing expeditions, racing motorcycles in Arizona. When I was that age, I’m not sure I even knew anyone with more than one bathroom in their home.

    The parents of my kids weren’t–with possibly two exceptions–professionals. They worked at Boeing, in inside sales of industrial equipment, construction, landscaping, one owned a pizzeria.

  12. Gravatar of Matthew Yglesias » The Wage Stagnation Debate Matthew Yglesias » The Wage Stagnation Debate
    4. January 2010 at 06:15

    [...] Sumner responds that living standards are realistically much higher: I don’t know what to make of these arguments. I find it hard to think of a single area where [...]

  13. Gravatar of ssumner ssumner
    4. January 2010 at 06:57

    Greg, Still, the homes exist. If someone moves out, someone else will move in. Yes a few McMansions may be torn down, but not many.

    Jon, You misunderstood my argument. I said nothing about electronics becoming cheaper and health care getting more expensive. I was talking about consuumption. We consume much more electronics AND much more health care. Indeed much more of just about everything.

    I also think you misunderstood Johnston, he is not arguing that a particular class of workers is worse off than before, but that the average American worker is worse off. And that just doesn’t seem to be the case. The average American grows up in a much richer country than 1973, in almost every respect. Our consumption bundle is much bigger. The current crisis may reduce that a bit, but soon we’ll be consuming like crazy again.

    Our living standards are not falling to Chinese levels, theirs are rising toward our levels.

    Patrick, That’s is exactly my point. And one other point I forgot to mention. In many industries where real wages have fallen, like meatpacking, almost all the jobs are being taken by hispanic immigrants. But while those immigrants may make less then the former American-born workers, they are also better off than their parents were living in rural Mexico.

  14. Gravatar of JRoth JRoth
    4. January 2010 at 07:28

    I know your list is partly a bit tongue-in-cheek (I don’t think purple shag carpeting was an economic choice so much as a [bad] aesthetic one), but I do want to note that some of the items are really mirages. In particular, I’m not sure by what measures Wal-Mart is supposed to be superior to K-Mart. Certainly not in the quality of the goods – Wal-Mart clothing is incredibly shoddy, and the hardware is definitively worse than what K-Mart sold 35 years ago.

    And I think that gets to part of why CPI seems counterintuitive – we see a lot of fancy, new products, which masks the real decline that is common to older products. In 1970, there were two kinds of commonly-available pliers: solidly-constructed ones, made in America by union labor, that were probably a bit higher quality than strictly needed by homeowners, and were available in hardware stores and department stores in every town and neighborhood in America; and extremely crummy ones made in Taiwan that could be had at 5-and-10s. Nowadays there are essentially three kinds: the former, available at Sears and home stores (and whatever hardware stores remain), the latter, available at dollar stores, and a middle grade that may or not be good enough for homeowners, is made in China, and sold at Wal-Mart. The good kind are no cheaper now than they were 35 years ago; I suspect they actually cost a bit more in real terms as they’ve become a smaller part of the market. The extremely crummy ones are perhaps cheaper than they once were, but not meaningfully (and it’s irrelevant, since they offer the user little more than the psychological benefit of owning a tool for emergency use). The mid-range ones arguably represent a consumer surplus: they are somewhat cheaper than the Sears pliers from 1973 partly because they are better-suited to non-professional use. But the practical reality is that they are lower quality and will not last as long. And if you need to replace them – as you likely will if you need them at all – then you’ve lost any theoretical gain.

    Point being, Wal-Mart is not, for the most part, providing better value than K-Mart or Sears did; they’ve simply managed to be more profitable while selling demonstrably inferior, but close-enough, goods.

    A lot of other items on your list are in this category, btw: MRI machines are a material improvement over X-ray machines for soft-tissue injuries, but access to your personal doctor is much more limited (and vastly more expensive); contemporary ethnic food is vastly better than the old supper clubs, but the service pales in comparison; housing construction as a whole is much shoddier than it once was (all but the very wealthiest live in houses that are larger, but worse-built, than Levittown, which was built on the cheap for returning veterans, not successful professionals).

    Most of these tradeoffs are labor-for-material – we get more stuff by paying less money to Americans – and that’s natural, but let’s not pretend that the tradeoffs don’t exist.

  15. Gravatar of Franklin Franklin
    4. January 2010 at 07:43

    This is a joke right?

