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Let them eat quality?

Summary:
Bruce Sacerdote has a very interesting new NBER working paper looking at growth in American consumption, income and wages. His study was motivated by the apparent disconnect between reports of stagnant real income and what seems to be rapid improvements in living standards: In the first part of this descriptive paper I consider growth in household consumption for households with below median income. The pessimistic narrative on real wages is somewhat at odds with casual empiricism about material goods consumption. If you spend time working with high school students, you notice that even in low income areas, many of the students have cell phones and have access to cable TV and internet service at home. Access to these powerful and modern tools suggests that low income families have seen important gains in at least some areas of consumption. The quality and variety of home appliances and electronics (TVs) in the average home is surely vastly superior to what people owned in the 1970s. American homes have become more spacious and cars are both higher quality and there are more cars per family. Last week I purchased a one-year-old Nissan Maxima SL (with 6600 miles) for ,350, and was stunned by how much cars had changed since I bought my last car (a one-year-old Altima, in 2008.) I recall reading that (in the 1990s) Bill Gates used to drive a Lexus LS400.

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Bruce Sacerdote has a very interesting new NBER working paper looking at growth in American consumption, income and wages. His study was motivated by the apparent disconnect between reports of stagnant real income and what seems to be rapid improvements in living standards:

In the first part of this descriptive paper I consider growth in household consumption for households with below median income. The pessimistic narrative on real wages is somewhat at odds with casual empiricism about material goods consumption. If you spend time working with high school students, you notice that even in low income areas, many of the students have cell phones and have access to cable TV and internet service at home. Access to these powerful and modern tools suggests that low income families have seen important gains in at least some areas of consumption. The quality and variety of home appliances and electronics (TVs) in the average home is surely vastly superior to what people owned in the 1970s. American homes have become more spacious and cars are both higher quality and there are more cars per family.
Last week I purchased a one-year-old Nissan Maxima SL (with 6600 miles) for $26,350, and was stunned by how much cars had changed since I bought my last car (a one-year-old Altima, in 2008.) I recall reading that (in the 1990s) Bill Gates used to drive a Lexus LS400. I would much prefer this 2016 Maxima to the car driven by the richest guy in the world, just a couple decades ago. The monthly payments are about $480, which means it's within reach of tens of millions of Americans. There are an amazing number of safety innovations since I last bought a car.

I recently passed by a store selling TVs, and was floored by the improvement in picture quality since I last bought a set (in 2008). For the first time in my life, good TVs don't seem inferior to what you get at a movie theatre. I don't think I even need to talk about calculators, cameras, flashlights, calendars, movie cameras, iPods, GPSs, encyclopedias, weather reports, timers, clocks, TVs, taxi summoners, and a dozen other appliances, all of which are incorporated into your telephone. My scanner recently broke, but I quickly realized that I don't need one--the iPhone can scan as well.

Some argue that all these quality improvements don't matter, "you can't eat quality". But even there it seems living standards are rising fast:

The Hamilton (1998) technique of calculating CPI bias is ingenious in that it only requires a modest number of data inputs. Hamilton's insight is that food's share of the household budget over time should depend only upon income and the price of food relative to all other goods. If incomes are not rising, changes in food's budget share should be attributable to changes in the relative cost of food. In reality, PSID (Panel Study of Income Dynamics) data show food's budget share falling over time even holding the relative price of food and CPI adjusted income constant. This is a strong indication that the CPI is over adjusting and that true real incomes are indeed rising. It is easy to calculate the CPI bias as that adjustment to CPI needed to explain the difference between true food budget share and predicted food budget share. Hamilton finds that CPI is overstated by 3 percent per year from 1974-1981 and 1 percent per year from 1981-1991.
Sacerdote estimates that consumption for families with below median incomes has risen by an astounding 164% since 1960, which is about 1.7% per year. That seems far more plausible to me than reports that real incomes are stagnant. Admittedly the fastest growth occurred between 1960-72, but even in the post-1972 period, consumption is up by 81.5% in the "below median income" category.
Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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