The Numbers Say Americans Made More...

Feel Richer?

You're better off than you thought you were, or so it seems.

You don't necessarily have more money. You just have a new, Washington-inspired, way to count its value.

For years, the official numbers have shown stagnation, perhaps worse, for most Americans' income.

Baby boomers, we've often heard, despite being champion consumers, have a lower quality of life than their parents.

"Nonsense," comes the new response from several economists. "The statistics are lying. Living standards are actually rising."

"The American public has been told life is a lot rougher than what it has actually experienced," says Roger Brinner, chief economist at DRI/McGraw-Hill, a consulting firm in Lexington, Mass.

The cause for this conclusion comes from the Boskin commission, five economists, chaired by Michael Boskin, former economic adviser to President Bush.

The commission says inflation is lower than the government has said, that the Consumer Price Index (CPI) is too high by 1.3 percentage points a year.

Since inflation erodes our living standard, the decline has also been overstated, these economists say.

The Boskin commission finding is controversial (see story below) and has generated plenty of disagreement, but among the possible conclusions, using its new adjusted inflation:

You earned more than you thought. Average, real earnings, under the standard CPI, peaked in 1973, near $14 an hour (in 1996 dollars). They have slipped ever since, to below the 1964 level of $12.

With the new Boskin inflation measure, wages rose from about $8.30 an hour (in 1996 dollars) in 1964 to nearly $12 last year. Average growth has been slower since 1973, notes Mr. Brinner, who did a study on the impact of lowering inflation by 1.2 percentage points per year.

A similar investigation by Richard McKenzie, an economist at the University of California, Irvine, found that lowering inflation by 1.3 percentage points per year meant wages rose by more than 13 percent from 1977 to 1995.

"Conclusions about living standards have been wrong for a long time," he says.

Fringe benefits plus wages rose even more. You're better off by a third, compared with 1977, says Mr. McKenzie. With the traditional inflation measure, compensation rose only 3 percent.

Using the Boskin adjustment, hourly pay has risen 57 percent since 1972 and 120 percent since 1964, finds Federal Reserve economist Daniel Sullivan.

Productivity gains are much higher. Brinner puts adjusted annual productivity growth at 2 percent in the 1980s and 1.9 percent in the 1990s, close to the halcyon days of the 1960s (2.8 percent) and early 1970s (1.9 percent).

This calculation, states Brinner, "could go a long way toward explaining the apparent slowdown in productivity."

Poor families gained in real purchasing power. Using the Boskin adjustment, Mr. McKenzie says the poverty income threshold for families was actually 31 percent higher in 1995 than 1977.

The rich got richer, but the poor also gained ground. People with incomes in the top 5 percent of Americans, enjoyed a 50.5 percent gain in incomes between 1977 and 1995, finds Mr. McKenzie.

The upper limit for the poorest fifth of American families rose nearly 29 percent.

Both Brinner and McKenzie admit most Americans have found it tougher to make progress, but it appears they have done so.

Poking Holes in the CPI Balloon

Dean Baker is something of a thorn in some people's sides.

Many politicians and some economists keep pushing to change the consumer price index (CPI) and he keeps poking holes in their thesis.

At the heart of the debate is the Boskin commission (see story above). Mr. Baker says it offers "insufficient evidence" to prove that inflation and the CPI have been overstated.

A CPI adjustment meets a warm welcome in Washington. It justifies a cut in Social Security payments and a boost in taxes - both linked to inflation.

"With a swipe of the statisticians' pen, another $222 billion could be wiped off the cumulative deficit tally over the next five years," notes Stephen Roach, chief economist at Morgan Stanley & Co., in New York.

Moreover, politicians could crow that they have managed the economy better than previously thought. If the CPI change is valid, it would mean living standards have been rising for most Americans - not falling.

But Baker says the clamor ignores evidence to the contrary. The adjusted CPI does not include higher costs of:

*Health insurance or Medicare.

*The increasing complexity of life - such as anticrime devices and the increased use of lawyers.

If the Boskin CPI bias is true, economists have been promulgating a great deal of nonsense in the last 50 years, Baker says, and public policy has been completely misdirected.

It means that nearly 50 percent of the population was living in poverty in 1960, compared to about 14 percent today. So the war on poverty was "an incredible success story," he says.

Richard McKenzie, of the University of California, Irvine, calls this a statistical illusion. Many officially poor today actually have more purchasing power than the poor had in 1960, he says.

Other economists disagree.

The Boskin adjustment, if valid, also implies the average annual wage will rise from $25,000 today to $60,000 (today's dollars) in 2030 and $90,000 in 2050. Now, that would wipe out the Social Security crisis....

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