Samuelson on standard of living

by Russ Roberts on September 3, 2008

in Standard of Living

Robert Samuelson does a nice job explaining why living standards are rising even though we sometimes hear otherwise:

Just last week, the Census Bureau released its annual study of household incomes, poverty and health insurance — often called the nation’s “economic report card.” Its hard numbers seemed to confirm how many Americans feel. Sure, we’re prosperous, but prosperity is fraying. Except for the rich, living standards are stagnant. Poverty is up; health insurance coverage is down. Naturally, both Barack Obama and John McCain seized upon the report to claim that their policies would restore progress.

Hold it.

Though echoed by policy wonks, pundits and politicians — last week, Bill Clinton — the conventional wisdom is wrong or, at least, misleading.

A couple of high points from the rest of the article. FIrst, he argues (as Don and I have frequently argued here) that low-skilled immigrants distort the measurement of our standard of living:

Low-skilled immigrants, concentrated among Hispanics, outnumber the high-skilled. They drag down median incomes and raise poverty and the number of uninsured. One way to filter out the effect on income is to examine groups with few immigrants or their American-born children. Consider non-Hispanic white families. From 1997 to 2007, their median incomes rose about $6,000, to $69,937, a gain of about 9 percent. For black families, the increase was also about 9 percent, though only to $40,222. Again, not stagnation.

Census counts only money income — wages, salaries, dividends, interest payments. But compensation growth is increasingly channeled into fringes. From 2000 to 2007, only 53 percent of the increase in average compensation came from wages and salaries, says economist Gary Burtless of the Brookings Institution. The rest went to health insurance (21 percent), pension contributions (19 percent) and payroll taxes (6 percent).

On the negative side, Samuelson says:

Americans understandably feel they’re on a treadmill. They don’t see fringe benefits in their paychecks, and small year-to-year cash gains barely register.

A nit-pick: take home pay is deflated by the CPI which includes health care. Because health care is a big part of the rising CPI in recent years, deflating take home pay with the CPI (which is what everyone does) distorts the purchasing power of take-home pay for people with generous health care plan. Suppose all of your health care costs are insured by your employer. Health care costs double but all other prices fall so that the overall CPI is unchanged. Suppose your total compensation is unchanged—your take home pay declines exactly offsetting the increase in the value of your fringe benefits. The drop in take home pay makes it look like your standard of living has fallen. But because the price of non-health care items has fallen, your actual command over goods and services is unchanged.

In recent years, take home pay for some has not kept up with inflation or maybe has just kept up with it, suggesting the standard of living is stagnant. But if take home pay grows slower than inflation, you can actually be getting ahead as long as your fringes are covering the part (health care) that’s growing rapidly.


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