New research from the Federal Reserve Board confirms that standards of living in the United States have been improving. Once again, it is poppycock to say they have been stagnant for decades.
Despite whining from millennials (born 1980-94) or those in Generation Z (born 1995-2012), and despite the politicized blather from the likes of Vermont Sen. Bernie Sanders and Massachusetts Sen. Elizabeth Warren, real economic hurdles are not higher now than for earlier generations.
The idea that “real average wages” (wages after adjusting for inflation) haven’t risen in 40 years is fed by both a misunderstanding of, and a mismeasurement of, how price inflation works. Economists have known for years that the main official inflation gauge, known as the primary consumer price index, “overstates increases in the cost of living because it doesn’t fully account for the fact that consumers change their buying patterns when the price of one item goes up or the price of another goes down.”
As economist and former Republican Texas Sen. Phil Gramm noted in a series of Wall Street Journal columns, wage stagnation is a “myth” and “Americans are richer than we think.” Commonsense proof of this comes in the realities that average home sizes are larger, and they contain more creature comforts (washing machines) and luxuries (extra televisions) than before, while pantries and refrigerators have a wider variety of formerly inaccessible foods.
Moreover, even in the oft-cited realm of healthcare, “annual price increases for medical care were [cited as being] three percentage points too high because they didn’t account for the greater efficiency and improved outcomes from new drugs and procedures.”
What it means is that if somebody uses the official CPI “inflation calculator” to say “it costs $40,050 for a December 2019 college graduate to pay for what would have cost a college graduate in June of 1986 only $17,000, that’s just not true. People are getting more value for their money today than a crude CPI calculation would suggest.
Those paying attention already knew all that. But what’s new is that the Federal Reserve study released in late February shows that new technology is actually causing an acceleration in the degree of overstatement of inflation. The paper by top Fed economist David Byrne and Conference Board economist Carol Corrado concludes that the effect of the rapid improvement in, and rapid cost reduction in, “digital access services — internet, mobile phone, cable TV, and streaming” has been so dramatic since 1997 that the official measure of “personal consumption expenditures” (the near-equivalent of CPI) has been overstated by a full half-percentage point per year. With compound interest, that is an enormous difference, more than 10% over 20 years.
And Gramm’s earlier columns do not even take into account most of this new information from economists Byrne and Corrado. Together, they indicate that real purchasing power, wages, and living standards are significantly higher now than ever before in U.S. history.
Meanwhile, with even officially measured inflation continuing a 35-year stretch of near negligibility and with unemployment so low that worker shortages in most of the country exceed job shortages, the opportunities for workers in their 20s and early 30s, even if burdened by high student loans, are tremendous. Even those who graduated from college at the depth of the Great Recession of 2008-2009 have experienced nothing like the economic headwinds of those who graduated in the decade between 1974 and 1983.
So, Generation Z and millennials should stop complaining and get to work.
