In my new The Week column, I explore“What Democrats Get Wrong About the Middle Class.” Here is a bit:
The problem is that Census data paints an incomplete picture. A University of Chicago poll of top economists earlier this year found that 70 percent agreed that the Census conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” How far off are those numbers? Maybe quite a bit. Feldstein argues that they fail to take into account shrinking household size, the rise in government benefit transfers, and changes in tax policy. They also measure inflation in a way some experts thinks overstates the true rise in living costs. He notes that when the Congressional Budget Office took all those factors into account, it found median household income had risen by 53 percent since 1980, five times as much as the narrower Census figures.
And it could be even higher. A lot higher. A growing number of economists are questioning whether our existing measures of economic growth and inflation are suited to the digital economy. A recent Goldman Sachs analysis suggests we may be understating annual economic growth by nearly a third due to our inability to accurately measure how vastly improved software and hardware are boosting productivity. Likewise, government data ignores the consumer value of free internet services like Facebook, Google, and Twitter. Put it all together, and Feldstein thinks real median household income may have risen by 2.5 percent a year over the past 30 years, not 0.3 percent. That would suggest a doubling of living standards over the past generation. And even those figures ignore welfare gains from rising life expectancy, which economists Charles Jones and Peter Klenow think could equal a full percentage point a year.
If you’re still not convinced, consider this simple thought experiment from Washington Post reporter Matt O’Brien: “Adjusted for inflation, would you rather make $50,000 in today’s world or $100,000 in 1980’s?” Is that added dough enough for you to give up your flat-screen television, smartphone, and internet access? If it isn’t, or if the answer isn’t obvious, that would suggest living standards aren’t stagnant or anything close to it.
Now, none of this is to suggest that the 2000s have been a boom time, much less the Not-So-Great Recovery. Nor were the 1980s and 1990s a golden age. For one thing, the 2000s were years that marked the beginning of our Too-Big-To-Fail banking system. And I think we need to take seriously polls that suggest two-thirds of Americans think the nation on the wrong track. People have legitimate fears about the evolving IT economy and their place — and that of their children — in it. (Though pols may be exacerbating those worries with scare stories, such as this one about the “gig economy.”) Concerns about whether a rising tide will adequately lift all boats should be on the mind of policymakers. But on the other side, American innovation and productivity could be stronger than we think and what the official stats say. Policymakers should remember that, too.
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