Conspicuous consumption: how to measure economic wellbeing.(Brief article)

WHEN George W. Bush took office in January 2001, the economy was producing roughly $10 trillion worth of output annually. This year, it looks like production will be in the neighborhood of $13.5 trillion. If we think of our nation's GDP as analogous to an individual's income, then that lucky fellow has seen his income increase over the past six years by about 35 percent. A person making $100,000 who saw the same increase in his income would now be making $135,000.

So are we better off today than we were in 2001? Despite the healthy growth, this is not a trivial question--for two reasons. First, it might be that the extra 35 percent in current-dollar national income does not go as far with today's prices. Second, it might be that the income went only to a few people, and that most people did not share in the growth.

Many recent articles have in fact suggested that, despite the great economic numbers, things are terrible. For example, Paul Krugman claimed in the New York Times that "the lion's share of the benefits from recent economic growth has gone to a small, wealthy minority, while most Americans were worse off in 2005 than they were in 2000.... The rich are getting richer, but most working Americans are losing ground."

Behind these ominous trends appears to be some kind of conspiracy of the privileged. Republicans are against the little guy, and use the power of the presidency to protect and enable the big businesses that feed on him. In this, modern-day populists are just rehashing age-old Marxist propaganda. As a consequence of the concentration of power and wealth among the bourgeoisie, Marx and Engels argued, workers' wages would be stuck at subsistence levels, for "no sooner has the labourer received his wages in cash, for the moment escaping exploitation by the manufacturer, then he is set upon by the other portions of the bourgeoisie--the landlord, the shopkeeper, the pawnbroker, etc." Substitute Wal-Mart in there someplace, and you are at a meeting with Howard Dean.

Today, populists argue that rising costs of health care and energy combined with falling wages are taking a terrible toll on the average American worker and putting a squeeze on the working middle class. Growth no longer helps them. You've probably heard that story so often you accept it as gospel truth. But the story is poppycock. When you look at the most accurate measures of how the middle class is doing, the answer is that things are good, maybe even terrific.

But before we look at the right answer, let's look at the flawed arguments.

Are workers taking home less pay than before? Some measures of wages suggest that they have disappointed in recent years. In order to get this spin, you generally have to exclude benefits. For example, between 2000 and 2006, real wages--which exclude benefits--increased 0.6 percent per year; but real hourly compensation, which includes benefits, increased 1.3 percent per year. So if you think benefits are a good thing, then you should believe that workers are moving ahead. If you do not believe so, it might help if you started calling them something else.