July 19, 2004
Consumption or Income?
When looking at the welfare for people which is the better measure? Right now there is quite a bit of talk about wages, income and so forth. The problem is that wages and income can give misleading results. Wages and income are at best a proxy for an individual's welfare. This notion is the topic of Arnold Kling's latest Tech Central Station article (via Daniel Drezner). Arnold notes that compared to the 1970's people are definitely better off even though incomes/wages might not have risen as much. How can this be? Well, prices change over time. Suppose your VCR breaks should you get it fixed or simply buy a new one? The price of VCRs is so low now you'll probably have a bit of trouble finding a repair shop. It the wage is constant (in real terms) and the price of goods either is the same or declines (in real terms) then consumers are strictly better off. It could even be the case that wages/income declines in real terms, but that welfare increases. This would be possible if the real prices decrease at a faster rate than wages/incomes decline.
So why use income? It is often rather easy to obtain income data vs. consumption data. If income increases then if prices are unchanged then welfare increases. But, just as people can be better off with declining prices and incomes, they can be worse off with increasing inomes and prices. If prices increase faster than income then people are worse off.
One of the problems with income is that it tends to be correlated with the business cycle. During a recession an individuals income could decline, but during that time consumption may not decline by as much. That is, consumers will try to smooth out the changes in income cause to consumption by saving and drawing down savings when necessary. So, the question isn't simply are incomes up or down, but are you better off. Income by itself may not answer that question. Something to keep in mind when listening to campaign rhetoric this election.
Posted by Steve at July 19, 2004 10:38 AMI agree with you and Arnold about the trends on prices and your arguments about luxuries vs. necessities across a time series.
However, :)
1.) It might be interesting to track CPI against wages for the lowest fifth of income earners.
Does the basket change over time to incorporate what were once luxeries into the basket of necessities? What else can be parsed from such an analysis.
2.) The social activists may yield to your point but claim that the rising tide so to speak, has enabled all household to benefit from the increased purchasing power, so relative to other groups, the lowest fifth are not rising as quickly and therefore they are worse off. This doesn't seem to be an economic argument but rather a political one.
You and Arnold seem to address the issue in economic terms, and the data looks pretty convincing, but IMHO, the question posed by the critics is a political and social justice issue and your data won't win that argument.
3.) The wage stagflation can be seen as a result of no/low skill labor supply increasing at such a pace as to keep wages stagnant. The large influx of illegal immigrants does have an impact here. This is having a devastating affect on the black community, consider that:
"By 2002, one of every four black men in the U.S. was idle all year long. This idleness rate was twice as high as that of white and Hispanic males."It's possible the rate of idleness is even higher, said the lead author of the study, Andrew Sum, who is director of the Center for Labor Market Studies at Northeastern University in Boston.
"That was a conservative count," he said. The study did not consider homeless men or those in jail or prison. It is believed that up to 10 percent of the black male population under age 40 is incarcerated.
So, the old saying that the best welfare is a job, and that once you're on the job ladder, your hard work and dilgence can enable you to climb the social mobility ladder, first of all requires that you have a job.
The system is incoherent vis a vis illegal immigration and its effect upon social mobility for the underclasses. Unless of course, the purpose is to create make-work gov't social programs to employ social workers to help the underclasses - then it all makes a weird kind of sense.
I find this somewhat hard to believe because this reduction in pricing assumes that the value of the dollar remains the same.
According to the BLS calculator, for every $1000 earned in 1970, I would have to earn $4889.18 in income in 2004.
This is based on the CPI which is fickle.
But I'm wondering if the decreased value of the dollar is the biggest bane facing working people.
Posted by: Chuck on July 26, 2004 02:04 PMI find this somewhat hard to believe because this reduction in pricing assumes that the value of the dollar remains the same.
No.
According to the BLS calculator, for every $1000 earned in 1970, I would have to earn $4889.18 in income in 2004.
Givent the high inflation in the late 70's/1980 this isn't that surprising. You can also reverse the above calculation. Take your current salary/income and find out what the 1970 equivalent was. Back in 1970 you would almost surely be earning less than you are now, but your consumption expenditures would be very similar in terms of the goods you were purchasing.
But I'm wondering if the decreased value of the dollar is the biggest bane facing working people.
Only if you are on a fixed income.
Posted by: Steve on July 26, 2004 02:42 PM"It the wage is constant (in real terms) and the price of goods either is the same or declines (in real terms) then consumers are strictly better off. It could even be the case that wages/income declines in real terms, but that welfare increases."
"In real terms" normally means, "when deflated by the appropriate price index". So what do you mean when you say that "the price of goods either is the same or declines (in real terms)"?
If some things (like VCRs) have fallen relative to the general price index, other things (like college education) must have risen. Generally, it's true that the real price of goods has fallen and the real price of services has risen, but this won't generally have much of a welfare effect.
The real-source of the consumption-income distinction must be related to saving and borrowing, not to price effects of the kind you mention.
Posted by: John Quiggin on July 27, 2004 09:14 PM