[from Maxspeak] September 21, 2006 THE DISTRACTING LIVING STANDARDS DEBATE By Jared Bernstein
Let us now discuss David Leonhardt's article yesterday in the NY Times, specifically, the adjustment to the CPI that changes flat male median real earnings into a real growth rate of around 27%. The argument in the paper is focused on the "new goods" bias in the CPI: the problem of not incorporating new goods into the index until they've fallen a lot in price (thus missing the price decline). Dean Baker raises good questions as to whether you should blithely assign the new goods bias to everybody, since it's typically only the wealthy who buy new, expensive gadgets. I just wanted to raise a few other points. 1) Any CPI adjustment you'd want to make to wages would also feed into GDP/productivity (less than one for one because consumer prices only account for part of the deflation in the product accounts, but it's the lion's share). So these adjustments don't much alter the gap between productivity and median earnings. 2) There's a good bit of cherry picking and hand-waving in these CPI discussions. It's not very plausible that all the mistakes are on one side biasing the price index upward; some surely go the other way. Research such as this paper, pg 65 documents biases that lead to slower measured price growth than actually occurred (a downward bias) in goods such as apparel and housing. The debate always seems to invoke cheap cellphones and DVDs without citing more expensive health care, housing, and college. And don't get me started on air travel. Sorry to wax anecdotal, but I'll bet price changes in air travel are not reflecting the declining quality of that sector. 3) There is a false degree of certainty to these bias adjustments. Price index scholar Jack Triplett notes: "...what I liked least about the Commission Report was exactly what made it so influential — its guestimate of 1.1 percentage points of bias. A guestimate is a number produced when one does not have research results. The Commission (and others who have followed its lead) used ad hoc reasoning to come up with a number. I did not think that we economists knew enough to estimate the overall CPI bias when the Commission wrote its report, and I still think we do not know enough." Note that Triplett is specifically referring to the quality adjustment part of the Boskin report. So you can make a case that Leonhardt should not have made the full adjustment to the median male series. I also think it's clear that the typical male worker, while surely facing the many advantages associated with life today noted in Leonhardt's piece, also faces a much tougher job market today than 30 years ago. The quality of jobs available to non-college-educated men has deteriorated. Such jobs are more likely to be in non-unionized sectors, with lower compensation, and they are less likely to provide health-care or pension coverage. Unemployment is also considerably higher and employment rates lower for such men now than three decades ago. That does not mean living standards have deteriorated. Living standards comprise many different aspects of life, from health advances to cheaper gadgetry. I love working on my wireless laptop while lying in bed (too much info?...sorry). But while this middle-class debate that's been raging lately strikes me as interesting and important, I fear it's a distraction from the current political economy debate. That is, it's obviously important to try to resolve these questions, to the extent the resolve-able, and many, I fear, are not. But right now, those of us who seek a different set of policy responses to the big challenges we face—health care, globalization, inequality—would be better off talking much more about that agenda, and not arguing over whether the middle class is better off relative to 30 years ago. That argument also sets an incredibly low bar. Real GDP is up over 150% (per-capita, something like 90%). I get that the wedge of inequality has precluded the broadly shared properity that characterized earlier periods--it's a major theme of State of Working America -- but of course some of this growth has reached middle income families. But what do we learn from that? I think the more important points are a) anyway you cut it, the middle-class was reaping much more of the benefits of the growing economy years ago than they are now, and b) as the structure of the economy and job market has changed, the distributional institutions—unions, minimum wages, fiscal policy, full employment—are far less operative today. Finally, as Leonhardt sort of suggests, it's a political distraction to have this debate about the 30-year record. The last six years are where all the political action is: we've had stellar productivity growth, but the real median household income of working age families is down 5%, $3,000 in 2005 dollars (2000-05). This is an incredible indictment of the current economic regime (and of YOYO economics) yet the elites are scratching their heads wondering why people don't get how great they're doing. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
