Faking Real Income

Brink Lindsey (author of the great cover story in the July issue of reason, excerpted from his new book The Age of Abundance: How Prosperity Transformed American Life and Culture) questions economic statistics based on "real income," especially those that conclude that median real income has fallen in America since the 1970s. Such stats imply that we are somehow as a nation worse off since then. Lindsey attacks this idea on a couple of fronts. First, the effects of immigration on national income statistics:

The share of the total population born in foreign countries has jumped from 5 percent in 1974 to 12 percent in 2004. Relatedly, people of Hispanic origin have climbed from 5 percent of the population in 1974 to 14 percent in 2004.

The huge wave of Hispanic immigration over the past generation has been good for the immigrants and their families, and good for the country as a whole. But this big influx of relatively low-skilled immigrants has to have depressed median income compared to what it otherwise would have been. Unfortunately, I'm not aware of good studies that quantify the effect.

This is not saying that immigration is "hurting America," unless somehow you think macrostatistics are more important than actual improvements in everyone's circumstances. Assuming immigrants are doing better for themselves in income terms than they would have in their home countries, their presence in America can drag down the nation's median income stats without anyone actually being worse off.

But that's not all that's wrong with statistics seeming to show a worsening in overall American economic circumstances, Lindsey explains:

Do your best job of coming up with a deflator that takes care of changes in the price level, and calculate the dollar income in 1800 that is the "equivalent" of an income of $100,000 in 2007. Then try with a straight face to convince somebody that the earner in 1800 and the earner in 2007 are equal in terms of material well-being.

Now let's go to the comparison that's at the heart of the stagnating median incomes argument: incomes today and incomes in the early 1970s. Do what you want as far as adjusting for inflation, but there's still the problem of all the goods that simply weren't available back then: personal computers, the World Wide Web, cell phones, cable and satellite TV, DVDs and iPods, airbags, anti-lock brakes, automatic teller machines, aspertame, LASIK surgery, CAT-scans, home pregnancy test, and ibuprofen, just to name a few.

………..

I don't see how anybody without an ideological axe to grind can maintain seriously that ordinary people in the '70s had the same material well-being as their counterparts today — yet that's the implication of saying that median real incomes have been stagnant.

W. Michael Cox and Richard Alm explored all the many improvements in American life that economic stats can miss back in reason's Aug./Sept. 2002 issue.