    If not, for starters, the college dorm proxy is pretty silly on its face.

    Only 27 percent of the country has a bachelors degree or higher, so using the “dorm room” baseline is pretty much by definition using a baseline that is an upper, upper-middle-class baseline.

    Part of the joke too with stories like BU dorm is that many of those kids are just passing through on borrowed dollars– the real costs of that experience are being hidden from them until they enter the work force and discover what it’s like to have $150,000 to $200,000 of debt for an undergraduate education and an income in the $35,000 to $45,000 range after graduation.

    Sure the college experience may be more luxurious than in the past — it’s also a lot more expensive, and the earning potential derived from the degree isn’t what it once was. Kids getting out of school are likely to have it much harder than graduates 10, 20, or even 30 years ago.

    Having said that: Of course, the material well-being has improved significantly for those in the top quartile of the economy.

    The question is whether it really has been so for someone in the middle of the economy or below. I’m dubious — especially as this relates to things like education, health care, and housing costs.

    Those things consume a much larger share of a person’s income than they did in the past.

    Even if you assume that the increased costs are simply a function of bigger more luxurious houses for median earners; and higher quality medical care — it’s also true that home owners today own a smaller percentage of that house than their parents likely did; also many people with some access to health care are still priced out of the best care available. I’m not sure that I even really buy the premise regarding the McMansion. The rooms may be larger, but the construction isn’t necessarily better.

    It would be interesting to see some more hard data to justify the use of the dorm room “metric” as a median standard.

  16. Gravatar of Blackadder Blackadder
    4. January 2010 at 08:09

    Last year there was a tv show, Life on Mars, about a present day cop who gets hit by a car and wakes up as a cop in 1973. According to a lot of folks on the left, the guy’s standard of living should have gone up, but watching the show made it hard to take the assertion seriously (and I don’t think this was because the show underestimated how good things were in 1973).

  17. Gravatar of the whole and not the half of it the whole and not the half of it
    4. January 2010 at 08:26

    They had their own batting machines and cages, video cameras, cellphones, toys I could have not even dreampt of

    An interesting observation, Patrick, which of course fits perfectly with Scott’s initial point.

    Thing is, what does it matter? Those 10-year-olds have a frame of reference completely foreign to yours. If, during their entire lives, income is stagnating, well, the it seems to them that income is stagnating. For some (not all!) partisans on the right, the dawn of time for the study of economics is around 1977. We live where and when we’re born.

    This is the Bangladesh-vs-US-happiness argument all over again, with the fact that “the past is another country” thrown in. Of course a person teleported from 2009 to 1973 would miss some stuff… but happily, that wasn’t a problem for people who actually existed in 1973.

  18. Gravatar of JRoth JRoth
    4. January 2010 at 10:07

    Blackadder – no one is asserting that life in 1973 was better. Wage stagnation isn’t the same as decline. In 1973 things were better than they had been in 1938 (and not just due to the Depression – TV, better cars*, electric fridges, near-ubiquitous indoor plumbing with hot water….). The important thing is to realize that someone in 1973 would have been earning a vastly larger real wage than his counterpart would have in 1938, whereas his 2008 counterpart would be earning about the same. There were new categories of things to buy with that wage, and the quality of many things would have improved for the same price, but that’s not the same as having more actual money.

    BTW, how much of our increased household income has come from longer hours? It’s the hourly wage, not annual income, that has stagnated.

    * on the cusp of catalytic converters

  19. Gravatar of Mike@pvl Mike@pvl
    4. January 2010 at 10:17

    YES, thank you! I think about this a lot, that if you were to compare feature to feature there has been massive deflation. Try purchasing a car today with equivalent features to a midrange car built in 1992. You will pay FAR less, of course, even in real dollars. Not too long ago I heard someone on NPR complaining that mortgage payments have increased from an average of 30% of income to 50% of income (or something similar, the numbers don’t matter) since the 70s. What she neglected to point out is that the average house size has doubled in the same time period.

  20. Gravatar of Blackadder Blackadder
    4. January 2010 at 11:05

    There were new categories of things to buy with that wage, and the quality of many things would have improved for the same price, but that’s not the same as having more actual money.

