Choosing the wrong measuring stick can make a big difference

We’ve all heard the bad news about the American middle class. Politicians from Donald Trump to Bernie Sanders have lamented its decline.

James Pethokoukis explains for Commentary magazine that data used to back up the argument are based on a flawed tool of measurement.

Economic facts, properly understood, simply do not support the argument that the broad American middle class has been stuck in neutral for nearly two generations. Now, it is true that Census data show real median incomes rising at an almost imperceptible 0.3 percent a year from the mid-1980s through 2013. At the same time, real per-person economic growth rose at a much quicker rate, nearly 2 percent a year. The difference between those figures reflects widening inequality. The rich got richer while others stayed relatively the same.

But only partisans think those numbers truly reflect the economic realities of the typical American family.

A University of Chicago poll of top economists found that 70 percent agreed with the proposition that the Census Bureau’s conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” The economist Martin Feldstein, for instance, argues that the agency fails to take into account shrinking household size, the rise in government-benefit transfers, and changes in tax policy. It also measures inflation in a way many experts think overstates the actual rise in living costs. The Census Bureau uses the common consumer price index, but many economists favor something called the personal-consumption-expenditures price index, viewing it as a more reliable and comprehensive measure. And the PCE typically shows a lower inflation rate than the CPI. …

… [S]tagnationists tend to narrow the focus and say that what really counts is worker wages, good old-fashioned take-home pay. And they will often produce charts showing that the typical American worker makes no more than in 1975. But they are choosing the wrong inflation measure, which makes a tremendous difference when evaluating the true purchasing power of workers. A 2017 study by the Dartmouth economist Bruce Sacerdote, for instance, finds that real wages grew by at least 24 percent since the Ford administration, and perhaps much more. “Estimates of slow and steady growth seem more plausible than media headlines, which suggest that median American households face declining living standards,” Sacerdote concludes.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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