Today I went down an internet rabbit hole on the following question: Are people – globally, but especially here in the US – better off now than they were 50 years ago?

I’m far from the first person to ask that question. There were plenty of news stories and think tank pieces, but shockingly few articles that really answered my question. The most direct response (among the first page of Google search results, at least) was this video from Bernie Sanders. Unfortunately, the video is about 45% personal anecdote, 54% anti-AI and anti-billionaire messaging, and 1% facts about whether people are worse off. Nonetheless, it seemed a good enough place to start.

Are real wages lower today?

So I began with his central claim: wages (inflation-adjusted) for the average American worker are lower today than they were 50 years ago. Luckily, a quick search yielded this Politifact article, which handily dispatches the claim as cherry-picked. Turns out the claim is only true for a small category of workers, if you start the 50-year clock in February 1973, when the wages spiked due to some Nixon policies.

So we know real wages (i.e. inflation-adjusted wages) have increased in the last 50 years (by 2.8%, according to Politifact). But that’s not really what matters, right? We care about how high wages are compared to how expensive things are. And I’m genuinely not sure whether “inflation adjustment” captures that.

From my one year of IB Economics in high school, I’m still not clear on how we measure inflation and whether it’s actually a good measure of how expensive it is to live. (Even if it is a good measure, are we adjusting for inflation regionally? i.e. what if people in Ohio are making $10K more, and prices have gone up $8K nationally, so inflation-adjusted Ohioan wages look good, but specifically in Ohio prices have actually gone up $12K?)

As I have found increasingly as I get older, many things that are confusing to me are also confusing to other people! Looking into the question of inflation adjustment, I quickly found myself in an online argument between American Compass and AEI.

Adjusting for inflation

As I suspected, adjusting for inflation is, as I guessed, extremely difficult for a bunch of reasons.

To start, inflation is based on the Consumer Price Index, or CPI. And it’s really difficult to calculate the CPI. The government has to deal with questions like:

  1. Substitution. Say the price of beef goes up, causing most people to eat chicken instead. Measuring purely the price of beef says costs have gone up, but day-to-day they didn’t.
  2. Change in quality. Cars now are way safer and more fuel-efficient than 50 years ago. If they’re 2x more expensive, how much of that is inflation vs. paying for more quality. You can’t buy a 1976 car today, so the question of how much the exact same car would cost is unanswerable. Similarly, if a pair of sneakers today cost twice as much, but last half as long; the index will only reflect the added cost to the single item, not the necessarily increased purchase frequency.
  3. New goods, e.g. smartphones, internet subscription, e-bikes. Similar to #1, the basket of things we buy is different than 50 years ago.

Then, in the 1990s, the plot thickened. In 1995, the Senate formed the Boskin Commission to investigate how the CPI was calculated. The Commission, in their report, estimated that the CPI has been overstating inflation 1.3 points per year pre-1996, and was on track to overstate inflation by 1.1 points per year going forward. That might not sound like much, but a 1.1% increase over 30 years is a 38% increase!

(I don’t yet know nearly enough to back this claim up solidly, but so far my reading all points to a crux: so many of these economic arguments about inflation, wages, prices, etc. are about numbers so small with error bars so large. Maybe most of the arguing economists aren’t even disagreeing – they’re within each other’s margin of error. But I’ll leave that to the economists…)

I spent ~10 minutes digging into the specifics arounds this “1.1% overstatement”, but I quickly realized I was staring down the barrel of a days-long rabbit hole. So I’m tempted to take the Commission’s word for now.

BUT WAIT! Quick conspiracy time. The government uses CPI to inform Social Security spending and other compensation programs. The higher the CPI, the more the government has to pay out to help Americans keep up. Now, I can’t help but observe that the Boskin Commission was appointed to evaluate CPI – and, by proxy, government spending on welfare – amidst a bipartisan effort to slash government spending. The Boskin Commission was appointed by a Republican-controlled Senate, 11 months before then-President Bill Clinton proudly announced at his State of the Union that “the era of big government is over.” The final report asserts that the 1.1% “… bias would contribute about $148 billion to the deficit in 2006 and $691 billion to the national debt by then.” All this to say: I’m mildly skeptical of a government report that claims we’re spending too much on welfare exactly at the time that the federal government is trying to cut welfare.

big questions

stupid question, but… if people feel like things are worse even they are… does it matter?

more on this to come!