    Why not? I mean, technically it’s not true that the average person in 2009 doesn’t have more actual money than the guy in 1973. To get stagnation you have to ‘adjust for inflation.’ Scott’s point is that this adjustment is flawed, in that it doesn’t take into account quality improvements, etc. and that talking about ‘real wages’ without taking account of this fact is misleading. How is that not a valid point?

    BTW, how much of our increased household income has come from longer hours? It’s the hourly wage, not annual income, that has stagnated.

    If you look at figure 7 here, the average annual hours worked in 1973 was 1,743 vs. 1,531 in 2007. So it’s not just a matter of people working more.

    I wonder if the difference might be due to the fact that relatively fewer people are on an hourly wage these days (as opposed to being salaried), and that those who are tend to be toward the bottom end of the spectrum. Does anyone know if the average hourly wage figures take account of this somehow?

  21. Gravatar of Franklin Franklin
    4. January 2010 at 11:32

    The cost of technology is one area where prices have definitely decreased. New technologies that did not previously exist have become widely available. This is one area where the standard of living has improved. It’s just one area though — arguably not as important as shelter.

    Debt as a fraction of household income is off-the-charts right now. Some people may live in much larger house, but they own less of that home than their predecessors did.

    e.g. based on the Feds numbers from May 2009: debt to disposable income: 55% in 1960; 65% in the mid-80s; 133% in 2007. Keep in mind too that home-ownership rates right now are close to where they were at the start of this decade. It’ll be interesting to see where things bottom out, but it’s not inconceivable that we could see ownership rates comparable to 1980 before all is said and done (e.g. a 3 percent drop from the present level).

    JRoth hits the mark will with his comment too.

    The two income family for some may be a way to enjoy a higher standard of living. For many families though it’s an economic necessity. For those families on the edge, I’m not so sure that homeless shelters and public housing are really that much better today than the rambler that many of these wage earners might have once been able to own outright with a decent blue-collar wage.

  22. Gravatar of Jim Naureckas Jim Naureckas
    4. January 2010 at 11:51

    This discussion is not particularly responsive to what David Cay Johnston actually wrote. He noted that “the average income of the bottom 90 percent grew from $22,366 in 1961 to $31,642 in 2006″–that’s almost half again as much, so you would expect to see an improvement in standards of living, just as you would hope that your lifestyle would improve if you got a 30 percent pay raise. The fact that families are working more hours for that improved lifestyle (900 more hours a year, roughly 22 weeks of full-time work) is kind of a subsidiary issue–the major point is that the economy has more than doubled in size per capita over the same period (up 227 percent), so the increase in standard of living is a lot less than what you would get if the gains were more equitably distributed.

  23. Gravatar of azmyth azmyth
    4. January 2010 at 12:18

    It appears at first glace that health care costs have gone up, but it is not quite so simple. Due to quality increases, the care is actually worth more as well. AIDS treatments are far better, cancer treatment has improved, there are more drugs available, and many diseases can be cured today that were untreatable 40 years ago. Additionally, as people become richer, they may choose to spend more of their incomes on health – health care is a “luxury good” in the microeconomic sense. Would you buy 1970s health care for 1970s prices or 2010 health care at 2010 prices? Which one you would pick depends a lot on how rich and how sick you are. If we had anything like a free market in health care, the increases in quality would be even more profound.

    Another huge benefit in the last few years that few people talk about is piracy. In the past, if you wanted to watch a video, you had to pay for cable TV and wait for it, pay an absurd amount for pay-per-view or rent it (getting in the car and driving to a store). Now, you can just fire up bittorrent and download it for free. Just because something is illegal does not mean it doesn’t improve lives. Hoist the black flag and raise a glass of rum to free entertainment!

  24. Gravatar of Simon K Simon K
    4. January 2010 at 12:48

    Will Wilkinson has written some interesting articles related to this, although more focused on assessing whether inequality has risen, for example here:

    http://www.cato-unbound.org/2009/10/12/will-wilkinson/economic-inequality-and-the-mirage-of-injustice/

    One thing people seem to agree on in that you get a very different picture if you look at consumption rather than income. Consumption, even measured in real dollar terms, has definitely not stagnated, whereas by some measures wages have.

