The CPI and the Rat Race
Let's talk about inflation
indexing and the meaning of life.
Early this month a panel of
economists, led by Stanford's Michael Boskin, made semiofficial what most
experts have been saying for some time: The Consumer Price Index overstates
inflation. Nobody really knows by how much, but Boskin and company made a
guesstimate of 1.1 percent annually. Compounded over decades, this is a huge
error.
This
conclusion is controversial. Some people are upset because any reduction of
inflation estimates will reduce Social Security benefits, which are indexed to
the CPI. Others are upset because a revision of recent price history would mean
abandoning a worldview on which they have staked their reputations. Quite a few
people have committed themselves to the story line that productivity is up but
real wages are down. If inflation has been lower than was previously assumed,
that means the real value of wages may have gone up after all. And some
economists with no particular ax to grind simply have doubts about the
methodology.
Boskin may be right or wrong, but one argument by his
critics is clearly wrong. They say: Suppose it's true that inflation has been
less than the official increase in the CPI over the past few decades. If you
assume a lower inflation rate and recalculate real incomes back to--say,
1950--you reach what seems to be a crazy conclusion: that in the early 1950s,
the era of postwar affluence, most Americans were living below what we now
regard as the poverty line. Some critics of the Boskin report regard this as a
decisive blow to its credibility.
The idea
that most Americans were poor in 1950 is indeed absurd, but not because of
Boskin's numbers. After all, even if you use an unadjusted CPI, the standard of
living of the median family (50 th percentile) in 1950 America
appears startlingly low by current standards. In that year, median-family
income in 1994 dollars was only about $18,000. That's about the 20 th
percentile today. Families at the 20 th percentile--that is, poorer
than 80 percent of the population--may not be legally poor (only about 12
percent of families are officially below the poverty line), but they are likely
to regard themselves as very disadvantaged and unsuccessful. So even using the
old numbers, most families in 1950 had a material standard of living no better
than that of today's poor or near-poor.
We can confirm this with more direct measures
of the way people lived. In 1950 some 35 percent of dwellings lacked full
indoor plumbing. Many families still did not have telephones or cars. And of
course very few people had televisions. A modern American family at the
12 th percentile (that is, right at the poverty line) surely has a
flushing toilet, a working shower, and a telephone with direct-dial
long-distance service; probably has a color television; and may well even have
a car. Take into account improvements in the quality of many other products,
and it does not seem at all absurd to say that the material standard of living
of that poverty-level family in 1996 is as good as or better than that of the
median family in 1950.
What do
we mean by this? We mean that if you could choose between the two material
standards of living, other things being the same , you might well prefer
the 12 th percentile standard of 1996 to the 50 th
percentile standard of 1950. But does that mean that most people were poor in
1950? No--because man does not live by bread, cars, televisions, or even
plumbing alone.
Imagine that a mad scientist went back to 1950 and offered
to transport the median family to the wondrous world of the 1990s, and to place
them at, say, the 25 th percentile level. The 25 th
percentile of 1996 is a clear material improvement over the median of 1950.
Would they accept his offer? Almost surely not--because in 1950 they were
middle class, while in 1996 they would be poor, even if they lived better in
material terms. People don't just care about their absolute material
level--they care about their level compared with others'.
I know
quite a few academics who have nice houses, two cars, and enviable working
conditions, yet are disappointed and bitter men--because they have never
received an offer from Harvard and will probably not get a Nobel Prize. They
live very well in material terms, but they judge themselves relative to their
reference group, and so they feel deprived. And on the other hand, it is an
open secret that the chief payoff from being really rich is, as Tom Wolfe once
put it, the pleasure of "seeing 'em jump." Privilege is not merely a means to
other ends, it is an end in itself.
My fellow Slate columnist Robert Wright would
undoubtedly emphasize that our concern over status exists for good evolutionary
reasons. In the ancestral environment a man would be likely to have more
offspring if he got his pick of the most fertile-seeming women. That, in turn,
would depend on his status, not his absolute standard of living. So males with
a predisposition to status-seeking left more offspring than those without, and
the end result is Bill G-g-g---I mean, Ronald Perelman.
Is my license as a
practicing economist about to be revoked? Aren't we supposed to believe in
Economic Man? And doesn't admitting that people care about fuzzy things like
status undermine the whole economic method? Not really: Homo economicus
is not a central pillar of my faith--he is merely a working assumption, albeit
one that is extremely useful in many circumstances.
But
admitting that people's happiness depends on their relative economic level as
well as their absolute economic resources has some subversive implications. For
example: Many conservatives have seized on the Boskin report as a club with
which to beat all those liberals who have been whining about declining incomes
and increasing poverty in America. It was all, they insist, a statistical hoax.
But you could very well make the opposite argument. America in the 1950s was a
middle-class society in a way that America in the 1990s is not. That is, it had
a much flatter income distribution, so that people had much more sense of
sharing a common national lifestyle. And people in that relatively equal
America felt good about their lives, even though by modern standards, they were
poor--poorer, if Boskin is correct, than we previously thought. Doesn't this
mean, then, that having a more or less equal distribution of income makes for a
happier society, even if it does not raise anyone's material standard of
living ? That is, you can use the fact that people did not feel poor in the
1950s as an argument for a more radical egalitarianism than even most leftists
would be willing to espouse.
You could even argue that American society in the 1990s is
an engine that maximizes consumption yet minimizes satisfaction. In a society
with a very flat distribution of income and status, nobody feels left out. In a
society with rigid ranks, people do not expect to rise above their station and
therefore do not feel that they have failed if they do not rise. (Aristocrats
are not part of the peasants' reference group.) Modern America, however, is a
hugely unequal society in which anyone can achieve awesome success, but not
many actually do. The result is that many--perhaps even most--people feel that
they have failed to make the cut, no matter how comfortable their lives. (In a
land where anyone can become president, anyone who doesn't become
president is a failure.) My European friends always marvel at how hard
Americans work, even those who already have plenty of money. Why don't we take
more time to enjoy what we have? The answer, of course, is that we work so hard
because we are determined to get ahead--an effort that (for Americans as a
society) is doomed to failure, because competition for status is a zero-sum
game. We can't all "get ahead." No matter how fast we all run, someone must be
behind.
If one follows this line of
thought one might well be led to some extremely radical ideas about economic
policy, ideas that are completely at odds with all current orthodoxies.
But I won't try to come to grips with such ideas in this column. Frankly, I
don't have the time. I have to get back to my research--otherwise, somebody
else might get that Nobel.
