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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.

Continue reading the entire piece here at American Affairs

______________________

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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