Can't Buy You Love

by Russ Roberts on September 5, 2006

in Standard of Living

In this post, I raised the possibility that the data have misled us on the state of the average worker. I hope to explore that possibility in more depth this week, but here I want to mention one aspect of the discussion that is frequently misunderstood. I wrote:

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?

One commenter had this reaction:

I find the iPod and Big-Screen TV index disturbing. Conservatives and
Liberals (and Communists and Fascists, for that matter) can all agree
that the "good life" is not measured by consumer conveniences (or any
convenient economic index, for that matter). People don’t merely want
toys: they want to work and build lives for themselves and their
children. Because of job insecurity (at least perceived job
insecurity), expensive health care, etc., many people are finding it
harding to reach this goal, and we shoudn’t be dismissive.

In my two books, The Choice: A Fable of Free Trade and Protectionism and The Invisible Heart: An Economic Romance, I explicitly make the point that economics isn’t about money, it’s about how we live our lives. Money doesn’t buy happiness or love. Material satisfaction is often fleeting. Whoever has the most toys wins isn’t true. In the new book I’m working on, I make the case for the cliche that no one on his deathbed wishes that he had spent more time at the office. So let’s be clear about this. The goal of life is to live well, not to accumulate the most electronic gadgets or the biggest house. Having said that, it is better to live in a nice house than in a shack. It is better to have clean water than water that kills your children. So material matters do matter.

And having said all that, let’s now return to the "iPod index." The argument about the state of well-being of the average or median worker in America is a discussion about material well-being. The claim of many is that the standard of living of the average worker has been stagnant for years or even decades. My point about iPods or big screen TVs isn’t that those toys make up for the horrible living standards. It’s that the sales of iPods and big-screen TVs (and of bigger and bigger houses and of more and more tickets to football games and baseball games and sailboats and safer and more luxurious cars and college tuition) is that these data suggest that the standard of living isn’t falling at all. It’s actually rising.

Go out and look around and you see everyday people, not just the top 1% or 10% or 20% buying luxuries that were undreamed of 30 years ago. This behavior suggestst that they are not hoarding their fragile incomes for their health care or the roof over their head, they’re living better than ever before. And despite the worries about rising health care costs or rising college tuition, both life expectancy and college enrollment are both at or near an all-time high.

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Ann September 5, 2006 at 9:07 am

Absolutely! These are excellent points. If someone wanted to live in an extremely small house and not buy all these gadgets, they could save enough to have all the security they need. Instead, people are choosing to live well because they realize that life has gotten better and that they're reasonably secure. Claims to the contrary are being made for political purposes.

Mcwop September 5, 2006 at 10:10 am

Russell writes:
"So let's be clear about this. The goal of life is to live well, not to accumulate the most electronic gadgets or the biggest house."

Living well is subjective. For some, having a 100" TV that allows them to enjoy an NFL game might mean happiness. For others, hapiness has nothing to do with material things. What is most important? People's ability choose what makes them happy, and not have government decide what makes people happy.

Patrick R. Sullivan September 5, 2006 at 10:26 am

I grew up in a family that was most years is the bottom income quintile, I also read Betty Smith's 'A Tree Grows in Brooklyn' on of those years.

I learned a lot more about real poverty from Smith's book.

John F. Opie September 5, 2006 at 10:26 am

Hi -

Great post.

I remember back when I was just getting into forecasting and had a discussion with the husband of a good friend. He is a tax consultant, and we talked about forecasting.

The point he raised was that there are huge problems based on using "real" numbers that are anything but that. "Real" numbers aren't real: the vast majority of people work with nominal numbers and not real. Real numbers are of interest to economists, econometricians and the like who want to seperate out "real" development from "accidental" development because of price increases due to inflation.

The man had a point. If you "really" want to understand economic development, then you must perforce not only use hedonic deflators, but use them with a vengeance to also generate different weighting procedures for each and every year, not wait for 5 years to change a theoretical basket of goods that no one has ever bought.

The differences in quality have been nothing less than amazing, as all of us technofreaks know. A 5-series BMW of today compared to a 5-series BMW of 10 years ago is a completely different car. Ten years ago you simply could not have bought the car for any price, given the technology in the motors and automative systems; today it is only slightly more expensive, after taking into account the loss of purchasing power, than the car 10 years ago.

That is what is critical and has been poorly treated in both the science of economics and the literature. Us economists have failed to get the idea of quality into a field so heavily dominated by quants.

This is true of most products who use significant technological inputs in manufacturing; for the simpler things in life, like a good shirt and a decent bottle of wine, these may be less important (but one hell of a lot important than you think, especially for the wine!), but the quality improvements have been staggering.


Mr. Econotarian September 5, 2006 at 10:48 am

My house is awesome.

My car is awesomely dependable, which is awesome.

My computer is awesome.

My HD projection TV is awesome.

My commute is not awesome, but then again the roads are not privatized.

George September 5, 2006 at 11:09 am

I don't understand how housing prices and energy prices can go up so much if income has stagnated or been reduced for the average person. The house price increase in the last few years in NOT simply in the highest price segment of the market, but in all markets. The increase in gas prices has not appreciably affected the amount of driving.

I just have one question to ask Russ: How can researchers report a drop in income when it is so apparent that the market is bidding the price of big expenditure items so much? Where is the money comming from for these things?

Ivan September 5, 2006 at 11:28 am

Yah, the good-life argument is big fat bait-and-switch.

People complain workers aren't getting enough money. The response is, in part, that you can buy a lot more stuff with that money.

They the retort is that life isn't about stuff.

Why bring up the stats about workers' incomes if life isn't about stuff?!

Moore's law is exponential, and we're complaining about a +/- 5 percentage points for growth of real compensation. Ridiculous.

Chuck September 5, 2006 at 2:12 pm

"Go out and look around and you see everyday people, not just the top 1% or 10% or 20% buying luxuries that were undreamed of 30 years ago. This behavior suggestst that they are not hoarding their fragile incomes for their health care or the roof over their head, they're living better than ever before."

Have you controlled for unprecedented consumer debt?

Also, were not the folks of 30 years ago also buying luxuries undreamt of 60 years ago?

Noah Yetter September 5, 2006 at 3:20 pm

"Also, were not the folks of 30 years ago also buying luxuries undreamt of 60 years ago?"

Which only reinforces the point that, to quote The Beatles, it's getting better all the time.

Will C. September 5, 2006 at 8:54 pm

I just traded off a 10-year old minivan. The current version of that van, with many, many improvements including a $1000 DVD player advertises for the price I paid 10 years ago and I got a deal back then; dealer cost minus $50. Someone once said that the only material gains we experience are productivity gains. Supporting the point about Moore's Law.

Chuck September 7, 2006 at 10:42 am

Your abosolutely right. I was going to call my financial advisor and complain that my investments are lagging the market by 2%. But now that I've thought about it, I'm going to call him and thank him that I'm simply making money at all!

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