Fun as an economic gauge

Measuring living standards is no snap for economists. It opens the way for disputes over whether Americans are better off today than, say, 20 years ago.

Liberal economists tend to be on the gloomy side. They frequently would like the government to give the poor a boost. Reforms are needed. Conservatives are commonly on the upbeat side. That suits a preference for less government intervention. If all is fairly hunky-dory, Washington's help is not needed. The economic system is working.

The usual way to measure prosperity is to look at changes over time of total income per person after inflation. More money, it's assumed, means better living standards. These statistics aren't too cheery. Jared Bernstein, an economist at the liberal-leaning Economic Policy Institute, reckons that the typical worker's wages only recovered their 1989 level earlier this year.

But economist Dora Costa cautions: "Real income is an imperfect measure of trends in living standards." For one thing, the consumer price index exaggerates inflation. So real income is higher than measured by the CPI. Also, real income doesn't account for such goods as health that aren't purchased in the marketplace, for some quality improvements, for technological change, and for increases in leisure, Ms. Costa maintains.

Another way to examine living standards is to count the products and services consumed by a household - the square footage of a home, how many bathrooms, the number of TVs, VCRs, phones, cars, and so on.

W. Michael Cox, an economist with the Federal Reserve Bank of Dallas, has explored this technique for several years.

"We've experienced splendid economic progress over the past quarter century...we should give thanks for the blessings of free enterprise," he says in a new book he co-authored, "Myths of Rich & Poor: Why We're Better Off Than We Think."

Costa, a professor at the Massachusetts Institute of Technology, has a third method for estimating living standards - an examination of recreation spending trends since 1888. This technique assumes that people, after providing for food, clothing, shelter, and other necessities, use some of whatever income is left over on purchasing recreation. As the proportion of income needed for necessities declines, they will have more money for vacations, radios, TVs, CDs, concerts, circuses, dances, toys, pets, sports, novels, newspapers, magazines, pianos, and other recreational goods and activities that strike their fancy. Rising recreational expenditures - "the quintessential luxury goods" - are seen as a sign of rising living standards.

Using old and more recent surveys, Costa figures living standards have risen faster than conventional income measures indicate, particularly during times of innovation in consumer goods and reductions in work hours such as in the 1920s and the 1970s and 1980s.

In the late 1880s, less than 2 percent of household spending was devoted to recreation. By 1991, it had risen to 6 percent.

Recreational expenditures also tend to rise with income. At the start of this century, pleasure spending was a luxury not affordable to low-income households. By the mid-1930s, low-cost recreational activities, such as motoring, movies, and radio had already spread widely. Meanwhile hours of work declined, and health improved as public health spending increased.

Costa finds that income underestimates living standards by 2.4 percentage points per year between 1919 and 1935, and 1.8 percentage points per year between 1972 and 1991. So even during the Great Depression, living standards rose - for those with jobs. Liberal economists admit that Americans are accumulating more "things" than in the past. And they acknowledge that entertainment and the time to enjoy it is more abundant. But they point to the gloomy side. Income has become more skewed to the rich in the past two decades. It takes two earners in a family to provide all those goods. Rent and university education have become much more expensive. The poor, presumably stressed by their financial status, tend to be less healthy. Because they can't afford campaign contributions, the poor have less say in politics. Commutes have become worse.

Trends in living standards, in other words, are fuzzy, not black and white.

*David R. Francis is senior economic correspondent for the Monitor.

(c) Copyright 1999. The Christian Science Publishing Society

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