Americans Are Still Thriving

But how much are living standards and income improving? Has growth slowed down in recent decades? Are we worse off than a generation ago? Both regular Americans and economic researchers have been asking these questions a lot lately. The debate often slips into dueling anecdotes or—even worse—wonky discussions of income measures and inflation adjustments.

What’s the best way to look at this data and answer those questions? I’ll try to give you a guide to the data, without getting too much into the weeds. Well, maybe a little bit. To give you a preview of the conclusion: while the prices of many categories of goods and services have risen rapidly, Americans have continued to see their standard of living rise in recent decades, properly measured. Now, let’s talk about measurement.

The Long-Run View

There isn’t much disagreement that in the really long-run, say 200-300 years, standards of living have improved significantly. By almost any measure—income, health, education, freedom—people today are better off in 2023 than they were in 1823. I really like a summary of the global data for six measures that Max Roser wrote for Our World in Data.1

You could do a similar analysis of the United States over our entire history. For example, life expectancy at birth in the United States was around 40 years in the early nineteenth century. Today, it’s approaching 80 years (though the pandemic along with the surge in opioid overdoses have set us back a bit).

Measuring the increase in income is more challenging than measuring life expectancy, but many economic historians have dug into the available data and given us some useful estimates. For example, Lawrence H. Officer and Samuel H. Williamson report that average compensation of production workers (non-supervisory manufacturing laborers) was about 4 cents per hour in 1800.2 Louis Johnston and Samuel H. Williamson also estimate that Gross Domestic Product per capita was about 90 dollars per year in 1800.3 GDP is a widely used, sometimes criticized, and sometimes misunderstood measure of average incomes, but it is one that we are able to approximately estimate for very long-past periods.

But those numbers from 1800 are a bit unsatisfying. How do they compare to wages and incomes today? We know that a dollar doesn’t buy as much “stuff” today as it did in the past. But how much less “stuff” does the dollar buy? This is where the familiar, but also often misunderstood, concept of “inflation adjustment” comes in. If your income triples, but prices also double, you are better off, but you are not three times better off. Inflation adjusting is a way to answer the “how much?” question of improvements in income over time.

Economic historians have developed long-run measures of consumer prices for purposes of inflation adjustment. The most common measure is a backwards extension of the Bureau of Labor Statistics’ Consumer Price Index, which officially only goes back to 1913, but once again, Officer and Williamson have combined all the best historical estimates to extend it back to 1774. The CPI also has some adjustments for the improvement in quality of products, even if this is not perfectly captured—stay tuned for much more on quality improvements later on in this essay.

For the latest data in 2022, we see that consumer prices are about 24 times higher, on average, than they were in 1800. That’s a lot of inflation! But when we look at average incomes, as measured by GDP, it is an astonishing 842 times higher than in 1800. Putting these two together, we can say that real, or inflation-adjusted, GDP per person in the United States is about 38 times higher in 2022 than it was in 1800. Economic historians still might debate the exact figure—is it actually 40 or 50 times, or maybe a little less than 38?—but no one debates the direction of improvement.

It’s also useful to point out that the past 200-300 years have been unusual in human history. Economic historian Deirdre McCloskey likes to call this the “hockey stick” of human history, as a very long-run chart of economic growth looks a long stick with a sharp blade at the end.

The Medium-Run View of Income Growth

While there is little dispute about the long-run, there has much debate about the prospects of Americans in recent decades. How has the last generation fared economically? It depends on what data you look at. And here’s where it gets interesting.

Measures such as Gross Domestic Product show continued progress. Adjusted for inflation, GDP per capita roughly doubled between 1982 and 2022. That’s pretty good growth. Other measures of economic well-being have shown improvement as well, though not quite as much as GDP. For example, real median family income has grown by about 40 percent over the past 40 years.

Not all of the data paints as rosy a picture. If we look at average hourly earnings for private sector, non-supervisory workers and adjust for inflation using the Consumer Price Index, we see the shocking fact that there has been essentially no net growth since 1973. That’s 50 years of stagnation! That’s not because nothing was happening. By this measure, real wages were falling from about 1973 until the mid-1990s, after which they rose again to roughly equal their 1973 levels recently.

Here’s where things get a little technical and confusing. The Consumer Price Index is a good measure of prices over time, but it fails to take into account a number of important factors, such as that consumers will change their behavior when prices of particular goods rise by buying other, cheaper goods. Combined with some other biases, the Boskin Commission (established by the U.S. Senate to study this issue in the 1990s) found that the CPI tends to overstate inflation by about 1 percentage point per year. This may sound small, but when inflation is only about 2-3 percent per year, if 1 percentage point of that is an overstatement, it really adds up over time.

How much does it add up? We can make the comparison by looking at an alternative price index, the Personal Consumption Expenditures price index.4 The PCE corrects for some of the biases in the CPI. And it makes a big difference, as Michael Strain has explained in more detail.5 Here’s the cumulative effect: while CPI-adjusted wages are essentially flat (no increase!) since 1973, PCE-adjusted wages have increased about 30 percent. That’s not as much as GDP per capita or median incomes, but it’s very different from the pessimistic CPI-adjusted picture.

