Monday, September 11, 2017

Should the Younger Generation Fear They Will Have Lower Real Incomes Than Their Parents?

Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard
By Martin Feldstein

Government statistics paint an excessively grim picture of what is happening to real wages and the growth of real national income. Although most households’ take-home cash has been rising very slowly for decades, their standard of living is increasing more rapidly because those wages can now buy new and better products at little or no extra cost. The government’s measure of real incomes gives too little weight to this increase in what take-home pay can buy.

The common assertion that middle-class households have seen no increase in real incomes for 30 years is simply not true. And contrary to a common fear, most members of the younger generation will have
higher real incomes as adults than their parents had at the same age.

The government’s growth estimates are excessively pessimistic for two reasons. First, government statisticians grossly understate the value of improvements in the quality of existing goods and services. More important, the government doesn’t even try to measure the full contribution of new goods and services.

Consider how the government handles manufactured products when their quality improves. Statisticians track a large number of products. For each, they ask the manufacturer two questions: Has the product changed since last year? If so, how much more does it cost to make this year’s model than it would now cost to make last year’s model?

If there is no increase in the cost of production, the government concludes that there has been no increase in quality. And if the manufacturer reports an increase in the cost of production, the government assumes that the value of the product to consumers has increased in the same proportion.

That’s a very narrow—and incorrect—way to measure quality change....

The official estimates of quality change are therefore mislabeled and misinterpreted. When it comes to quality change, what is called the growth of real output is really the growth of real inputs. The result is a major underestimation of the increase in real output and in the growth of real incomes that occurs through quality improvements.

The other source of underestimation of growth is the failure to capture the benefit of new goods and services. Here’s how the current procedure works: When a new product is developed and sold to the public, its market value enters into nominal gross domestic product. But there is no attempt to take into account the full value to consumers created by the new product per se.

Think about statins, the remarkable class of drugs that lower cholesterol and reduce deaths from heart attacks. By 2003 statins were the best-selling pharmaceutical product in history. The total dollar amount of statin sales was counted in GDP, but the government’s measure of real income never included anything for improvements in health that resulted from statins—such as a one-third decrease in the death rate from heart disease among those over 65 between 2000 and 2007.

Or consider consumer electronics. New York University economist William Easterly recently tweeted an image of a 1991 RadioShack newspaper ad and noted that all the functions of the devices on sale—clock radio, calculator, cellphone, tape-recorder, compact-disk player, camcorder, desktop computer—are “now available on a $200 smartphone.” The benefits to consumers from these advances don’t show up in GDP..

There are other problems that cause the official statistics to underestimate the true growth of real income. A basic government rule of GDP measurement is to count only goods and services that are sold in the market. Services like Google and Facebook are therefore excluded from GDP even though they are of substantial value to households. The increasing importance of such free services implies a further understatement of real income growth....

Even though real incomes are rising faster than is widely believed, we can and should do even better. Changing our tax rules, reforming regulation and improving education can spur faster growth and a more rapid rise in the standard of living. But even as we pursue these policies we should not lose sight of the economy’s superior performance.

Read the full essay at The Wall Street Journal here.


  1. This is such a shoddy assessment with no reference to stealth inflation or analysis of diminishing value based on cost

  2. Now do these increases in standard of living even match the productivity increases and two person household incomes vs. one? The working hours required to make these incomes? Are the gains being financed? That is an increase in household debt is driving them?

    Looking at the places where the market still functions like it is supposed to saying things aren't so bad is essentially looking at marginal gains in some areas to excuse massive structural issues due to interventions elsewhere.

  3. Feldstein makes a few good points here. For example, I agree with him that the full value of a smartphone cannot be ascertained by simply focusing on its price absent the increased level of productivity it provides to those using it.

    However, I take issue with his position that incomes of the young will exceed that of their parents. One only needs to take notice of the fact that that a growing number of college graduates live at home with their parents because they either don't make enough to live on their own or don't want to spend practically all of their money on living expenses. If real incomes were "rising faster than is widely believed" would be living on their own with increasing levels of monthly disposable income.