I’ve spent years telling Tyler Cowen that conventional price indices are upwardly biased, so his stagnationist views are wrong. And he’s spent years replying that my views are sadly out-of-date. In this piece, the highly up-to-date Scott Winship unequivocally reaffirms the classic view that indices are indeed upwardly biased. Indeed, the old Boskin Report was probably too cautious:
The chart shows that from 1969 to 2012, the PCE and my extended C-CPI-U series indicate that prices rose by a factor of 5, while the CPI-U-RS gives the ratio as 5.5 and the CPI-U as 6.3. These distinctions are important. If nominal income—income prior to taking the rising cost of living into account—rose by a factor of 7.2 over this period (as my own estimates suggest), using the CPI-U to adjust for inflation would give the conclusion that “real” income rose by 16 percent. Using the PCE or C-CPI-U, we would conclude that real income rose by 45 percent—nearly three times as much. For comparison, the CPI-U-RS would indicate a 31 percent increase—substantially lower than the estimate from indices that fully take substitution into account.
And even this is not the end of the story, because even the PCE deflator is likely to overstate the rise in the cost of living…
Winship then speculates on why people are so resistant to the correct view:
In large measure, the reason is that analysts have tended to take their cues from the Census Bureau, which uses the CPI-U-RS for its income trend figures (but, inexplicably, still uses the CPI-U to adjust the poverty thresholds each year for trend analyses). Very few researchers—even within academia—have expertise in the methodologies of price adjustment (I do not either), so they trust in the decisions of the Census Bureau. I suspect that the Census Bureau uses the CPI-U-RS rather than the PCE deflator partly out of inertia and wanting to stay somewhat consistent with past publications and practices. There may also be internal political considerations, as the Census Bureau and Bureau of Labor Statistics often collaborate, and the latter has been in charge of developing the CPI family of indices.
[…]
There is also the reality that many parties in Washington and many outside parties interested in influencing Washington have biases in favor of analyses that convey gloomier news. Advocates and politicians on the left want to promote agendas that involve redistribution and more government intervention into markets. Politicians on the right, meanwhile, must tend to middle class anxieties (and most of these policymakers mistakenly believe, along with other Americans, that our problems are worse than they appear). Policymakers from both parties have an interest in painting a dour picture of the economy when their opponents are in power.
Meanwhile, academic and policy researchers on the left often believe that economic problems are relatively great, and so results that reinforce the view that we have calamitous problems help generate support for their preferred policies. Researchers across the ideological spectrum—and their institutions and funders—want to attract attention, which creates a bias in favor of more dramatic results. And journalists are largely left-leaning*, making them predisposed to believe gloomy economic news, eager to help people in need through their writing, and disproportionately likely to have relationships with left-leaning researchers producing work that corresponds with their priors. Even moderate and conservative journalists face pressures to find and report on dramatic results; if it bleeds it leads. Finally, the spread of overly gloomy results to policymakers, consumers of news, and citizens tend to give people the impression that things are worse than they are, reinforcing many of the dynamics that incentivize gloomy news in the first place. People are generally more pessimistic and negative in polling that asks about the economic problems of others than they are when asked about their own economic situation.
Parting words:
These are powerful forces working against knowledge of the state of our living standards. If you’ve read this far, the challenge is yours to accept: produce a reason to disbelieve the case I have made or change your priors about how well we are doing and hold others accountable in producing, disseminating, and publicizing economic research that conveys the truth as best it can.
READER COMMENTS
MarkW
Jul 23 2019 at 11:24am
I’m on your side. The consumption gains since 1970 for average Americans are huge — and that’s true if you ignore tech completely. Compared to when I was little, Americans travel more (especially by air), eat out more, live in much larger and better appointed houses, and drive much fancier, better equipped, safer cars. We all own many more pairs of shoes and outfits of clothing — when I was a kid in the 70s, hand-me-downs were a big thing, some mothers still bought patterns and sewed clothes for their families to save money, while most ironed patches on jeans. Now you can barely give used clothing away. Home appliances were a major expense and weren’t simply replaced when they broke down (appliance repair guys were kept busy). We didn’t even own a washer at first (my Mom used a clothes line) nor a color TV (another major expense). And nor were we poor (my Dad was a college grad with a white-collar job). The stagnation story doesn’t even come close to passing the eyeball test.
nobody.really
Jul 23 2019 at 12:53pm
Thought-provoking.
Thaomas
Jul 24 2019 at 9:17am
Valid points, but they don’t address the other parts of the “narrative,” the increasing disparities in wealth and income concentration at the top and the decline in measured productivity across many industries.
dmm
Jul 25 2019 at 7:08am
Disparities in wealth and income are not a problem except for the envious.
If you want to talk about the reasons for the disparities, game on. But leave your assumptions at the door, please. In return, I’ll leave my privilege, meh heh.
Thaomas
Jul 27 2019 at 10:27pm
I thought this was about facts. Has there been an increase in disparities of wealth income consumption or whatever? Winship’s argument is not so much in consumption.
Tim Worstall
Jul 24 2019 at 12:01pm
“don’t address the other parts of the “narrative,” the increasing disparities in wealth and income concentration”
You, me and Bill Gates all have access to the same amount of Facebook, Google, Twitter and the rest at the same price. Bjornolfson is estimating the value of these at $20,000 a year or some such (heavily reliant upon the value of search engines but still). That rather reduces the ratio for income inequality, doesn’t it. Wealth is just capitalised income, so that too.
Confused
Jul 25 2019 at 1:31pm
I’ve read and heard smart, data-rich arguments on both sides of this issue. Both seem compelling — and who am I to do battle with the likes of Tyler Cowen, Bryan Caplan, or any of their esteemed cohort? It would be great if Tyler, Bryan, or others could address some nagging questions:
1. 50 years from now, do we think a consensus on this topic will emerge — so smart people armed with good data and models will largely agree?
2. Is this really an empirical question? Surely financial wealth can be quantified, but it seems that the subject matter is more than just financial wealth — seems to be about perceptions of wealth and maybe “well-being”? Do we imagine people who feel deprived and “unequal” today will wake up to read a new convincing analysis of wealth positions and suddenly feel they were wrong all this time and are truly now wealthy?
3. I fear Winship is right about politicians’ and journalists’ interests and incentives to find the data that support their agenda – this cannot be good for democracy and freedom. But what then are we to think about the interests and incentives (or just personalities and proclivities) of academics like Cowen, Caplan, Winship? Do you operate outside these forces?
Appreciate any perspectives on these nagging questions.
Mark Z
Jul 27 2019 at 12:40am
I think it’s important to seperate this into two different questions, 1) has the economy been stagnant in recent decades (to which I think the answer is clearly no, and Bryan and Scott are very much in the right) and 2) are we entering an era of general stangnation. I think the case for the latter has merit because there’s good reason to suspect the rate of technological progress won’t keep pace in the coming decades with what we’ve seen in recent decades. One can be a retrospective optimist and a prospective pessminist.
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