Paul Krugman: The Average Family is Materially Much Better Off
By David Henderson
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.