Quality of Life Trends vs. Income Growth Trends Revisited

Tyler Cowen’s NY Times piece sketches a pessimistic vision of U.S economic stagnation as measured by trends in median household income. As an eternal optimist, I offer my response here.  Consider Los Angeles or New York City today, how many people would prefer to live in 1970 versus 2011?  Crime is down over time. Pollution is down over time.  The rise of the Green City has sharply improved our quality of life. Such non-market local public goods improvements are not seen in national income accounts.   Economists have struggled with what is the right way to construct the CPI “consumer  price index.” This is crucial for measuring inflation and thus trends in real income.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

9 thoughts on “Quality of Life Trends vs. Income Growth Trends Revisited”

  1. "In 1962, the Internet, the Smart Phone and Facebook would have been expensive to use." Pulling your punches, dude. How about, "As recently as 1992, the Smart Phone and Facebook were science fiction, and only primordial fragments of the internet existed." You raise an essential issue here. I am personally troubled by the increasing concentration of wealth in recent decades. However, I have been watching middle income American life first-hand about a decade and a half longer than you have, and my my sense of a broad-based quality of life squares with yours. This needs more attention.

  2. Over long periods of time, getting the CPI "right" is an impossibility. It is a linear measure of what is, fundamentally, a non-linear development. At best, it gives us a short-term measure of monetary inflation. Over the course of a generation, it just exposes the imponderables.

    Tyler is wrong about the pace of innovation. His grandmother (like mine) did see remarkable innovations — the airplane, automobile, telephone, movies, penicillin, new vaccines for polio and various childhood diseases. But, the slowing pace of innovation is a cognitive illusion. Grandmother's innovations, and those of the earlier first and second industrial revolutions, required new categories. The automobile replaced the horse, but we didn't think of them as, fundamentally the same thing in the same way that we think of our smartphones as "phones".

    The rate of technical progress continues to accelerate. We see this not in the introduction of the new — because we have filled out our conceptual matrix with the past proliferations — but in the passing of technologies. We are seeing innovation now as the disappearance of things: the newspaper, the teletype and telegraph and soon the home phone, film for movies, any medium at all for music, the bookstore, maybe the book, the post office will go away soon.

    The apparent stagnation of the developed world is due to the rapid obsolescence of its capital stock in these waves of innovation. Maybe because I live in Hollywood, I am especially aware that vast corporate businesses thrived on their possession of the expensive "means of production" and distribution only a decade ago, and today, the equipment and bureaucratic organization to record and distribute a song or a movie is, well, approaching the trivial.

    The details are different in Michigan and Ohio, and auto and steel factories are not within anyone's household budget the way a video-editor might be, but much the same thing has been happening in heavy industry over longer periods of time. The value of the capital stock, and its associated quasi-rents, to use the economic term, are declining rapidly due to technical obsolescence.

    In the Great Recession, roughly 5% of the labor force became both unemployed and unemployable, since there's really no where for them to work — no capital stock to which to apply their labor. People, who retained their jobs, have continued to see their productivity climb. When the Circuit City chain closed, that capital stock disappeared; folks at Best Buy and New Egg and Amazon saw their capital utilization and productivity climb, but there's no where for the Circuit City folks to work.

    It is one of the frequently overlooked paradoxes of economics that an increased capital investment in the capital stock drives up labor income, and labor's share of income, as it drives up labor's marginal productivity. We're seeing the opposite phenomenon. Capital spending is very low, the rate of obsolescence is very high, and, consequently, perversely, Capital's share of national income is rising, and while *average* productivity climbs, *marginal* productivity and wages decline.

    People at the bottom of the economy, without access to the bureaucratic economy and the productive capital stock — the people, whose contact with our "innovative" finance sector is a payday lender or a debit card scam — are forced into the capital-less scam-economy, which increasingly pervades the country.

