||The CPI and the Rat Race
New evidence on the old question of whether money
By Paul Krugman
posted Saturday, Dec. 21; to be composted Saturday, Jan. 4)
Let's talk about
inflation indexing and the meaning of life.
Early this month a panel of economists,
led by Stanford's Michael Boskin, made semiofficial what most experts have
been saying for some time: The Consumer Price Index overstates inflation.
Nobody really knows by how much, but Boskin and company made a guesstimate
of 1.1 percent annually. Compounded over decades, this is a huge error.
is controversial. Some people are upset because any reduction of inflation
estimates will reduce Social Security benefits, which are indexed to the
CPI. Others are upset because a revision of recent price history would
mean abandoning a worldview on which they have staked their reputations.
Quite a few people have committed themselves to the story line that productivity
is up but real wages are down. If inflation has been lower than was previously
assumed, that means the real value of wages may have gone up after all.
And some economists with no particular ax to grind simply have doubts about
may be right or wrong, but one argument by his critics is clearly wrong.
They say: Suppose it's true that inflation has been less than the official
increase in the CPI over the past few decades. If you assume a lower inflation
rate and recalculate real incomes back to--say, 1950--you reach what seems
to be a crazy conclusion: that in the early 1950s, the era of postwar affluence,
most Americans were living below what we now regard as the poverty line.
Some critics of the Boskin report regard this as a decisive blow to its
The idea that most Americans were
poor in 1950 is indeed absurd, but not because of Boskin's numbers. After
all, even if you use an unadjusted CPI, the standard of living of the median
family (50th percentile) in 1950 America appears startlingly
low by current standards. In that year, median-family income in 1994 dollars
was only about $18,000. That's about the 20th percentile today.
Families at the 20th percentile--that is, poorer than 80 percent
of the population--may not be legally poor (only about 12 percent of families
are officially below the poverty line), but they are likely to regard themselves
as very disadvantaged and unsuccessful. So even using the old numbers,
most families in 1950 had a material standard of living no better than
that of today's poor or near-poor.
can confirm this with more direct measures of the way people lived. In
1950 some 35 percent of dwellings lacked full indoor plumbing. Many families
still did not have telephones or cars. And of course very few people had
televisions. A modern American family at the 12th percentile
(that is, right at the poverty line) surely has a flushing toilet, a working
shower, and a telephone with direct-dial long-distance service; probably
has a color television; and may well even have a car. Take into account
improvements in the quality of many other products, and it does not seem
at all absurd to say that the material standard of living of that poverty-level
family in 1996 is as good as or better than that of the median family in
What do we mean by this? We mean that
if you could choose between the two material standards of living, other
things being the same, you might well prefer the 12th percentile
standard of 1996 to the 50th percentile standard of 1950. But
does that mean that most people were poor in 1950? No--because man does
not live by bread, cars, televisions, or even plumbing alone.
that a mad scientist went back to 1950 and offered to transport the median
family to the wondrous world of the 1990s, and to place them at, say, the
25th percentile level. The 25th percentile of 1996
is a clear material improvement over the median of 1950. Would they accept
his offer? Almost surely not--because in 1950 they were middle class, while
in 1996 they would be poor, even if they lived better in material terms.
People don't just care about their absolute material level--they care
about their level compared with others'.
I know quite a few academics who have
nice houses, two cars, and enviable working conditions, yet are disappointed
and bitter men--because they have never received an offer from Harvard
and will probably not get a Nobel Prize. They live very well in material
terms, but they judge themselves relative to their reference group, and
so they feel deprived. And on the other hand, it is an open secret that
the chief payoff from being really rich is, as Tom Wolfe once put it, the
pleasure of "seeing 'em jump." Privilege is not merely a means
to other ends, it is an end in itself.
fellow SLATE columnist Robert
Wright would undoubtedly emphasize that our concern over status exists
for good evolutionary reasons. In the ancestral environment a man would
be likely to have more offspring if he got his pick of the most fertile-seeming
women. That, in turn, would depend on his status, not his absolute standard
of living. So males with a predisposition to status-seeking left more offspring
than those without, and the end result is Bill G-g-g---I mean, Ronald Perelman.
Is my license as a practicing economist
about to be revoked? Aren't we supposed to believe in Economic Man? And
doesn't admitting that people care about fuzzy things like status undermine
the whole economic method? Not really: Homo economicus is not a
central pillar of my faith--he is merely a working assumption, albeit one
that is extremely useful in many circumstances.
But admitting that people's happiness
depends on their relative economic level as well as their absolute economic
resources has some subversive implications. For example: Many conservatives
have seized on the Boskin report as a club with which to beat all those
liberals who have been whining about declining incomes and increasing poverty
in America. It was all, they insist, a statistical hoax. But you could
very well make the opposite argument. America in the 1950s was a middle-class
society in a way that America in the 1990s is not. That is, it had a much
flatter income distribution, so that people had much more sense of sharing
a common national lifestyle. And people in that relatively equal America
felt good about their lives, even though by modern standards, they were
poor--poorer, if Boskin is correct, than we previously thought. Doesn't
this mean, then, that having a more or less equal distribution of income
makes for a happier society, even if it does not raise anyone's material
standard of living? That is, you can use the fact that people did not
feel poor in the 1950s as an argument for a more radical egalitarianism
than even most leftists would be willing to espouse.
could even argue that American society in the 1990s is an engine that maximizes
consumption yet minimizes satisfaction. In a society with a very flat distribution
of income and status, nobody feels left out. In a society with rigid ranks,
people do not expect to rise above their station and therefore do not feel
that they have failed if they do not rise. (Aristocrats are not part of
the peasants' reference group.) Modern America, however, is a hugely unequal
society in which anyone can achieve awesome success, but not many actually
do. The result is that many--perhaps even most--people feel that they have
failed to make the cut, no matter how comfortable their lives. (In a land
where anyone can become president, anyone who doesn't become president
is a failure.) My European friends always marvel at how hard Americans
work, even those who already have plenty of money. Why don't we take more
time to enjoy what we have? The answer, of course, is that we work so hard
because we are determined to get ahead--an effort that (for Americans as
a society) is doomed to failure, because competition for status is a zero-sum
game. We can't all "get ahead." No matter how fast we all run,
someone must be behind.
If one follows this line of thought
one might well be led to some extremely radical ideas about economic policy,
ideas that are completely at odds with all current orthodoxies.
But I won't try to come to grips with such ideas in this column. Frankly,
I don't have the time. I have to get back to my research--otherwise, somebody
else might get that Nobel.