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An alternative hypothesis

Posted By Russ Roberts On September 4, 2006 @ 11:25 am In Standard of Living | Comments Disabled

Sebastian Mallaby sums up conventional thinking in today’s Labor Day column [1]:

By now almost everyone agrees that inequality is serious. Economic
growth no longer seems to help the majority of workers; the proceeds
flow to the top fifth or so of the workforce, and the top within the
top has done especially handsomely. But the tough debate is what to do
about this trend. The surprising answer is: tax reform.

If I have time later this week, I’ll discuss whether tax reform is going to solve this problem. But here I want to look at two interesting qualifiers in that paragraph. The first is in the first sentence, the word "almost." Mallaby realizes that there are a few skeptics left out here in the hinterland who haven’t quite accepted this new kind of economic growth that somehow leaves most of us in the dust.

But the more important word is in the second sentence, the word "seems." Why did Mallaby insert that word? Why didn’t he confidently write, "Economic
growth no longer helps the majority of workers?"

Perhaps he is uneasy about making the absurd assertion that there is something new about the extraordinary growth in recent years in America without an explanation of how this has come about. For it is absurd, to presume that somehow, without our noticing, the economic system has
for the first time in American history become a system that grows like topsy without
benefiting the average worker. But it’s more than absurd—it’s dangerous.  You’re in uncharted terroritory. How can you possibly posit a solution to the problem without understanding it?

But there is another way to interpret the word "seems." It doesn’t just express uncertainty. It has an alternative meaning. It is an admission of the possibility that the claim of a stagnant standard of living for the average American is simply an illusion.

What if the average worker is actually benefiting from economic growth? What if the measures of inflation we use are not capturing quality changes (which they surely do not). What if because those measures overstate actual inflation, living standards are actually rising and the average worker is sharing in economic growth, despite statistical claims to the contrary.

What if in fact, all the other data, the data on life expectancy, on the size of our houses, on our purchases of unparalleled luxuries—our iPods and big-screen TVs—and enrollment in college at or near an all-time high—what if these data are more reliable than the official data on wages?

What if things are actually getting better for the average worker, but it merely seems otherwise?

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[1] today’s Labor Day column: http://www.washingtonpost.com/wp-dyn/content/article/2006/09/03/AR2006090300741.html?sub=AR

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