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The Cost of Thriving

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The Cost of Thriving

American Affairs February 20, 2020
EconomicsEmploymentRegulations
OtherChildren & Family

It sounds like an absurd riddle, or perhaps a kindergarten-level math problem: the median male full-time worker earned $314 per week in 1979, while his counterpart at the median in 2018 earned $1,026;1 who was better off? In fact, the question proves fiendishly difficult, even as its answer lies at the heart of understanding America’s economic progress and challenges.

The easiest answer is that $1,026 is 227 percent larger than $314, case closed. People lacking even rudimentary training in economics know that’s not right, however. Inflation reduces the value of money over time, so $1 in 2018 is not the same as $1 in 1979. But how much inflation has occurred? Economists have numerous methodologies and indices for making estimates, and they have engaged in long-running battles over which are most appropriate in which circumstances.

Unfortunately, the most common estimates produce opposite an­swers to our question. According to the Bureau of Labor Statistics’s “Consumer Price Index” (CPI), the 2018 worker’s $1,026 in 2018 earnings is worth only $297 in 1979 dollars—or 6 percent less than the $314 in 1979 dollars earned by the 1979 worker. But according to the Bureau of Economic Analysis’s “Personal Consumption Expenditures Price Index” (PCE), the 2018 income is worth $353 in 1979 dollars—a 13 percent gain.

Fortunately—though, in a larger sense, most unfortunately—we need not litigate between them to answer our question, because nei­ther offers an appropriate benchmark. Price indices are not intended to, and do not, describe all the forces acting on a household budget against which a changing wage might most reasonably be compared. To put rising nominal wages in context, inflation is not the right technical mechanism. Nor is it conceptually valid. What does it mean, after all, to say that a 2018 dollar is worth twenty-nine or thirty-four 1979 cents? No currency exchange counter exists at which one can be swapped for the other. Our worker cannot travel back in time to spend today’s earnings in a market of yore.

The standard economic view holds that price indices designed to measure inflation overstate the actual rise in “cost of living.”2 Such indices fail to account fully for the savings that consumers can enjoy by switching to newer and lower-cost products or sales channels, or the constant but subtle improvements in the things they buy. If “inflation” describes the increased price of buying the exact same set of things as in the past, then any new opportunities that emerge for consumers to substitute new and different things must leave them better off, or at least no worse off. Hence the price of replicating one’s 1979 level of well-being in 2018 could not possibly have risen as much as inflation suggests.

This view is wrong, however, because it relies upon the unrealistic assumptions that (1) the things available in 1979 will also be available in 2018, and (2) having the same set of things in each time period would lead to the same level of well-being. That’s not how life, or a market economy, works. To use one obvious example: Consider the period when the car was invented and widely adopted. A new invention has no effect on inflation and advancements in manufacturing that lower its price would appear deflationary. A new invention, therefore, cannot increase the cost of living as defined above because a household can always choose whether to shift consumption toward cars (if they improve welfare) or stand pat with horses and buggies. And yet, from the household’s perspective, the level of “well-being” achieved previously with no car may now require a car, whether to access retail establishments that have moved to the town’s periphery, to get to work, or to socialize with friends—in short, to remain full participants in society. The household might also face the problem that horses and buggies are no longer for sale.

Alongside both the formal concept of “inflation” that measures the economy-wide price level, and a technical “cost of living” that aims to price a fixed level of material consumption, an accurate depiction and understanding of economic trends requires a measure that tracks the evolving basket of things a family needs to achieve the financial security and social engagement typical of a flourishing middle class. Call it the “cost of thriving.” Much work could be done in constructing the most accurate possible measure or, more likely, a series of measures that tests sensitivity to various assumptions and accounts for regional and demographic differences.

As a starting point and proof of concept, I propose the following Cost-of-Thriving Index (COTI): the number of weeks of the median male wage required to pay for rent on a three-bedroom house at the 40th percentile of a local market’s prices, a family health insurance premium, a semester of public college, and the operation of a vehicle. A rising COTI indicates that economic trends are compounding the challenge of making ends meet, while a declining COTI would leave households with greater financial security and flexibility.

