[samgheb]

Prof. Herbener,

I have often heard people from all over the political/economic spectrum claim that since the early 70’s the average income has stagnated. I recall a lecture from Murray Rothbard from the 80’s where he talked about how married couple were no longer so easily able to get a house which seemed to suggest that Rothbard too believed that something had changed since the 70’s. I think Ron Paul has said similar stuff.

On the other hand I have read free market economists who point out that the change has been in terms of preferences rather a change in living standards. That the difference between the pre-70’s and today is that couples might prefer having more than 1 car for example or enjoy other leisures that people pre-70’s didn’t enjoy.

So what is the truth on this issue?

[jmherbener]

Real wages have been declining, or at least stagnant, since the 1970s. But overall compensation has been rising.

http://www.econbrowser.com/archives/2005/12/declining_real.html

As the linked blog discusses, it’s controversial to claim that government mandated benefits constitute part of standard of living in the same way that voluntarily chosen goods and services do.

Standards of living consist in the set of consumer goods and services that people have to use. So the direct measure of standards of living is to investigate what set of goods and services households have and see how it changes over time.

While doing so is difficult and reasonable people can disagree in their judgments, it’s much clearer that capital accumulation in America has slowed since the 1970s.

[samgheb]

Thanks for the answer Prof. Herbener

“As the linked blog discusses, it’s controversial to claim that government mandated benefits constitute part of standard of living in the same way that voluntarily chosen goods and services do.”
I have sometimes read by free market economists that usually the government numbers don’t show these benefits but the mere fact that the recipients use these benefits prove that they are useful in some way to the recipient. So surely we can’t discount them can we?

“So the direct measure of standards of living is to investigate what set of goods and services households have and see how it changes over time.”
I think Mises said that there is no scientific way of judging whether or not the living standard has been higher. That you can’t use any index per se to make a scientific claim one way or the other. If I understood that correctly I gues that means we have to make informed opinions. Is that right?

I remember a clip by Thomas Sowell where he said that income stagnation was a fallacy. He pointed out that the problem lies in the way we measure income in terms of households.

“It is an undisputed fact that the average real income… of American households rose by only 6 percent from 1969 to 1996… But it is an equally undisputed fact that the average real income per person in the United States rose by 51% over that very same period. How can both these statistics be true? Because the average number of people per household was declining during those years.”

[jmherbener]

The argument about government goods and services is that we can’t know their monetary value to consumers because they are not voluntarily purchased on the market. Of course, our use of them indicates that we value them, but it doesn’t indicate how much we value them. Therefore, it is a fallacy to add government expenditures used to provide their goods with consumer purchases of privately produced goods as if government expenditures had the same meaning as consumer purchases.

I’m not disagreeing with what you’re asserting Mises claimed. No index could ever be formed in comparing one set of goods to another because there is no common unit in which the goods can be added up that doesn’t itself change over time. Assessing whether or not standards of living have risen is economic history not economic theory. By nature, it’s not scientific. But who would deny that if you look at the set of consumer goods a typical family had in 1912 in America and compared it to the set of consumer goods a typical family has in 2012, that standards of living have risen in the past hundred years.

Your quote by Sowell illustrates why economists look at real wages and per capita income. If you look at real wages there is evidence of stagnation. The question is what are the causes? My contention would be that the 1970s and the 2000s were periods of dramatic booms and busts while the 1980s and 1990s were more normal periods of economic progress. The reason for this pattern has to do with the USA going off the international gold standard in 1971, re-establishing a dollar-reserve standard in the early 1980s, and having the dynamics of that international arrangement play themselves out in the 2000s in a way similar to the collapse of Bretton-Woods in the 1960s.

[samgheb]

re: Compensation
I agree that compensation shouldn’t be added on top of our consumer purchases but surely we can’t just disregard compensation altogether when trying to figure out how what is going on with regards to living standards?

re:Measuring living standards
What sort of index or measure do you think is the best indicator for telling use about improvement in living standards?

re:Concerning the Sowell quote
I’m not sure I understand your first point:
“You’re quote by Sowell illustrates why economists look at real wages and per capita income. If you look at real wages there is evidence of stagnation.”
From that quote I read that he disagrees that there has been any stagnation and that the reason economists claim that there has been economic stagnation is that they look at household income instead of tracking individuals. I tried to look to the source data from the graph on
“Real Average Hourly Earnings January 1964-October 2005” from the link you gave me which took me to this site:
http://macroblog.typepad.com/macroblog/2005/12/are_workers_los.html

From there I saw that the data was from Bureau of Labor Statistics but I couldn’t open the data because I didn’t have the program you need to open the data.
However if the data turns out to be on household income then wouldn’t Sowell be right that there has in fact not been any stagnation since the 70’s?

[jmherbener]

Right, we can’t ignore compensation, but there is no “scientific” way of handling it. We must use our judgment. We are in the realm of economic history, not theory.

I don’t think there is a single index to indicate living standards. We have to look at all the relevant data and make a judgment call.

The Sowell quote said that HH income rose slowly because the average number of people in a HH declined. My point is that it’s precisely because of such problems with HH income that economists don’t use it. They use measures standardized for population, like per capita real income and real wages. Some of those statistics indicate stagnation others do not.

[samgheb]

Thank you so much for your answers and your time

[samgheb]

When we talk about the income stagnation on a per capita basis are we also measuring something about social mobility and either way what has the trend been over the past decades? is social mobility declining, rising or stagnating?

[jmherbener]

It depends on how one defines social mobility and what proxy one uses to indicate its extent. Sowell claims that the standard sociological definition is not the relevant one and suggests replacing it with “economic mobility.”

http://townhall.com/columnists/thomassowell/2013/03/06/economic-mobility-n1525556/page/full

http://cafehayek.com/2007/11/economic-mobili.html

Here is the IRS study on income mobility:

http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf

Here is a broader study on income mobility put out by the Boston Fed:

https://www.bostonfed.org/economic/wp/wp2011/wp1110.pdf

[Author]

Posts