America says it has got poorer. That's rich

Reuters News
Posted: Sep 25, 2013 11:10 AM

By Edward Hadas

The U.S. Census Bureau says the median American household's income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation. That suggests stagnant American consumption for the last 24 years. That assertion is not as ridiculous as North Korean propaganda about the United States - "their houses blow down very easily and they have to live in tents" - but it's still misleading.

To start, the country is currently enjoying the fruits of major technological advances in electronics. In 1989, there were almost no mobile phones. Today, more than 90 percent of American adults have one, according to the Pew Internet and American Life Project - and more than half of those phones count as "smart". The same project estimates that about 70 percent of U.S. adults are daily internet users, compared to zero in 1989.

Considering the increased consumption of electronic goods, a typical American household could only be poorer now than then if there were matching declines in the consumption of other goods and services. But none of the statistics I could find shows this. On the contrary.

Housing? The government calculates that the average living space per person in the U.S. increased by 15 percent between 1985 and 2005. The newer and bigger dwellings are still standing, so the subsequent housing market bust could not have eliminated the gain, and the increase is far too large to be accounted for entirely by the spread of so-called McMansions for the richest sliver of the population.

Travel? No way. Both car and airline miles traveled per person are up about 12 percent since 1989. Also, overall quality has improved, despite decaying highways. Planes are quieter; cars are both more powerful (80 percent more horsepower on average) and more fuel efficient (11 percent higher miles per gallon).

Healthcare? It's easy to count up how much is spent on healthcare - up from 11 percent to 18 percent of U.S. GDP since 1989 - but there is no good way to measure what all that money actually buys. The basic health trends are positive, despite the vast increase in self-inflicted obesity. For example, American life expectancy at birth is up by 4 percent since 1989 and a 65-year-old can expect to live 12 percent longer.

The environment? The Environmental Protection Agency calculates that emissions of six leading pollutants are down by about 60 percent since 1989. Household income does not capture the consumption of cleaner air and water, but the environmental gains are shared by everyone.

There have also been steady increases in calories consumed and in the average years spent in school (education can be considered a consumption good). So whatever the Census Bureau says, the median household in the United States had enough income in 2012 to consume much more, both in quantity and in quality, than in 1989. The increase is not surprising; it merely continues the two-century trend of improving lifestyles in industrial economies.

Economists, like everyone else, have noticed the flow of more, new and improved products. However, the Census Bureau income report was presented as a tale of long-term stagnation in many professional blogs, including offerings from the Wall Street Journal, the Washington Post and the Huffington Post. Among the numerous comments on these articles, only a handful are skeptical.

Technically, the appearance of stagnation could be erased by changing what are known as "hedonic" or quality adjustments. For example, a new car costs 5 percent more than an old one. Some of the increase pays for higher quality and the rest is considered inflation. Economists have to decide how much belongs in each category.

Suppose they have been dividing the car's increase as 3 percent inflation and 2 percent quality. They could decide that the split is more like 6 percent quality and -1 percent inflation - in other words the car has actually become cheaper, adjusted for quality. Apply that sort of adjustment to everything in the economy and the apparent income stagnation would disappear.

Of course, the reported inflation rate would fall by as much as the growth rate increased. That doesn't correspond to another part of reality - the steadily rising prices of lots of goods and services whose quality has not improved at all.

Economists have some hard questions to answer about their technique. They probably should not try to capture both quality gains and general price trends in a single number. But their problem does not explain the absence of derision that met the Census Bureau's reported stagnation.

I cannot fully explain what is going on. People sometimes seem to have an almost perverse desire to feel relatively poor. Or perhaps the United States' genuine economic problems - such as increasing income inequality, a slow recovery from the recent recession and a harsh job market - put Americans in a funk in which any specious claim can seem plausible.

Whatever the explanation, this is an error ripe for correction.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)