Any number of objections might be raised to these particular parameters: Why focus on male wages, when most women work too? Why count a health insurance premium’s total cost, when employers often cover a substantial share? Each choice is explained below. But, broadly, the parameters flow from the question to be answered. Here, the question is how well the typical male worker can provide for a family. The COTI shows that his ability to do so has degraded dramatically.

In 1985, the COTI stood at 303—the median male worker needed thirty weeks of income to afford a house, a car, health care, and education. By 2018, the COTI had increased to 53—a full-time job was insufficient to afford these items, let alone the others that a family needs. A generation ago, the worker could be confident in his ability to provide his family not only with the basics of food, clothing, and shelter, but also with the middle-class essentials of a house, a car, health care, and education. Now he cannot. Public programs may provide those things for him, a second earner may work as well, or his family may do without, while his television may be larger than ever. The implications of each are surely worth pondering. But the fact that he can no longer provide middle-class security to a family is an unavoidable economic reality of the modern era.

Inflation Does Not Measure Affordability

A wage can lose the ability to cover major household expenditures, even as its “real” value changes little, because economists are not talking about affordability when they talk about inflation. Nobel laureate Robert Shiller provided a particularly stark illustration of the disconnect between economists and the public by surveying both on their “biggest gripe about inflation.” Whereas more than three-quarters of the public chose “inflation hurts my buying power, it makes me poorer,” fewer than one in eight economists said the same. Roughly half chose that “inflation causes a lot of inconveniences. I find it harder to comparison shop. I feel I have to avoid holding too much cash, etc.” and the rest chose other issues entirely.4

Indeed, while inflation reduces the value of cash, it should in theory have little effect on real buying power as it raises at once the prices of goods and services, assets, and labor. Michael Bryan, a senior economist and vice president at the Federal Reserve Bank of Atlanta, explains:

Money is not only our medium of exchange but also our numeraire—ouryardstick for measuring value. Embedded in every price change, then, are two forces. The first is real in the sense that the good is changing its price in relation to all the other prices in the market basket. It is the cost adjustment that motivates you to buy more or less of that good. The second force is purely nominal. It is a change in the numeraire caused by an imbalance in the supply and demand of the money being provided by the central bank. . . . If inflation is a nominal experience that is independent of the cost of living, then the inflation component of medical care is the same as that in haircuts. No good or service, geographic region, or individual experiences inflation any differently than any other. Inflation is a common signal that ultimately runs through all wages and prices.

“I wonder,” muses Bryan, “if, in the minds of most people, the Federal Reserve’s price-stability mandate is heard as a promise to prevent things from becoming more expensive. . . . But this is not what the central bank is promising to do.”5

Certainly, this misconception seems widely held among policy analysts: If inflation is low, that must mean things are not becoming much more expensive. So in a world with no inflation, for instance, someone should be indifferent between living and earning $10,000 in 1980 or in 2020. The $10,000 has exactly the same “value,” and thus purchasing power. If inflation caused prices to double over the period, the person would much prefer the $10,000 in 1980 to $10,000 in 2020; he would need $20,000 in 2020 to be comparably situated.

But even if inflation were exactly zero, households might vastly prefer $10,000 in 1980 to the same amount in 2020, or vice versa. Three different types of social and economic forces, which inflation estimates intentionally disregard, are central to understanding how affordability has changed and whether households are becoming more or less able to support themselves on a contemporary wage at a contemporary standard of living.

(1) Quality adjustment. If a product that costs $100 is replaced by one that costs to $200, but is determined to be twice as valuable, its price is considered unchanged for purposes of inflation. A household that can only afford to spend $100 on the product, however, will perceive that the price has in fact doubled.