Beyond Inflation Adjustments: The Cost of Thriving Index

A new analysis of incomes in recent decades has challenged these results on a number of fronts. In 2020, Oren Cass published the first edition of his “Cost of Thriving Index,” which was updated in 2023 and published by his American Compass think tank.6 Cass’s COTI is much more pessimistic about how American families are doing, suggesting that it is much harder for a family with one earner to purchase the necessities of life today than in 1985.

How much harder? COTI tells us that in 1985, the median male earner could pay for five basic necessities for his family (groceries, a car, a home, health insurance, and a college education) with about 40 weeks of work. By 2022, COTI tells us that it would take about 62 weeks of work to pay for these same necessities. That’s not a typo; it’s not 52 weeks. According to COTI, it takes more than a full year of work for a man to purchase these goods and services. That means that men must take on second jobs, women must work outside the home, or a family must go without some of these goods and services or go into deep debt to buy them. None of these seems to be an ideal situation, especially if the family would prefer the wife to stay at home.

How does Cass arrive at this conclusion? The first important step is that he says inflation adjustments are misleading. Yes, the quality of, say, minivans has improved. But the CPI treats these quality improvements in a curious way: it says the goods haven’t gotten more expensive. They have gotten more expensive, which is bad, but they are also nicer, which is good. But for a family struggling to make ends meet, perhaps they would prefer a lower quality minivan, but you can’t just say, “Hold the airbag and anti-lock brakes, please.” (Cars in 1984 didn’t have these features, nor air conditioning in many cases). In short, Cass looks at the actual costs of goods and services, rather than a quality-adjusted cost.

But he also gets many of the costs wrong.

In a recent report published by the American Enterprise Institute, Scott Winship and I analyze Cass’s COTI in detail and find many errors.7 Some of the errors and omissions are so significant as to almost completely eliminate the apparent increase of 22 weeks of work that Oren Cass claims are necessary to maintain a lifestyle like that of 1985. For example, while health insurance costs have surely risen significantly in recent years, Cass dramatically overstates the cost of health insurance to a family by including the employer share of health insurance. Workers are not paying this share out of their wages—it may indeed lower their wages, but Cass’s method is double counting (or double subtracting, if you will). Other errors show up for most of the five spending categories.

A major omission is to consider the effect of income taxes, which definitely do come out of a worker’s wages. Cass includes no provision for income taxes. But while incomes taxes do reduce take-home pay, thus requiring even more hours work, what’s important for this analysis is the change in income-tax liability for a median-income family from 1985 to 2022. Due to a number of changes in tax law, the biggest being the Child Tax Credit, families today will pay a significantly smaller share of their income in federal income taxes, falling from about 16 percent to just 6 percent of their annual income. These tax changes significantly reduce the number of weeks per year needed to pay the bills.

Winship and I make a few other improvements to the analysis. Importantly, we consider not just men over 25, but both women and men. We also include workers under the age of 25, so long as they are working full-time. Cass does have a separate analysis just for women, but we instead include all workers together in one version of our analysis.

Including the improvements to the costs of goods and services, the inclusion of federal taxes, and broadening the workers we consider (to all full-time workers 16 and older), we find dramatically different results than Cass. Families are 15 percent better off, rather than 36 percent worse off, as Cass’s analysis suggests. And keep in mind this doesn’t include quality improvements to goods and services, which have been substantial since 1985. Forget about air bags in minivans for a moment, and think about how much better healthcare is in 2023. Many of the procedures, drugs, and technologies that we use today weren’t even available in 1985—at any cost.

By including these quality improvements, we finally conclude that the median family—even if they only chose to have one spouse working—is about 53 percent better off than 1985. This still falls short of the roughly doubling of GDP per capita during this time period, but it’s still a huge improvement in our standard of living.

The American family continues to thrive, despite many headwinds in recent years such as growing government, the rampant inflation of the past few years, and two major recessions in the past fifteen years.

Footnotes

[1] Max Roser, “The short history of global living conditions and why it matters that we know it”. Available online at Our World in Data: https://ourworldindata.org/a-history-of-global-living-conditions

[2] Available online at Measuring Worth: https://www.measuringworth.com/datasets/uswage/

[3] Available online at Measuring Worth: https://www.measuringworth.com/datasets/usgdp/

[4] Available online from the Federal Reserve Bank of St. Louis at https://fred.stlouisfed.org/series/PCEPI

[5] Michael R. Strain, “Have Wages Stagnated for Decades in the US?” Available online from the American Enterprise Institute at https://www.aei.org/articles/have-wages-stagnated-for-decades-in-the-us/

[6] The Cost of Thriving Index is available online from American Compass at https://americancompass.org/2023-cost-of-thriving-index/

[7] Scott Winship and Jeremy Horpedahl, “The Cost of Thriving Has Fallen: Correcting and Rejecting the American Compass Cost-of-Thriving Index.” Available online from the American Enterprise Institute at https://www.aei.org/research-products/report/the-cost-of-thriving-has-fallen-correcting-and-rejecting-the-american-compass-cost-of-thriving-index/