David R. Henderson  

Paul Krugman: The Average Family is Materially Much Better Off

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In researching a piece I'm writing, I came across an excellent article by Paul Krugman, written in 1996, at the height of his "explain economics to non-economists" era. It's titled "The CPI and the Rat Race." He starts by pointing out that the Boskin Commission's finding back then that the Consumer Price Index overstates inflation was well-known by economists. While he doesn't endorse the Commission's finding that the overstatement was 1.1 percentage points annually, the tone of his piece is that such an estimate is reasonable. See Michael J. Boskin, "Consumer Price Indexes," in David R. Henderson, ed., The Concise Encyclopedia of Economics, Liberty Fund, 2008, for more on this.

Then Krugman writes:

This conclusion is controversial. Some people are upset because any reduction of inflation estimates will reduce Social Security benefits, which are indexed to the CPI. Others are upset because a revision of recent price history would mean abandoning a worldview on which they have staked their reputations. Quite a few people have committed themselves to the story line that productivity is up but real wages are down. If inflation has been lower than was previously assumed, that means the real value of wages may have gone up after all. And some economists with no particular ax to grind simply have doubts about the methodology.
Boskin may be right or wrong, but one argument by his critics is clearly wrong. They say: Suppose it's true that inflation has been less than the official increase in the CPI over the past few decades. If you assume a lower inflation rate and recalculate real incomes back to--say, 1950--you reach what seems to be a crazy conclusion: that in the early 1950s, the era of postwar affluence, most Americans were living below what we now regard as the poverty line. Some critics of the Boskin report regard this as a decisive blow to its credibility.

By the way, when is the last time you saw Krugman admit that real wages may have increased?

He then continues:

The idea that most Americans were poor in 1950 is indeed absurd, but not because of Boskin's numbers. After all, even if you use an unadjusted CPI, the standard of living of the median family (50th percentile) in 1950 America appears startlingly low by current standards. In that year, median-family income in 1994 dollars was only about $18,000. That's about the 20th percentile today. Families at the 20th percentile--that is, poorer than 80 percent of the population--may not be legally poor (only about 12 percent of families are officially below the poverty line), but they are likely to regard themselves as very disadvantaged and unsuccessful. So even using the old numbers, most families in 1950 had a material standard of living no better than that of today's poor or near-poor.
We can confirm this with more direct measures of the way people lived. In 1950 some 35 percent of dwellings lacked full indoor plumbing. Many families still did not have telephones or cars. And of course very few people had televisions. A modern American family at the 12th percentile (that is, right at the poverty line) surely has a flushing toilet, a working shower, and a telephone with direct-dial long-distance service; probably has a color television; and may well even have a car. Take into account improvements in the quality of many other products, and it does not seem at all absurd to say that the material standard of living of that poverty-level family in 1996 is as good as or better than that of the median family in 1950.
What do we mean by this? We mean that if you could choose between the two material standards of living, other things being the same, you might well prefer the 12th percentile standard of 1996 to the 50th percentile standard of 1950. But does that mean that most people were poor in 1950? No--because man does not live by bread, cars, televisions, or even plumbing alone.

Krugman then goes on to say that the idea that most Americans in 1950 were poor is absurd, not because there's anything wrong with the above data, but because people judge their circumstances relative to those of others. We are, in short, in a rat race.

He goes on to apply his point to academics, writing:

I know quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter men--because they have never received an offer from Harvard and will probably not get a Nobel Prize. They live very well in material terms, but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing 'em jump." Privilege is not merely a means to other ends, it is an end in itself.

He's speaking about his own view of the world and the view that many people around him have apparently had. So I won't gainsay his views on this. They are what they are. I will say that it doesn't fit my views. I'm pretty sure that I'll never get an offer from Harvard and that I won't get that 4:00 a.m. PDT phone call from Sweden on Columbus Day in which I learn that I've won the "Swedish thingie." But I am not at all bitter. I am quite content. I'm doing what I want to do and I do it well. I get great feedback, often from people whom I respect more than I respect the Nobel Committee. And I make good money. Not Krugman-style good money, but good money nevertheless.

I'm not just content. I still have wonder at everything I've achieved and have. I've written about that here. And, although I'm not "really rich" by Krugman's standards, I love the fact that I was able to sign a contract yesterday to get my roof replaced, even though it will cost about $15,000. Yes, I will go into some debt to pay for it, but, a year later, most of the debt will be paid off. Moreover, if someone in my family gets really sick, I have good health insurance that pays for things people didn't dream of in 1950 and, even if my health insurance doesn't pay, I can pay. To me, that's what's so great about wealth. I have no desire to "see 'em jump."

But back to the main point. What's striking to me is how much Krugman admitted the point that living standards had increased dramatically from 1950 to the mid-1990s.


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CATEGORIES: Growth: Consequences



COMMENTS (16 to date)
Steve J writes:

I am not sure Krugman's opinion has changed much from that time - but how he frames it has. Here is a more recent post on living standards:

http://krugman.blogs.nytimes.com/2013/01/26/what-we-have-less-of/

He still admits we have more stuff but notes what getting that stuff has cost us.

By the way, I have only been reading Krugman (and economic blogs in general) since the financial crisis. While I completely understand why some people disagree with his politics his track record that I have seen is pretty good.

Hazel Meade writes:

Do I need to point out that a Democrat was in office in 1996?

Philo writes:

“What's striking to me is how much Krugman admitted the point that living standards had increased dramatically from 1950 to the mid-1990s.” Assuming, that is, that you evaluate living standards without counting positional goods (which seems OK to me).