In theory, an efficient market can continue offering the $100 option for households that cannot afford or see less value in the new and improved version. In practice, this may not happen. Firms dislike the complexity of maintaining countless product lines and instead target their product development and marketing toward what they expect will be a market’s most profitable segments—often higher-income households with more disposable income.6 New firms can hypothetically enter to exploit subsequent gaps, but they may lack the scale and expertise to deliver a reliable product at a low price. In some cases, regulatory forces will eliminate lower-cost options, as when safety and environmental standards affect the design of vehicles.

A market’s evolution may also preclude the combination of certain features. Housing provides the most obvious example: a home built with 1940s style, size, and quality in a neighborhood of middle-class families can simply cease to be available at its 1940s price. Health care, with the structure of its insurance market, faces a similar constraint. Even supposing a product could be designed to offer a family gold-plated access to 1970s-quality care for the price paid in the 1970s, providers would have no idea how to deliver such service and would be unlikely to accept such patients.

A new car, according to BLS, costs no more in 2018 than in 1996.7 Anyone who has watched car advertisements over the past twenty years, let alone shopped for a car, knows this is not true. Prices have increased substantially. Typical cars that a family might consider for their primary vehicle are illustrative: the manufacturer’s suggested retail price (MSRP) for a base-model, four-door Toyota Camry increased by 40 percent, from $16,8008 to $23,600;9 the MSRP of the lowest-cost minivan, the Dodge Caravan, increased 47 percent, from $17,90010 to $26,300.11 BLS reports these prices as flat because a base-model vehicle has many more features than one did 20 years ago. In effect, estimates BLS, the 2018 Toyota Camry would have cost $23,600 back in 1996. Or, put another way, the right comparison for a base-model 2018 Camry is not a base-model 1996 Camry, but a midrange 1996 Camry SE, whose MSRP was $24,100.12

This dynamic has important implications for how economists think about substitution and their assumption that the cost of living will rise less quickly than inflation. The claim that substitution can only improve a household’s well-being requires that the same basket of goods available in year zero remain available in year one—in which case, any change must reflect the household preferring the year‑one basket. But if price increases are accompanied by changes in the available baskets of goods, a quality-adjustment analysis can yield a situation where no inflation occurs yet households must change their consumption in ways that reduce their well-being. If large and costly necessities become unaffordable while other components of the consumption basket plummet in price and become ubiquitous, inflation can seem tame and households better off, even as they lose access to the things they care about most.

(2) Risk sharing. The challenges of quality adjustment are com­pounded by products that spread risk, offering everyone value in formal economic terms though only those who suffer the risky outcome receive a tangible benefit. If health insurance premiums rise because a condition present in 1 percent of families can now be treated with a new and costly procedure, prices have not increased for inflation purposes nor has the cost of living increased—aconclusion resting on the incorrect assumption that each family still has the option of purchasing an insurance plan at the previous cost that excludes coverage of the new procedure. Not only might the families have to buy the more expensive insurance, but also 99 out of every 100 will never experience any perceptible change in the quality or quantity of their health care.

The BLS estimate for medical inflation appears far lower than the rate at which households are seeing health care costs rise. BLS reports that medical care prices have risen 90 percent from 1999 to 2017,13 similar to the increase from $2,122 to $4,380 in median health care expenditures for a family of four reported by the Agency for Healthcare Research and Quality.14 But during the same period, according to the Kaiser Family Foundation, the average family health insurance premium increased by 224 percent, from $5,791 to $18,764.15That is, the typical household is paying almost $13,000 more to get health care that costs $2,200 more. The family is in fact better protected from a wide range of rare conditions, but both their material living standard and financial flexibility may be far lower. Good analyses of economic well-being are usually careful to focus on outcomes at the median, rather than mean, yet when it comes to the asserted improvement in material living standards associated with higher health care spending, the gains are present only on average and are concentrated in a very small fraction of the distribution.

