Thomas Sowell

Only an economist can get excited by the consumer price index. Other people's eyes are more likely to glaze over when the term is mentioned. However, an inaccurate consumer price index is part of the reason for the appearance of declining real wages.

When the consumer price index says that inflation is 3 percent a year, it may really be more like 2 percent or 1.5 percent. As anyone who has had to pay off a mortgage knows, a difference of a percentage point can add up to real money over a period of decades.

Economists' estimates of how much the consumer price index exaggerates inflation range from an estimate of one percentage point by former Federal Reserve chairman Alan Greenspan to an estimate of 1.5 percent by Michael Boskin, former chairman of the Council of Economic Advisers to the President.

Even if we take the lower estimate of one percentage point, over a period of 25 years, that under-estimates the real income of the average American by nearly $9,000. In other words, a working couple will have their real income under-estimated by nearly 18 grand, using the consumer price index to correct for inflation.

No wonder the income statistics look so bad, even while the standard of living is rising and Americans have a higher net worth than before. Nothing is easier than to turn reality upside down, especially if you are just trying to score points, instead of getting at the truth.

My comment on this book has been reprinted on its cover: "Cox and Alm deserve a medal for bringing some sanity to a subject where insanity is the norm."

If making a whole society's rising prosperity look like a disastrous decline is not insane, what is?

Ed. Note: "Myths of Rich and Poor" by W. Michael Cox and Richard Alm is available from the Townhall Book Service for only $9.95 this week. 


Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

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