    Economists tend to fret about income inequality in a singularly abstract and detached way, as if it did not relate to anything else we see about us. That the actual phenomena encompass the corruption of academia, which pushes the worst hack economists, spouting nonsense to the forefront — the "brilliant" Larry Summers or Tyler Cowen of the Koch-funded George Mason economics department — makes it even harder to see reality.

    Squinting hard at the latest statistics on life expectancy I see what appears to be a slight decline in the Great Recession. Americans are getting shorter, which is a sure sign of declining nutrition. The population of the U.S. has more than doubled since I was a young man, and competition for access to the scarce resources of lakeshore, seashore, etc., which God isn't making any more of, contributes to income inequality in a pernicious way. When I was a young, a newly minted teacher at a public school earned roughly 70% of what a newly minted lawyer at a prestigious firm did. Care to speculate on that ratio today?

    The divergence of median from mean indicates that a fair number of people at the bottom are being ground into nothing by the emergence of the pervasive scam economy, which is funding those Goldman Sachs bonuses that make Manhatten glitter. It's ugly and it's getting uglier.

  3. I have to say, I'd rather live in 1970s New York City than, say, 2011 suburban Phoenix.

  4. I've spent a few weeks in both, and 1970s NYC was much more fun, but that may have been because I was much younger. Youth isn't a factor in the CPI, either.

  5. "Consider Los Angeles or New York City today, how many people would prefer to live in 1970 versus 2011?"

    I have to wonder, when a question like this is asked, if the "obvious" answer is not a reflection of the life that I and people like our author lead.

    In particular

    – we are not in jobs that have the threat of of laying off hanging over them each and every day of our lives

    – we are not in a position where we have children who are smart enough for college, but don't have the money for it

    – we have not gambled on having a corporate pension, which now looks likely to default, or simply not be very large

    – we are not in the position of having to somehow pay for medical insurance over the next few years [of course this may or may not change with the fate of the ACA, but we're talking about the trend over the last few years]

    etc etc

    Of course if you are educated and smart and youngish, modern America is great — your income is still going up, or at least tracking inflation, employers like people like you, and there's a wealth of new gadgets that making learning (your favorite pastime) ever easier and cheaper. The point is, and always has been, what about the people who do not fit into that category — most of which I imagine don't frequent blogs like this?

  6. In 1970 NYC, undergraduate education in the City University system was still free — all you had to do was pass an entrance exam — and they were considered good schools.

    My older cousin, Arline, who majored in English at City College while living at home, used to joke that since she could take all the books she needed for her classes out of the library (e.g., Moby Dick), she didn't pay anything at all. Of course, she exaggerated, there was still the subway fare, texts for her non-major classes, some fees, etc. But it wasn't exaggerating by much, especially in light of how much her education would cost her now.

    Anyway, free public higher education certainly added much to the quality of life for the New Yorkers I grew up among. It made (the children of immigrants who were) my parents' ascent into the middle class possible. Many more things felt possible when I was growing up a baby boomer in Queens that don't feel possible now, though yes, it's nice to not to have to worry about crime as much.

  7. "Consider Los Angeles or New York City today, how many people would prefer to live in 1970 versus 2011?"

    Consider Detroit or Toledo today, how many people would prefer to live in 1970 versus 2011?

  8. Re "Consider Los Angeles or New York City today, how many people would prefer to live in 1970 versus 2011?"

    As a long term Angelino, I would take 1970 without hesitation. Since then the population has grown from 2.8 million to 4 million. It currently has a density of 8,000 per square mile – which is half that of Hong Kong!

    Traffic is a pain since this growth was not accompanied with transportation infrastructure expansion. And in most cases, there was no viable expansion of capability, which should have resulted in the city not allowing for denser building.

    Also, this higher density has meant much higher rents, and houses that go for prices much larger multiples of income than is found elsewhere.

    I have to conclude that Matthew Kahn didn't live in Los Angeles in 1970.

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