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.

Resident Scholar Kevin A. Hassett

Research Fellow Aparna Mathur

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.

But even if we rely on the wage numbers that include benefits, the numbers still understate how fast the average American is moving ahead. First, wage measures usually exclude taxes and transfers--but taxes have declined enormously, especially for middle-class families with small children. That makes a difference. And second, these measures adjust for inflation--which can be misleading in our present circumstances. Inflation has been surprisingly high in recent years, owing chiefly to sharp increases in energy prices; these increases likely moved consumers to change their behavior, trading in the Hummer for a Prius. Deflation can overcorrect for price changes if the model does not allow for changes in consumer behavior. (If I ate 80 apples last year, and the price of apples increased this year to a million dollars, my welfare would not go way down; I would just switch to oranges.)

But there's another way to measure how people are doing: consumption. One benefit of looking at consumption is that it accounts for all of the other complicated things that are going on with income, such as taxes or black-market income. It also accounts for fluctuation of income over time. Consumption is generally smoothed over time by people to match their expected income. A person’s consumption provides a much more accurate read on how he's doing than does his before-tax income.

So how have the consumption numbers been doing? Just as GDP has been rising, so has aggregate consumption. Between 2001 and the second quarter of this year, the consumption of Americans grew 17.24 percent.

But the populists' claims are specifically about "the middle class." To find out how they are doing, we need to dig deeper into the source data. The Department of Labor’s Consumer Expenditure Survey provides detailed consumption data on a cross section of Americans; we can use this to estimate how much of our aggregate consumption went to each income group in recent years.

These data reveal that the middle class has been doing pretty well for itself. Breaking the income distribution up into five quintiles, we tracked the consumption experience of the middle quintile (or middle class) in recent years. The data tell a striking story: Consumption has increased solidly for the middle class. Paul Krugman has claimed that people are worse off today than they were in 2000 because "once you adjust for inflation, you find that the income of a typical household headed by a college graduate was lower in 2005 than in 2000." But if the measure of income he chooses is a good measure of welfare, then consumption should stagnate as well--and, in fact, the opposite has happened. Adjusting for inflation, we estimate that the real growth rate of consumption for the middle class between 2000 and 2005 was about 7.5 percent. So the welfare of the middle is improving, and unambiguously. There is nothing to debate. The strong economy is lifting all boats.

The data also reject the view that we are evolving toward an economy that is less friendly toward the middle class. Indeed, the rate at which consumption by the middle class is increasing has accelerated in recent years. The average annual consumption growth for the middle class was less than 1 percent in the period from 1990 to 1994, rose to 1.5 percent in the period from 1995 to 1999, and jumped to more than 2 percent in the period from 2000 to 2005. The middle class is even doing better than the upper crust: The growth of their consumption expenditures exceeded the growth rate in the highest income category between 2000 and 2005. Consumption is becoming more equal across these income classes.

A pessimist might argue that the middle class has been able to increase its consumption because it took money out of its inflated housing wealth, or loaded up on credit-card debt. Such moves might presage a big drop in consumption in the next few years. Perhaps, but this story seems exactly backward to us. Economists have studied individual consumption behavior for many years, and one thing they have indisputably learned is that people adjust when times are troubling. When individuals are fearful about the future, they reduce their consumption and increase their saving. This gives them a buffer stock of wealth to tide them over if things get rough. Since Americans are consuming enthusiastically, they must be optimistic about the future.

Consumption is a measure of what people use and eat. It has increased sharply in recent years, revealing the flawed income statistics as woefully inadequate measures of well-being. The proof is, we believe, in the pudding: The times are better than they used to be. The middle class is flourishing and optimistic.

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Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI. Aparna Mathur is a research fellow at AEI.