Still, it remains slightly unclear to me why you are happy with your own life. Evidently it has (so far) turned out better than some baseline you have in mind, but you don’t say what the baseline is. You’re doing what you want to do in the main, but surely some of what you do is burdensome and unpleasant: things could be even better. You’re making good money, but you don’t specify the standard of comparison, except to say that it’s not the income level of other people (and then, inconsistently, you seem to congratulate yourself on being better off than the Americans of 1950). Perhaps you *wonder at your present situation* because you are better off than you expected to be when you were young. But the expectations of young people are based on such ignorance; why ascribe any authority to them?

Inevitably, you could be better off and you could be worse off, and you actually are better off than some standards and worse off than others. Could you specify the appropriate standard relative to which one should decide whether to be happy or unhappy about his life?

ThomasH writes:

I have not seen Krugman recant his opinion that real incomes in 1996 were much greater than in 1950 or even discuss the issue.

David R. Henderson writes:

@Philo,
Still, it remains slightly unclear to me why you are happy with your own life.
And so it shall remain.

Simon C writes:

I imagine everyone would agree that to some extent happiness is determined by comparative wealth in the community. There are different ways that this fact could be interpreted however. Krugman seems to think that since relative wealth is so important, people may be overall happier with lower absolute wealth but more even distribution. The question remains though as to whether this 'comparison happiness' is a result of wealth differences or whether it is just part of human nature to compare jealously with others. I suspect it is the latter. Even in a society of notionally equal wealth, jealousy may shift to some other field of comparison. Only one person can marry Angelina Jolie or Brad Pitt, even if wealth is equalised. In this interpretation of 'comparison happiness', the happiness or sadness that results from comparison is inevitable and not affected by distribution. If this is the case then absolute wealth, to the extent that it does contribute something to an individual's happiness, is the only thing that matters.
Is there a way to determine which is closer to the truth?

eric falkenstein writes:

The fact that you are happy with your life isn't very dispositive. That's like proving markets are efficient (or not) based on the reason I bought my last stock.

I'm all for this line of reasoning btw, in that gratefulness is a valuable virtue, but libertarians shouldn't fear this result so much, because it isn't going away and it doesn't invalidate the superior focus on growth over equality. That my relatively impoverished grandfather was probably as happy as I am doesn't change the fact that I'm also glad I live now: growth more important than redistribution in spite of my status-seeking instincts.

Productivity growth is the natural consequence of free minds and markets, so flattening growth means not merely focusing on 'more important things' but rather squelching freedom, and liberty is more important than equality because it's much more feasible. In contrast, equality is only possible in a few dimensions, and via a great deal of force.

Warren Mills writes:

I think the salient point here is not whether happiness is a relative thing, but the idea that is often posited that it should be gauged in terms of others' belongings. In fact, I would argue economic status does not prove happiness any more than it disproves it. Is wealth and resources a factor of happiness? Yes, but only so far as someone does or does not have what they want; not because they have less or more than others.

If happiness was largely determined on relative wealth we would have situations where an individual could be completely unhappy at his/her home in the Hampton's because they are on the "poorer" end of the scale, but completely content when they leave their surroundings and are among those with lower incomes. This is not only an absurd notion, but could have a substantial psychological impact on an individual by them often entering and exiting happiness based merely on the wealth (or lack) of those around them.

john hare writes:

I think the problem inherent in the relative wealth and redistribution positions is that statistically the poor will always be among us. 50% of all Americans are earning less than the national average and we have to address this inequality!!!

Just for a minute cast yourself into the position of a 2013 'poor' family transported back to 1950 with their house and all their gear. Computer, cell phone, and big screen are almost worthless with no support system, but would be priceless if operable. Fresh fruits and vegetables available year around would be missed. The car would be massively safer and more comfortable than those of the 1950 gazzilionairs. Air conditioning had a different meaning and the cheap 2013 running shoes would be marvels of the day in 1950.

I am personally grateful for what we have today, and happy for the lifestyle that will be available to my grandchildren.

Philo writes:

“And so it shall remain.” Too bad. I was hoping you would give a thoughtful answer.

Philo writes:

. . . not biographical details, of course, but rather a specification of your implicit baseline.

David R. Henderson writes:

@Philo,
not biographical details, of course, but rather a specification of your implicit baseline.
I thought I did. You did check the link to my earlier post, right?

AMW writes:

I don't follow Krugman's blog that carefully, but doesn't he usually say median incomes started stagnating in the '70s?

Philo writes:

Yes, I clicked on it, and here’s what I found.
“I realize how far I've come.” Well, some people would complain about not having had a more promising starting point. Of course, others would consider your starting point so advantageous that even if you had never advanced beyond it your life would have been highly satisfactory. And you belong to this latter group, for you go on to say: “In my view, every day above ground and not in prison is a good day.” In some respects this seems to set the bar awfully low; some lives outside prison are pretty miserable. On the other hand, is prison necessarily *so* bad?

But my main point is this: While being happy or unhappy about any one incident in one’s life makes sense to me, since there are clear-cut alternatives for comparison, I wonder it if makes sense to be happy or unhappy about *one’s life as a whole*, since I don’t see with what one’s life is to be compared.

ScottA writes:

I'm not old enough to remember Krugman's popular writing from the 1990s, but I've always been interested in what exactly happened to him. I suppose he'd say that the Republicans got worse/became anti-science/various other Dem.talking points, but he's clearly far less nuanced and far more abrasive then he used to be. Anyways - just something I've always wondered about.

Warren Mills writes:

John Hare wrote:

"50% of all Americans are earning less than the national average and we have to address this inequality!!!"

By definition an average (generally speaking) indicates the mid-point of a data set, therefore, despite any change in so-called inequality approximately half of the population will operate in the bottom 50%. Unless, of course, all income becomes strictly equal which would be a purely authoritarian, or perhaps a largely aristocratic, situation whereas one group (the vanguard party??) determines how much we should be apportioned from our own labors.

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