(3) Social norms. Supposing that all options remain available in the market and a 2020 household could indeed consume precisely the same basket of goods and services as in 1980, a third problem still remains. Societal changes can dramatically alter the need for and value of goods and services, independent of their objective quality. Wheth­er, and if so how, to account for these changes is especially controversial because doing so injects a seemingly subjective element into the process. If people “feel” differently about their consumption, that can seem less economically valid than a measure of the absolute amount they consume. It is not. The value or utility of a basket of goods is a function of not only its absolute size, but also the context in which it is used and the effects that it has.

For instance, social norms implicate tangible economic value when evolving technological standards destroy and create network effects, reducing the utility of some products and services while increasing it for others. If, for example, access to a navigation app is assumed, driving directions may no longer appear in advertisements or invita­tions. Likewise, if teenagers begin to spend their evenings group-chatting, or vendors convert to accepting only mobile payments, then a smartphone and wireless subscription become necessities to engage in both community and commerce.

Social norms can also act through expectations. Hosting a Super Bowl party in 2019 with a 1979 TV is not an option. Purchasing a 1970s-era toy is unlikely to deliver the desired result for children who have just sat through an hour of 2010s-era television advertising, let alone spent time with friends whose own toys are more up-to-date. Evolving standards of personal appearance with respect to hygiene and attire ensure that merely maintaining a bygone consumption pat­tern is unlikely to deliver the “value” it once did.

BLS reports that televisions have declined in price by 97 percent from 1996 to 2018. This is not true in a literal sense—a TV available in 1996 for $500 could not be purchased new in 2018 for $15. It would be more accurate to claim that households can now pay $500 for a 55-inch, high-definition, flat-screen, “smart” TV that would have cost $17,000 in 1996, which may technically be true,16 though of course almost no households were indeed footing that bill. From the house­hold’s perspective, a more relevant comparison might be along the following lines: In 1994 a Best Buy flyer advertised seven televisions ranging in price from $150 to $1,548 (median of $330),17 while in December 2019 the top seven “Best Match” offerings on the Best Buy website ranged in price from $90 to $1,000 (median of $280).18 A much better television, of course, and a savings too—but closer to $50 in savings rather than $500 or $15,000.

Children fare no better. BLS reports that toy prices (including electronics and video games) fell 73 percent from 1994 to 2018.19 Yet the actual toys on the market have become more expensive. In 1996, Toys “R” Us advertised a Nintendo 64 for $200.20 Today, the cheapest Xbox One console sold by Amazon costs $245 (and its list price is $300).21 The outdated Sega Genesis cost $100 in 1996, whereas the outdated Xbox 360 costs $170 now.22 A twenty-inch boys’ bike cost $100 in 199323 and costs at least $100 now.24

Beyond formal economic descriptions, dismissing the salience of social norms is an obvious denial of human nature. This might be contested when comparing expectations across a couple of decades, but the fallacy becomes apparent when the time frame gets longer. It seems almost plausible to say that people can derive the same utility or value from a 1980 standard of living in 2018 that they could in 1980. But if social norms are irrelevant, why stop there? Does the assertion hold for an 1880 standard of living? Who believes that a family should be as satisfied in 2020 with an 1880 middle-class lifestyle as they would have been in 1880?

The Cost-of-Thriving Index

Instead of “how much has the money supply affected price levels in the economy?” or “how much would it cost a family today to live like one at some arbitrary point in the past?,” an economic analysis that sought to understand whether changing wages left workers more or less able to cover a middle-class family’s needs would ask “does this wage cover a middle-class family’s needs?” In contrast to inflation, this measure would ignore substitution: the question is not what the family in fact chooses to buy, given its budget constraints. It would also ignore quality adjustment: the question is not whether the prod­ucts that the family does manage to buy have improved over previous versions. It would, however, look at changes in the price of pooled-risk insurance products: the question is how much it costs the family to acquire insurance, not how much the family would pay out of pocket if uninsured. And it would account for social as well as eco­nomic changes: the question is not what a family needed in an arbitrarily chosen year of the past (that no one needed a car in 1819 says little about its importance in 2019), but what a representative family needs in the present.

