Freeman

ARTICLE

Our Skyrocketing Living Standards

Capitalism Takes What Was a Luxury for the Rich and Makes it an Everyday Item for the Poor

SEPTEMBER 01, 2007 by DAVID R. HENDERSON

In the mid-1950s, when I was a young child, I would occasionally see a man walking along the street with a grapefruit-size growth in his throat. The first time I saw such a thing I gasped. My mother hushed me up and told me later that the man had a goiter. The last time I saw a goiter was in the mid-1960s. Improvements in diet, namely the addition of iodine to salt, have virtually eliminated goiters.

When my family used to drive to our summer cottage, a very basic dwelling that my grandfather built in 1921, we would stop to “eat out.” I got French fries, which in Canada we called potato chips, and a Coke. Not French fries, a Coke, and a hamburger. Just French fries and a Coke. We “ate out” twice a year, once on the way to the cottage and once on the way home. No one in Canada, or in the higher-living-standard United States for that matter, would have called us “poor.” My father’s income was probably just at the median—he was a public-school principal in a small prairie town. Now, even many of the poor eat out at McDonald’s a few times a month.

In 1960, when I was ten years old, I had two pairs of pants. In 2000, a gardener friend making no more than $15,000 a year showed me his nice clothes closet that his new bride had arranged: it contained about 20 nice shirts, five to ten suits, and the same number of nice ties. He had bought many of them at Goodwill, but isn’t it interesting how you can buy even high-quality items at Goodwill?

I could easily tell dozens more stories like these. I’ll bet you could too. The point is not to get you feeling sorry for me or for yourself. I think I had a pretty good life back then, at least in economic terms. In fact, that’s the point. What many of us thought of as pretty good back then is a life that is economically far below what the vast majority of Americans have today. There has been an explosion in living standards in the United States and Canada, in most of Europe, in Japan, and in other places around the world that has brought the richest one billion people to what our counterparts 50 years ago would have considered the life of the rich.

How have we gotten here? By being fortunate enough to have been born in, or by being ambitious enough to have moved to, countries that have a fair amount of economic freedom, countries whose governments allow private property, allow citizens to keep up to 70 percent of what they earn, and usually allow contracts to be enforced.

Yet many people claim that middle-class people today have less than their parents had. In a January 5, 2004, article in The Nation, for example, New York Times columnist and Princeton University economist Paul Krugman wrote: "According to estimates by the economists Thomas Piketty and Emmanuel Saez—confirmed by data from the Congressional Budget Office [CBO]—between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent."

What should we make of this claim?

Krugman can’t be right that the CBO confirmed the data from Piketty and Saez for the simple reason that CBO estimates go back only to 1979. More important, the CBO data show that between 1979 and 2000, average after-tax income in each quintile (fifth) of the household-income distribution rose. For the lowest quintile, it rose from $13,500 to $14,600 (all numbers in this sentence are in 2003 dollars); for the second-lowest quintile, it rose from $27,300 to $30,900; for the middle quintile, it rose from $38,900 to $44,700; for the second-highest quintile, it rose from $50,900 to $63,300; and for the top quintile, it rose from $89,700 to $151,100. So for Krugman’s claim to hold true, average income in the bottom 90 percent would have had to fall drastically between 1973 and 1979 to more than offset the later increase. Economist Alan Reynolds, using U.S. Census data, has shown that this didn’t happen. In short, people at all income levels were better off in 2000 than in 1979.

Reynolds, going back to the source—the Piketty-Saez data that Krugman and many others cite—points out just how implausible their data are as a measure of family income. Piketty and Saez write that in 2000, “the median income, as well as the average income for the bottom 90% of tax units is quite low, around $25,000.” Note the use of the term “tax units.” “Tax units” are not the same as families. In my family, for example, we have two tax units: my wife and I file our taxes jointly and our daughter files on her own. But that has not stopped people, including Krugman, from writing as if “tax unit” and “family” are synonymous. If they were the same, then 45 percent of families (half of 90 percent) would have had to make less than $25,000 in 2000. But U.S. Census data show that for 2000, only 27.5 percent of households made less than $25,000 in 2003 dollars. Granted that households are not the same as families either, but households are probably more like families than “tax units” are. The problem stems from the equation of “tax unit” with family.

If your eyes glaze over when reading comparisons of income numbers, there’s another way to see how our living standards have changed. Look at what average people have. Start with what’s in the household. In their book, Myths of Rich and Poor, W. Michael Cox and Richard Alm show that a household officially counted as poor in 1994 did better in certain important ways than the average household in 1971. For example, 71.7 percent of poor households in 1994 had washing machines versus 71.3 percent of all households in 1971. Poor households in 1994 did better than the average 1971 household on most items. The figures were as follows: clothes dryers, 50.2 percent for poor households in 1994 versus 44.5 percent for all households in 1971; refrigerators, 97.9 percent vs. 83.3 percent; stoves, 97.7 percent vs. 87 percent; microwaves, 60.0 percent vs. less than 1.0 percent; VCRs, 59.7 percent vs. 0 percent; color TVs, 92.5 percent vs. 43.3 percent; air conditioners, 49.6 percent vs. 31.8 percent; dishwashers, 19.6 percent vs. 18.8 percent; personal computers, 7.4 percent vs. 0 percent. The only items on which poor households in 1994 did worse than the average 1971 household were freezers (28.6 percent vs. 32.2 percent), telephones (76.7 percent vs. 93.0 percent), and cars (71.8 percent vs. 79.5 percent).

When I cited these data to a colleague of mine he retorted, “Of course, but look at how much cheaper those items are today.” Exactly. Our system of relatively free markets has given entrepreneurs and inventors an incentive to cut costs, improve quality, and innovate. That’s how capitalism takes what was a luxury for the rich and makes it an everyday item for the poor. As the famous economist Joseph Schumpeter wrote back in 1942:

Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.

The only things I can think of that have arguably gotten worse are our protection from crime and the quality of education our children receive in schools. Interestingly, both of those are largely provided by government. Hmmm.

ASSOCIATED ISSUE

September 2007

ABOUT

DAVID R. HENDERSON

 

David R. Henderson is a research fellow with the Hoover Institution. He is also an associate professor of economics at the Naval Postgraduate School in Monterey, California.

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