The Real "Truth About the Economy:" Have Wages Stagnated?
Prof. Don Boudreaux responds to "The Truth About the Economy," a recent video featuring former Labor Secretary Robert Reich (http://lrnlbty.co/z0ACuH). In the video, one of Reich's key points is that most people's wages have barely increased since 1980. However, when Reich's numbers are examined in greater detail, his claim does not hold up. If you care about this issue, there are three things to consider:
- How inflation is calculated
- Benefits workers receive other than wages
- The distinction between statistics and individuals
Adjusting for inflation, especially over long periods of time, is as much an art as it is a science. In an attempt to measure inflation, economists have developed several indexes. All of these indexes are considered legitimate, but all of them yield different results. In "The Truth About the Economy" video, Robert Reich uses the consumer price index (CPI) to calculate the average hourly wage, and he finds that wages haven't risen much over the past 30 years. However, when using other methods of adjusting for inflation, which are no less respected, the average hourly wage rate rises as much at 18% over the same 30 year period.
Index differences aside, everyone agrees that all forms of compensation must be considered to accurately calculate worker's compensation. This includes not only wages and salaries, but also benefits like health insurance, retirement benefits, vacation days, sick pay, and more. It's worth noting that fringe benefits have become a larger share of income over the past 30 years. According to Don Boudreaux's calculations, which include fringe benefits, average hourly wages have increased up to 26% over the past 30 years.
Lastly, and most importantly, Robert Reich confuses statistical categories with real people. When Reich says that, since 1980, most people's wages have barely increased, he gives the impression that most people have enjoyed no economic gains over the past three decades. What he means is that, adjusting for inflation, average wages have not increased. The real flesh and blood people within these statistical categories have actually experienced increased compensation. Some workers are gaining skills, others are retiring, and others are joining the workforce for the first time. Especially noteworthy is the increasing rate at which women and immigrants have entered the workforce in the past 30 years.
To Boudreaux, Reich is right to claim that a strong economy needs a strong middle class. However, taxing the rich, as Reich suggests, is not the path to a strong middle class. The path to a strong economy and a strong middle class requires the hard work and great entrepreneurial ideas of individual people acting in a free market.
Comments
This excellent piece from Reason.tv and The Drew Carey Project series - http://reason.tv/video/show/living-large - from early 2008 covers another angle on the analysis. Time spent as the value traded for goods and the extreme trend down over time. Fairly confident the Professor knows of it.
This was done prior to the full arrival of our current Great Recession or Greater Depression whatever you want to call it - so the positions of boat owners in California may have changed (I am assuming mortgage debt did much of the financing for the boats).
Thanks Professor.
I love his conclusion, but he's very wrong in a number of places. An Apple IIe computer was enough to be productive and get your job done back when it first came out. Nowadays, it is essentially useless other than as an antique. By his logic of the CPI needing to take into account the difference between a TV in the 80's and a TV now, somebody who owns an Apple IIe now should be as well off as somebody who owned one when they first came out, and somebody who owns an iPad 2 should be vastly better off. While it's true, that the iPad 2 is a dramatically superior product, this way of looking at it completely discounts the fact that an object's usefulness for achieving a better life is completely dependent on the context. Are the first animals to use sight still sticking around in direct competition with modern animals? No. They have been drowned by the rising tide of improved abilities. Under the definition used in the CPI, zero inflation actually implies a decreasing purchasing power because of gradual downward substitutions of items in the basket, and these sorts of hedonic adjustments. In the minds of the folks measuring the CPI, if salmon is too expensive, and most people have resorted to eating hot dogs instead, then salmon no longer belongs in the basket, but no inflation has occurred, because hot dogs are as cheap as salmon used to be. Eventually we'll all be eating dog food even under "zero inflation". The truth is that the CPI figure of -4% actually understates the decrease in useful wealth. If you use the CPI measurements we used to use back in the 80's without all these nonsense adjustments, it would be painfully obvious that the real wage has gone down. I really don't care if my TV looks better if I can't afford a house or a couch or healthy food...the things that don't get much better or much cheaper to produce over time.
True, many things are better than they were in the 80's, but only through the massive improvement of technology, of doing more with less, when really we should be doing much much more with more. Part-time jobs should not be a bad thing because they're not full-time jobs...they should be a good thing because you can afford not to have to work 40 hours a week to get by. Technological improvement is fighting against the massive confiscation of wealth taking place thanks to taxes and inflation, and it is only winning in the high-technology sector. If his discussion were about comparing 80's couches with today's couches, or regarding food, or housing, or anything that is restricted by the price of raw materials, his conclusions wouldn't be quite the same. They would be the exact opposite.
Also, he mentions figures based on GDP giving a more rosy picture of wealth adjustments. GDP figures are completely bogus, just as the CPI is. GDP this year will include all the rent home-owners would have been paid if they were renting out their homes...even though they aren't. This is some fanciful thing invented to increase our GDP without us having to produce any real value. In the minds of the statistics masters, it's as if homes are creating wealth continuously just by existing. In reality, they aren't perpetual wealth machines. They slowly fall apart without continual reinvestment, like most things.
The truth is that if the government is involved in calculating an economic indicator in any way, then the economic indicator has been dramatically skewed to paint a rosier picture than it should. If the real average income trend based on CPI isn't looking so hot (even after the government's CPI beautification project), then things are really much much worse than that. Not only does it look better for the current administration if their indicators look better, but it means that TIPS (treasury inflation protected securities) payments are lower (because "inflation" is lower), and social security payments (adjusted for cost of living) are lower, etc. The indicators are bullshit. There is a reason it takes two competent breadwinners to raise a family nowadays. We're a generation of people raised by crappy day-cares and teachers at poor government schools.
The truth is that we need the fed to go away and big government to disappear so that the private sector can create wealth without having it confiscated via taxes and inflation.
while I do believe that he makes a good point about the free market ending, I use my family as a good indicator for the middle class, My mother made about 13-17 dollars an hour as a Pharmacy tech for merck medco in the 1980's.
After growing up and getting computer certifications and skill bases comparable to her in but the IT field, I make about 14 dollars an hour. Again, we have comparable education, comparable experience, except she had much better benefits(go figure she worked for a healthcare company) than I do. I onther hand had a 20% discount from Verizon for working for them(which was later taken away from all employees).
While studying these facts, I have come the the conclusion that the flesh and blood part of this video is absolutely incorrect. Obviously, if my mother made more than me in the 1980's than I do now with better benefits, you can spout off all different types of statistics but the truth is, the wages have become stagnant or have decreased, of course, I live in Florida which is a right to work state meaning that wage's are generally lower than the national average, but of course so did my mother at the time she worked for Merck medco
First comment! This was an excellent video! I wish that Prof. Boudreaux went into attacking the very creator of inflation (the Federal Reserve) but in this short video, he made his point very well and very convincingly. I read http://cafehayek.com/ often and I am always happy to see his contributions to liberty. Just one more reason I want to attend GMU for graduate school.