Note also that the question posed here refers specifically to a family. Economy-wide inflation measures take averages across all household units, substantially diluting the “signal” from the costs of highest concern to young people forming families.25 The selective focus is not “discriminatory”—everyone will be a child in a household at some point, and most will be adults in households with children. Rather, it argues for focusing—for everyone—on a life stage where budget constraints may be especially salient and where those constraints are most likely to be of societal concern, both because they influence decisions about labor force participation and family formation and because they define the conditions in which children are raised.

Highly sophisticated models could—and should—be designed to analyze these issues in detail and examine how answers differ across demographic groups and regions. Defining the relevant basket of goods and services will always be an inherently political process and methodologies will differ. So long as analysts state their assumptions clearly, policymakers and the public can make their own determinations of what standards they consider reasonable and what conclusions they should draw.

As a starting point in addressing the gap in policymakers’ understanding, and to underscore just how different the answer looks from the conventional wisdom, I describe here a Cost-of-Thriving Index (COTI), consisting of the largest expenditures a middle-class family of four might face each year: rent for a three-bedroom house, a health insurance premium, a car, and a semester of public college tuition. It compares the cost of this basket to median weekly earnings for men working full-time, yielding the number of weeks required to cover these costs.

At first glance, some of the items chosen for the COTI basket will puzzle modern analysts: What middle-class household could possibly afford the costs of a house, a car, a college education, and a health plan on a single income? This reflects the bias built into standard cost‑of-living analyses, which work from what households are buying at the current moment in time. In the past, as the COTI demonstrates, it was perfectly plausible to afford all these things. And all are things that a typical middle-class family might want to have confidence that it can afford. By working backward from what households do buy today, standard analyses intentionally disregard the possibility that households can no longer afford what they need. The COTI suggests this is exactly what has happened.

(1) Transportation. The COTI’s transportation component is the most straightforward. The typical household has one or two vehicles and drives a total of ten to twenty thousand miles per year.26 COTI adopts the fifteen-thousand-mile figure used by the federal Bureau of Transportation Statistics to report total cost of ownership for a vehicle, which rose from $3,484 in 1985 to $8,849 in 2018.27

(2) Housing. Housing data comes from the federal Department of Housing and Urban Development’s estimate of “Fair Market Rent” for a three-bedroom unit in Raleigh, North Carolina. Rent provides a more reliable estimate of total annual cost than assembling the dispar­ate elements of home ownership, and the HUD estimates of “Fair Market Rent” (FMR) are at the 40th percentile in each housing market, making the reference unit one that is near the distribution’s middle but also slightly below average.28 Three bedrooms is both the median and mode for American housing units29 and a logical number for a family with two children.

The Raleigh market was chosen as representative of markets nationwide: roughly half of Americans live in metropolitan areas larger than Raleigh and half live in areas smaller; roughly half live in areas with a higher FMR and half live in areas with a lower one. The median hourly wage in Raleigh, $18.97 per hour in 2018, is similar to the nationwide median of $18.58.30

While the size, quality, and amenities of the 40th percentile unit in 2018 may differ from those in 1985, holding constant the percentile comes closest to approximating a unit of comparable quality on di­mensions like location, neighborhood, community, and schools that are of central importance to families in choosing their housing. Put another way, if the specific house at the 40th percentile of the rent distribution in 1985 were at the 20th percentile in 2018, it would be unlikely to offer a family a living experience of comparable quality, regardless of the square footage and appliances inside. From 1985 to 2018, the annual FMR for a three-bedroom, 40th percentile unit in Raleigh rose from $5,560 to $15,924.31

(3) Education. To assign an annual cost of college to a family whose tuition payments will be concentrated in a few years, the COTI uses the federal National Center for Education Statistics esti­mate for half of one year’s tuition, fees, room, and board at a four-year public institution. Two children pursuing four-year degrees would require a combined sixteen semesters of college, so a household preparing for those costs would need to save roughly one semes­ter’s worth of cost per year before the children reached college-going age. (While the savings might ideally earn a positive return in the interim, that return would need to be quite strong just to keep pace with the rate of increase in tuition over the same period.)