    At a deeper level, I’m not sure adjusting for the CPI to compare “real” wages over long periods of time is valid, because there are profound structural shifts in the economy to account for so the aggregate price level doesn’t mean much – you can buy a very large flat screen color TV for some amount of money now, where you could not have bought such a thing at all in 1960. Vastly more medical conditions are treatable now than were in 1960, but its expensive to treat them – that makes healthcare costs look higher, but how do you compensate for the fact that some of the treatments available now were unavailable then? The CPI measure gets fiddled with annually to try to acocunt for these things, but over long periods of time, the error probably gets to be unacceptable – I don’t know how you’d even measure it.

    Consider trying to measure current real wages in iPods rather than dollars. You get a certain number for the present day. Now how do you measure real wages in iPods 3 years ago? You could probably count a 2006 iPod as equivalent to a 2009 iPod, even though its technically inferior, and get a reasonable number. But how do you measure real wages in iPods for 1980? Use Sony Walkmen instead? Presumably you’d have to derate for the additional utility provided by an iPod over a Walkman … But what about 1960?

    Trying to compare real wages in dollars rather than iPods isn’t any less problematic. In fact it seems more problematic, because dollars aren’t only exchangeable for iPods, but for flat screen plasma TVs, McMansions in the distant suburbs of LA, and organically produced free range heritage turkeys, none of which were available in 1973, so the utility of dollars has clearly gone up in some way that can’t be reflected in the CPI figures.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. January 2010 at 13:17

    ‘Those 10-year-olds have a frame of reference completely foreign to yours.’

    Which is irrelevant. We’re trying to measure whether today’s 10 year olds are materially better off than 10 year olds in the past. By consumption, clearly today’s are miles ahead of those in 1973.

    ‘If, during their entire lives, income is stagnating, well, the it seems to them that income is stagnating.’

    That is entirely circular. First you have to establish, with evidence, that ‘income is stagnating’, and that hasn’t been done, except by dubious statistical revisions to nominal incomes (which are clearly higher today).

  26. Gravatar of ssumner ssumner
    4. January 2010 at 14:12

    JRoth, I could find just as many examples where quality has improved. Cars are one obvious example, but there are many others.

    Homes are better in some ways but worse in others. The walls are thinner, but they are better insulated and the kitchens and baths are generally better. And of course we have the market test–people pay more for homes built today than those built in the 1960s, even if in perfect shape.

    The list was not meant to be an argument so much as an illustration. The improved dorm quality was my argument.

    Franklin, You said;

    “This is a joke right?

    If not, for starters, the college dorm proxy is pretty silly on its face.

    Only 27 percent of the country has a bachelors degree or higher, so using the “dorm room” baseline is pretty much by definition using a baseline that is an upper, upper-middle-class baseline.”

    No it’s not a joke, and your observation about the percentage of Americans with college degress actually strengthens my argument. Over 50% of kids now go to college, so as a wider number enter college, the quality of dorms should have gone down to reflect the less elite audience. In fact dorm quality has improved. That’s how we know living standards have improved. So your point strenghtens my argument. BTW, students at my school come from a wide cross section of classes, not just the upper middle class.

    You said;

    “The question is whether it really has been so for someone in the middle of the economy or below. I’m dubious — especially as this relates to things like education, health care, and housing costs.”

    More people go to college than before, ranch houses that used to be considered middle class are now often occupied by low income hispanic immigrants (who have greatly improved their living standards compared to rural Mexico.) I can hardly think of a single category where the poor aren’t considerably better off than 1973. In 1973 many people in the South and Appalachia still lived in shacks. That is much rarer today.

    Blackadder. Yes, I remember 1973 and to argue living standards for the average American were as high as today is really pretty absurd.

    The whole and not the half, Yes, I said in an earlier reply that I am not making any claims about happiness.

    JRoth, I don’t believe Americans work significantly longer hours than in 1973. Admittedly it is hard to measure, because many jobs (like mine) now combine work and leisure. I know people who do their Christmas shopping online on their office computer. And others work while on vacation via their computer.

    If I go to the shopping center at 2:00 on a weekday I often have trouble finding a place to park. At those times I always think about those articles that say Americans are overworked. Why aren’t these people at work!

    Mike@pvl, The car example I always think of is the first Japanese luxury car, the Acura Legend, which debuted in 1986 for $22,500. You can still get a car just as good as the Legend, indeed better in most ways, for about that price, and yet nominal incomes are several times higher.

    Some people say we spend a bigger percentage of our income on housing. Of course, that’s because we spend a smaller share on food, clothing, cars, etc.

