How do we measure whether Americans are better off than in the past?

By Allison Schrager

Are you better off than you were twenty years ago? Probably not relative to very rich people today, but what about relative to you, or to someone your age and position twenty years ago? Income inequality has been called the defining issue of our time. Powerful leaders, from President Obama to Pope Francis, have cited it as evidence that the unfettered capitalism that has enriched the wealthy hasn’t been shared. Of course, there’s a difference between the gains in income being shared evenly, shared a little, or making everyone else poorer. In many ways the average American is much better off than he used to be; in other ways he’s worse off.  But even if we focus on what’s gotten better, we may still need to worry about the future.

The most common metric used to measure changes in our economic condition is income, but several other factors determine quality of life: health, consumption, leisure time, financial security, and prospects for the future. Which of these factors matters most comes down to personal values. Some people prefer more leisure to income. If they work less, even at the cost of lower earnings, they’ll be happier. Some people are more comfortable with risk; health care coverage and financial security matter less if they can buy more stuff.

In order to assess economic improvement, we must also consider demographics. Over the course of your lifetime, you will probably see an increase in earnings and wealth and accumulate goods. Most people get pay raises as they age and acquire more skills. They also become more risk averse and have more years to collect wealth. In this respect, the relevant question is: are your finances improving at the same rate they used to? Or did people your age used to have more than you do now?

Income statistics are not a sufficient indicator of well being, but they are a good place to start. It’s fairly well known that median household income in America has stagnated since the 1980s. That means while it’s not worse off, the typical American household’s income didn’t grow as much this century as it did in the 20th century. The picture darkens when you consider demographics. Since the 1970s, the median age in America increased about 8 years. You would expect income to increase too. Stagnating income could mean we’re worse off relative to earlier decades. Alternatively, income does not fully capture compensation. When you consider household size, taxes, and the value of non-monetary benefits (like health care) income has increased since the 1970s by some estimates more than 30 percent.

These income figures all account for inflation. That’s because it’s not income itself that matters; it’s what you can buy with it. Some economists argue that even if income has stagnated, people are still better off because they buy more and better things.  Flat-screen TVs, air-conditioning and air travel have become ubiquitous among the middle class. David Weinstein, Christian Broda, and Ephraim Leibtag point out that historically, inflation was not measured properly because it only considered prices for a fixed basket of goods. This method doesn’t allow for new, cheaper, and better quality products, and this shortcoming over-estimates inflation, thereby understating real income growth.

In the last ten years, inflation measures have improved to reflect the better quality and expanding variety of the goods we buy. But the new method hasn’t been projected on historical inflation estimates that researchers often use. When Broda, Weinstein, and Leibtag revised historical inflation estimates and applied it to earnings, they found income increased for all income groups, even the bottom 10 percent of earners. They believe the actual poverty rate is half the official estimate.

But there’s more to life than money and the stuff it buys. Economists normally assume two things matter to people:  how much they consume and how much they work (or don’t work, because people value leisure time).  According to economists Erik Hurst, Mark Aguiar, and Loukas Karabarbounis, between 1965 and 2003 leisure time (they count things like watching TV, exercising, and socializing) increased 5 hours per week for the average American.  But starting in the 1980s, they found an increase in leisure inequality mirroring income inequality. Between 1985 and 2003, lower-educated Americans had more leisure time, while educated Americans had less. These trends have continued since 2003. Yet after 2008, in many cases, it doesn’t mean people are better off.  More leisure time may reflect higher unemployment or part-time work.

Of course, leisure time and flat-screen TVs don’t matter if you don’t have your health. Larry Summers recently pointed out that things like TVs and toys have become cheaper, but health care is much more expensive. Access to affordable health care has become fundamental to economic well-being. Since 1987, the proportion of Americans with health insurance has been fairly stable, about 85 percent of the population. This suggests that the fraction of Americans who have access to health care hasn’t changed, even if it takes a larger share of their income. Theoretically, that figure will increase with health care reform.

Similar to other goods, health care has also improved. Americans are living longer lives. According to the Social Security Administration’s Hilary Waldron, the life expectancy (at age 60) of lower-income earners has increased by two years since the 1970s. Similar to income, life expectancy increased much more for higher earners, but even at lower income levels, there is some improvement.

Another factor to consider is that risk and uncertainty make you worse off, many economists argue. This suggests that what’s happened to financial and economic security should also be considered. It seems that consumption has increased more than money income. This was possible in part because of lower prices, but also because people saved less. Saving rates have fallen since the 1970s. Median wealth of people under 35 has declined since the 1980s, mainly because they have more debt (especially student loans).  That means they are more vulnerable to financial hardship if faced with economic or personal misfortune. Economists also assume people derive utility from consumption that is smooth and predictable over their lifetime. A drop in lifestyle is, from an economic perspective, one of the worst things you might experience. If people are consuming more today, but it comes at the price of less in the future (or less leisure if they have to retire later) it’s hard to say that increased consumption is a positive development.

Finally, another troubling trend is mobility. Most Americans still believe they have control over their economic destiny. But if they have a hard time achieving their goals, that optimism may fade, breeding hopelessness and resentment. According to a Brookings study, Americans are less economically mobile than people in other countries (especially poor and minorities), although up until the recession, mobility rates were fairly stable. The recession exacerbated an ongoing structural trend; most job recovery has been concentrated in high or low-skill jobs, which means fewer middle-income jobs. That may mean people born into the middle class won’t stay there and will be even poorer relative to high earners.

So far, depending on how you measure economic improvement, it seems the rising tide did lift all boats. But it may be in ways that aren’t sustainable. That may mean a future where the rich get richer and the poor get poorer.

PHOTO: Demonstrators stage a rally after a long march from Sea-Tac to raise the hourly minimum wage to $15 for fast-food workers at City Hall in Seattle, Washington December 5, 2013. REUTERS/David Ryder 

Source: Newsjyoti