The one-semester estimate may overstate costs in some respects—forinstance, a family would likely have twenty or more years be­tween the birth of a first child and the college graduation of a second. And in practice, many children do not ultimately attend college (though a small and, it seems likely in recent decades, declining share has chosen from a young age not to consider that path at all). But the approach also understates costs by considering only public school costs; private school costs are more than twice as high.32 Note also that the cost of public school tuition already incorporates the sub­stantial public subsidy provided by the state government.

Inescapable in any discussion of college costs is the question of whether sending all kids to college, especially where the return on investment might be poor, makes sense. The answer to that question is no.33 But here the question is what costs a household faces and, so long as the nation’s education policy continues to advance a message of “college for all,” saving for college will remain at the forefront of parents’ minds.34 In 1985, a semester of public college cost $1,841. By 2018, that cost had risen to $10,025.35

(4) Health care. Health care costs are the most difficult to estimate and are highly dependent on the assumptions chosen, because most families receive “employer-sponsored insurance” (ESI). The COTI uses estimates from the Kaiser Family Foundation and the federal Centers for Medicare and Medicaid Services for the cost of ESI family coverage as a proxy for the costs that a family faces.

While use of ESI data is imperfect, it provides a reasonable proxy for all comprehensive private health insurance policies. Individuals covered by employer-sponsored plans do not bear their full cost, but the share of the population under age sixty-five that is covered by employers has fallen to less than 60 percent. Among full-time workers with income up to 250 percent of the federal poverty line ($62,000 for a family of four), less than half have employer coverage.36 The share that will lack such employer-provided coverage at somepoint in time is substantially higher and access to coverage in the event of job switching is often a major concern.

Among those with ESI coverage, the share of premium costs borne by the worker has been growing and spending to meet deductibles (which is excluded from the ESI estimate) has more than tripled in the past decade—the typical covered household incurred almost $8,000 in expenses in 2018.37 Indeed, despite costs skyrocketing, the share of compensation paid as employer contributions for pensions and insur­ance has barely increased, from 11 percent in 1985 to 13 percent in 1993. The share in 2018 was slightly lower than in 1993.38

Moreover, it is a bizarre feature of today’s market that the idea of a middle-class family taking on its own health insurance premium might seem implausible. From 1987 to 2013, the final year before implementation of the Affordable Care Act, the number of directly insured Americans fell from 13.7 million to 12.8 million, even as the uninsured population rose from 27.3 million to 44.1 million. In 2018, with the ACA’s exchanges and subsidies firmly established, the share of Americans purchasing their own insurance remains below its (unsubsidized) 1980s level.39 Perhaps that’s because in 1985 the typical premium cost less than $2,500, while in 2018 it cost more than $19,000.40

Against what should all of the above costs be compared? COTI focuses specifically on the wages of a single worker, rather than total household income for a family that might have multiple earners, because broader measures of household income credit the additional earnings of sending another worker into the market but do not make an offsetting debit for the loss of nonmarket work that person might otherwise have performed for the household. The basic unit of analy­sis that holds constant the amount of work done outside the home in exchange for wages and the amount done inside the home for the family’s benefit is the single wage earner.

The COTI uses a male earner for both sociological and statistical reasons. Sociologically, a substantial body of empirical research has identified the unique importance of work to men’s well-being and to both family formation and stability.41 Recent work by David Autor, David Dorn, and Gordon Hanson has found not only that the declining economic fortunes of men contributes to various social maladies, but also that the effect on women is the reverse: “Shocks to male and female-intensive employment have opposing and precisely estimated effects on marriage formation: a one-unit shock to male-intensive employment reduces the fraction of young adult women ever married by 4.2 points and the fraction currently married by 3.6 points; a unit shock to female-intensive employment has a countervailing impact on marital status that is about two-thirds as large as the impact of a shock to male-intensive employment.”42