    Franklin#2, A small part of the improvement may be due to larger debts. And I certainly agree with those who say that Americans should save more. But I still think that most of the gain is real.

    Jim You said;

    “This discussion is not particularly responsive to what David Cay Johnston actually wrote. He noted that “the average income of the bottom 90 percent grew from $22,366 in 1961 to $31,642 in 2006″–”

    I was responsive to the part of what he wrote that I quoted, and was not responsive to the part of what he wrote that I didn’t quote. I am under no obligation to discuss issues that I am not interested in, such as the change in living standards since 1961, or his left-wing theories on inequality. My only interest was living standards since 1973; have they risen or not? But if you want a comment, I don’t believe either the real wage or the real GDP data. The methods used are very arbitrary and unreliable. I honestly believe dorm quality gives a better indication of the change in US living standards than does the CPI, because it reflects actual living standards that a wide cross section of Americans (now over 50%) have grown used to.)

    BTW, the gap between 50% and 227% cannot be explained by increasing inequality. It reflects different statistical techniques for the two series.

    azmyth, Those are good points. And also recall that it doesn’t really matter whether stuff costs more or not. We are consuming a lot more stuff. I’m not trying to say everything is great, BTW, there is surely a lot of waste in our health care system. But overall most Americans do get better health care. Health care doesn’t explain all of the big rise in life expectancy (less smoking also helped) but it explains some of the increase.

    Simon K, Your last point is very good, and summarizes something that a lot of people missed. It’s not so much that I beleive the current CPI is flawed, rather I believe that any CPI is flawed and arbitrary. Instead I propose that we actually look at how people live, and how that changes over time. Dorms are a huge leveling device. A huge chunk of Americans now go to college, and live in similar rooms. This inclused significant numbers from minority groups. Furthermore, any selection bias would tend to skew the results toward lower improvements, because of the larger and larger share of Americans going to college. So if that huge cross section of Americans has much higher expectations for living standards then we had in 1973, then living standards have improved. And nothing statisticians do at the BLS can change that fact.

    I just hope the people who disagree with me are young. Because if there is anyone my age who hasn’t observed big improvements in living standards, you can’t have been very observant. The evidence is all around us.

  27. Gravatar of Jim Naureckas Jim Naureckas
    4. January 2010 at 17:49

    You’re arguing with something that Johnston isn’t saying–the idea that living standards have not advanced at all in the latter part of the 20th century. As Johnston acknowledges, they have–the typical household is almost half again as wealthy as it was back then. That’s a lot–you don’t have to assume that the CPI was broken to explain why average people seem to be living better now than back then. But if growth had been more equally shared, we’d be a lot wealthier–more than twice as wealthy as we are now.

    It seems like you’re taking the passage you quoted as arguing that household incomes have not grown at all in the period under discussion. I don’t think it’s saying that at all.

  28. Gravatar of Simon K Simon K
    4. January 2010 at 22:09

    Jim – I really don’t think Scott is arguing that inequality hasn’t risen. Just that the CPI isn’t a very good measure of anything, which he has totally different and probably generally equality-promoting reasons for wanting to believe.

    However, I think Johnston (and Thoma) are just citing the much-quoted Piketty and Saez study again. There are some problems with this. There’s a good summary of them here:

    http://www.scottwinship.com/1/post/2009/11/how-much-has-inequality-risen-low-bs-edition.html

    Plus you should probably read the Will Wilkinson article I linked above. In brief: Its actaully the top 0.05% for whom incomes have massively accelerated, and its probably mostly an artifact due to strategic tax planning. Consumption equality numbers show radically different results, even before you consider that different income groups consume different baskets of goods and therefore have different CPIs, the poor’s generally growing more slowly.

  29. Gravatar of Mr. Econotarian Mr. Econotarian
    5. January 2010 at 00:20

    Please see this comparison of productivity and real compensation per hour:

    http://mjperry.blogspot.com/2008/06/real-compensation-has-risen-with.html

    Yes, real wages are stagnant, household incomes are stagnant (which are skewed by number of workers and hours worked per household), but real compensation per hour is not. We are paying more for health insurance, retirement plans, life insurance, and other non-wage benefits.

