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For much of the 20th century, the Great Depression was the singular economic event influencing American politics. Voters gave lots of credit — and big reelection wins — to presidents who presided over prosperity. Job and GDP growth drove approval ratings, which drove voting behavior.
One would think the Great Recession/Financial Crisis/Housing Crisis would serve a similar role today. But rather than referencing the events of 2007-2009, politicians these days typically make a broader argument. Capitalism is broken, and it has been that way for many years. Proof: Decades of worker wage stagnation. Entire political campaigns and think tanks are seemingly built upon this data point.
The specific claim, typically, is that since the early 1970s, real wages — take-home pay, adjusted for inflation — have gone pretty much nowhere. The calculation: Take the growth in average hourly earnings of production and nonsupervisory employees and deflate it by the consumer price index. The result: Wages have growth by just 5% since the Nixon administration. Sure looks like stagnation, or a pretty close facsimile.
But as my AEI colleague Michael Strain argues in a recent Bloomberg column, using that 5% percent number to encapsulate some five decades of American economic history is problematic. You kind of miss a lot, such as this less frequently mentioned statistical observation: “Slow and steady wage gains have produced significant increases in purchasing power over the last several decades.”
It’s true! Since the 1990 business cycle peak, wages are up 20% in real terms. And if you use the “personal consumption expenditures price index” rather than the CPI as the inflation measure — it’s the one preferred by the Federal Reserve and Congressional Budget Office — you find a 32% increase in average worker wages and about the same for the bottom fifth of workers. (Fun fact: Broader after-tax income measures show middle-class living standards up by 42% since 1979 and 70% for the bottom fifth.)
A key point: The Fed and CBO prefer the PCE over the CPI because the former better accounts for how consumers respond to price changes. As Strain explains, “If the price of strawberries goes up, you might buy fewer strawberries and more raspberries. By not accounting for consumers’ ability to substitute goods that are relatively cheaper, the CPI overstates inflation.”
But isn’t looking at wages since the 1990s rather than the 1970s some sort of scholarly dodge or clumsy attempt at cherry picking data? Not really, Strain writes. First, the further back you go, the harder it is to compare the purchasing power of wages over time given the ongoing quality changes in consumer products. Second, using a stat that incorporates data from decades ago doesn’t say much about how the economy more recently been affecting workers in their prime, creating an overly pessimistic perception with real political consequences.
Which brings up an interesting point: If wages haven’t been stagnating for years and years, does that change any opinions about American capitalism or next steps in public policy?
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