Alan Reynolds

"Something is wrong with America's economic boom," wrote The New York Times. "After nearly four years of ever-stronger growth, people's wages should be going up faster than their expenses. For most people they're not, and this is the first time in decades that a recovery has gone so long without putting more money in more pockets." Louis Uchitelle wrote that in Jan. 8, 1995, a couple of years after Mr. Clinton took office. In those days, wage stagnation was rarely mentioned in that newspaper, and only as a euphemism. Real hourly compensation (wages and benefits) fell every year from 1993 to 1995, and rose less than 1 percent in 1996. From 2001 to 2005, by contrast, real compensation rose by 1.4 percent a year. That's stagnation?

Throwing facts aside, a recent New York Times editorial, "Consumption Gap," nonetheless began by saying, "conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans' standard of living as they've been made out to be. In their view, how much one buys -- rather than how much one makes -- is a better measure of economic well- being."

No economist who hopes to avoid professional ridicule would try to deny that consumption is a better measure of long-term living standards than the most widely cited income distribution figures, which do not even add transfer payments or subtract taxes.

A 2005 study by Dirk Krueger and Fabrizio Perri concluded that any increase in income inequality from 1980 to 2003 "has not been accompanied by a corresponding rise in consumption inequality." In my book "Income and Wealth," I show that inequality of consumption is about 40 percent lower than inequality of income (before taxes and transfers) and that consumption inequality declined slightly between 1986 and 1999-2001.

The New York Times editorial takes sides in a little spat between American Enterprise Institute economists Aparna Mathur and Kevin Hassett on the right, and Jason Furman of the Center on Budget and Policy Priorities and Jared Bernstein of the Economic Policy Institute on the left.

Calculating the annual growth of personal consumption spending per capita for the middle fifth of households, Mathur and Hassett wrote, "The average annual consumption growth for the middle class was less than 1 percent in the period from 1990 to 1994, rose to 1.5 percent in the period from 1995 to 1999, and jumped to more than 2 percent in the period from 2000 to 2005."

Alan Reynolds

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