  30. Gravatar of Let them eat electronics « occasional links & commentary Let them eat electronics « occasional links & commentary
    5. January 2010 at 06:48

    [...] best Scott Sumner can come up with in response to David Cay Johnston’s analysis of increasing inequality is the [...]

  31. Gravatar of David Cay Johnston David Cay Johnston
    5. January 2010 at 08:35

    As the author of the words that set off the post above, may I suggest that it pays to read in context and to not take a snippet out of context when drawing conclusions.

    How curious to read some of the words here when my book PERFECTLY LEGAL says near the start that while wages have been flat many pries have gone down, citing color televisions among other examples.

    But the Tax Notes column from which this one paragraph was lifted was not about that issue.

    The column was about the relative changes in incomes and taxes 1961 to 2006. It was about whether our tax system is creating wealth or concentrating it, whether it is undermining our society or building stablity. The end point was this: the net worth of the middle third of households whose head is under 50 is a smaller net worth today than in 1983.

  32. Gravatar of David Cay Johnston David Cay Johnston
    5. January 2010 at 08:39

    Jim Naureckas got it right in his post above.

  33. Gravatar of Greg Ransom Greg Ransom
    5. January 2010 at 08:43

    We’re borrowing against the wealth of future generations from the Chinese so kids taking remedial math and English can live in high end dorms?

    Is this sustainable?

  34. Gravatar of Greg Ransom Greg Ransom
    5. January 2010 at 08:46

    Scott, the trips to elite resorts no longer exit, most of the endless toys from China have been trashed, the high end clothes have worn out, the cars have lost most of their value, the endless drive through meals have been eaten and expelled, and on and one. The the McMansion is worth have of what someone payed for it.

    “Greg, Still, the homes exist. If someone moves out, someone else will move in. Yes a few McMansions may be torn down, but not many.”

  35. Gravatar of Michael E Sullivan Michael E Sullivan
    5. January 2010 at 09:36

    “1. Nobody is forcing people to have dual incomes, so I consider that change an improvement, since it is undertaken voluntarily. Even the worst case statistics show real wages to be roughly flat since the 1960s, so families could still have the wife stay at home if they wished. ”

    This is far too facile.

    People are not choosing based on 1960, they are choosing based on 2010. Clearly the change is an improvement relative to one person working in 2010, or the second parent would not choose to work. That doesn’t by itself imply anything about the tradeoff versus having the economy do a time machine back to 1960.

    And by looking only at what is consumed you completely ignore the face that there is a tradeoff to working more.

    It’s fair to assume that work more hours + have more stuff is considered to be a positive result by the people who do it voluntarily.

    But by simply comparing how much stuff a one-income family had in 1970 to what a two-income family has today, and ignoring the extra work hours, you are implicitly suggesting that extra work hours have zero utility cost, not merely “less than the extra stuff we get from working them”.

    If I work twice as many hours and have twice as much stuff as in 1973, we can assume that I am better off, because, presumably, if I chose, I could work the same number of hours as before and have the same stuff, but I chose otherwise.

    What we can’t assume is that I am twice as well off, which is what you do when you simply compare my 1973 house and stuff, to my 2010 house.

    Note, I’m in sympathy with your general point. I do think we (as in the median person in the US, not the mean, which is affected too strongly by the amazing fortunes of the top 1%) are quite a bit better off economically than in 1973, despite the CPI deflator suggesting that real median wages per hour have not/barely improved in that time.

    Socially, the difference is even more dramatic to me.
    Although, I suspect that the 10-30% of us whose racism, sexism, homophobia, et. al. are active and chosen, and not mostly limited to deep cultural programming we are trying to get rid of and somewhat embarrassed by, might have a different opinion.

  36. Gravatar of TheMoneyIllusion » Never criticize someone who buys ink by the barrel (or a blogger.) TheMoneyIllusion » Never criticize someone who buys ink by the barrel (or a blogger.)
    5. January 2010 at 12:08

    [...] have recently become very annoyed by criticism of my post on dorms vs. the CPI.  All sorts of people point out that I did not do justice to David Johnston’s work on [...]

  37. Gravatar of Doc Merlin Doc Merlin
    5. January 2010 at 13:31

    “I just hope the people who disagree with me are young. Because if there is anyone my age who hasn’t observed big improvements in living standards, you can’t have been very observant. The evidence is all around us.”