While Americans see traits like “be caring and compassionate,” “contribute to household chores,” and “be well educated” as of nearly equivalent importance to being a “good husband” or a “good wife,” they are far more likely to describe “be able to support a family finan­cially” as a very important trait for a good husband. This finding holds across education level, race, and gender: 72 percent of men and 71 percent of women say being able to support a family financially is very important for a man to be a good husband, compared to 25 percent of men and 39 percent of women saying the same about being a good wife.43

Statistically, the median male wage was higher than the overall median wage in past decades and remains higher today. The female wage, or an aggregate wage, has more difficulty than the male wage in covering the cost of major expenditures. A focus on men also has the benefit of holding constant the economic experience of a group recognized as the family’s traditional breadwinner. By contrast, a median wage across all earners experiences downward pressure from a “mix shift” as women account for more of the workforce.

The federal Bureau of Labor Statistics reports that the median usual weekly earnings for men over age twenty-five employed full-time as wage and salary workers in 1985 was $443.44 Thus, it would take thirty weeks to cover the $13,227 in costs for the goods and services in the COTI basket. By 2018, that basket had risen in cost to $54,414, which at 2018’s weekly wage of $1,026 would require fifty-three weeks of work to cover—in other words, more than the fifty-two weeks in a year. The normative question of whether we should care if the typical man can confidently provide for his family is beyond the scope of this analysis. What we can say is that once he could and now he cannot.

The American Experience

The COTI shows a declining capacity of a worker to meet the major costs of a typical middle-class household. As the COTI basket has become unaffordable, families have found workarounds, like having more household members work more hours, making do without, borrowing, and relying on government support. Each of these comes with its own costs, undermines the stability of families and the rationale for their formation, and creates high levels of stress and uncertainty. While some may celebrate the increased role played by government in filling these gaps, the continued drift in this direction threatens to strip from the middle class the pride of earned success and self-sufficiency and to reorient society around dependence on the beneficence of public programs. An economy in which even the middle class is largely dependent on redistribution is also likely to be one with badly distorted incentives that steer both individuals and the broader culture away from the behaviors and norms necessary to maintaining a true middle class at all.

The COTI tells only one part of the story of the economy’s evolu­tion in recent decades—there is much it ignores, and many of its assumptions run counter to ones useful in answering other questions about the economy. The same, however, can be said for standard measures of macroeconomic inflation and the adjustments they sug­gest to nominal wages, and for qualitative assessments of material living standards and technological progress. If we want to place price levels in historical context, inflation indices are the closest approximation. If we want to know how much consumer surplus our households are capturing, evaluations of product quality can help.

But if we want to understand what has happened to people’s abil­ity to provide for their families, the COTI provides the more reliable guide. The widening gulf it depicts between what American life costs and what American jobs pay is a central fact of American political economy that the public appears to have understood long before eco­nomists. Policymakers should prefer it to standard inflxation adjustments for interpreting the nature and quality of economic progress.

Establishing basic facts is only the first step in formulating effec­tive solutions and the COTI does not automatically validate a specific policy agenda. To the contrary, it highlights two very different path­ways that each deserve much greater study: “What can be done about low wages?” and “What can be done about high costs?” Re­forms aimed at making college less necessary, or health insurance less expensive, for instance, might achieve just as much as ones aimed at raising wages—if they genuinely reduced costs rather than merely introduced additional subsidies that deepen dependence on government largesse. The U.S. economy of recent decades has eroded, rather than reinforced, the American model of thriving, self-sufficient fami­lies. In the decades to come, we will need to do better.

This piece originally appeared at American Affairs Volume IV, Number 1 (Spring 2020): 15-32

______________________

Oren Cass is the executive director of American Compass and author of The Once and Future Worker. This piece is based on a Manhattan Institute report, “The Cost-of-Thriving Index: Reevaluating the Prosperity of the American Family.” Follow him on Twitter here.

Photo by William_Potter/iStock

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