    I observe them just within my own lifetime, and I am pretty young. My mother has been teaching speech at a college level for years. When we were growing up, she could barely afford the apartment we lived in, now at a roughly similar job she has a 3.5k square foot house with a pool, and frequently travels. I think the disagreement is more to do with ideology than age.

  38. Gravatar of scott sumner scott sumner
    5. January 2010 at 19:43

    No time for these tonight, but I have a new post that addresses some of the comments. Today was the busiest day ever for this blog.

  39. Gravatar of scott sumner scott sumner
    6. January 2010 at 12:30

    Jim Naureckas, I have an entire new post that addresses this issue in more detail. But I have just one question: What makes you think that if we shared our wealth we’d be twice as well off. As far as I know there are no countries (excluding Norway and Luxembourg) where the average citizen is even as well off as in the US. And now you claim that there is some policy change that would make the average citizen twice as well off as in almost any other country? What policy would do that? Sharing the wealth? Isn’t that the policy that caused 30 million Chinese to starve to death in 1960? Higher taxes on the rich? They are already almost as high as in Western Europe (counting State, Federal and Medicare.) Please tell me the policy that will make average Americans twice as well off.

    Simon K, I agree.

    Mr. Econotrarian. Good point.

    David Johnston. My post wasn’t about your article, it was about the CPI. See my post yesterday that explains in more detail.

    Greg, Yeah, we should save more.

    Greg, You’ve got to get out of OC, you’re starting to depress me. I plan to retire in LA in a few years. My Boston house is still worth a lot. I just pray the LA prices stay low for a few more years so that I can move into one of those McMansions that no one else seems to want. But somehow I doubt it will happen. Prices will zoom right back up again.

    Michael, In a post yesterday I discussed why I don’t think total hours worked have increased in the way Johnston suggested. But I need to do more work on that. I vaguely recall reading something by Fogel that disputed the increase in hours worked.

    Thanks Doc.

  40. Gravatar of Max Max
    7. January 2010 at 15:20

    About the super nice dorms…this reminds me of how in “Capitalism & Freedom”, Friedman makes a clear distinction between spending money on schooling (nice dorms, gyms etc) and education (the actual curriculum). It is unfortunate that the money is being spent on nice flat screen TVs in dorm common rooms than on getting better quality professors.

  41. Gravatar of ssumner ssumner
    7. January 2010 at 20:02

    Max, I suppose there are two issues here. If it is due to student preferences, it may be efficient. but if government education subsidies are contributing to this, it is probably wasteful as there is not the sort of “external benefit” from TVs as their is from an educated population (or at least that is the argument.)

  42. Gravatar of TheMoneyIllusion » Augustan America TheMoneyIllusion » Augustan America
    9. April 2013 at 17:04

    [...] I grew up in a Formica America, and will die in a granite America.  When younger economists claim that the real median income in American is no higher than in 1970 I just shake my head.  I’m old enough to remember what America was like in 1970. [...]

  43. Gravatar of Mike Rulle Mike Rulle
    10. April 2013 at 12:17

    Agree completely, even though you argued at a disadvantage with the inflation adjusted numbers. As usual, writers like David Johnston use the left-liberal’s trifecta. Confusing households with individuals, confusing quintiles and quartiles with real people, and ignoring adjustments for average age of the population and income at a given age. Further to your point, we drastically understate productivity. Example. The top end BMW (the 6 series) in 1983-84 cost 39k in nominal dollars. The current Ford Taurus SHO today costs 39k in nominal dollars. I owned the former in 83 and my wife owns the latter in ’13. Needless to say it is like comparing Secretariat (SHO) with a broken down quarter house. True, it does not say “BMW”—but the point is clear

  44. Gravatar of myb6 myb6
    10. April 2013 at 13:43

    All your arguments essentially boil down to two phenomena:

    -You have a very strange perspective on the 2-worker household. If you asked Americans in 1970, they would probably expect a 2-worker household in 2010 to be earning 3 times as much as a 1-worker household in 1970, not just 2 times. Hence the disappointment.
    -You’re operating entirely first-person, and you are a Boomer. Yes, the Boomers have done much better than their parents. Much of it through various policies that amount to robbing the future. Gens X and Y are decidedly not doing any better than the Boomers did at similar ages.

    Whenever you move off monetary policy the quality of this blog plummets, I’m sorry to say.

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