Against What Benchmark Should We Measure Equitable Growth Performance?

I find the very sharp Marty Felstein engaging in a goalpost-moving effort that I cannot endorse:

There may be some powerful argument that the true consumer price index has risen more for the rich than for the middle class and the poor. But if there is, I am not aware off it. And so I think: The existence of downward bias from failure to measure the value of new good and new kinds of goods in official statistics of real income growth does not reduce the rise in inequality over the past generation–although it does mean that we collectively are richer now relative to our predecessors than we would be if official statistics were gospel.

Here I think we need to draw some distinctions. If you are not tech-savvy–if you are not a relatively intensive user of modern information, entertainment, and communication technologies–then you do not benefit from them. Then the official statistics showing declining median incomes over the past generation apply to you. And you are certainly much poorer now than you reasonably expected back then to be now. And it is wholly reasonable for you to believe that, while the economy has worked for the rich, it has not worked for you and somebody should be held accountable.

If you are tech-savvy, then it is still reasonable for you to complain. You do need to praise the bureaucrats of DARPA and the other pieces of government support for what became Silicon Valley. You do need to be grateful for California entrepreneurship and enterprise. But that enormous outpouring of wealth and enterprise is orthogonal to the rest of the economy–which has still failed you. And, especially, it is not irrational for you to feel upset by the fact what you thought were the standard indicia of middle-class status now seem beyond your grasp and getting further beyond every day.

Thus while I very much agree with Marty that we should be doing much more to boost the growth of middle-class incomes in the future, I do think it is very important to look at the reasons why the coming of Silicon Valley was not associated with an increase in the pace of growth of middle-class incomes but, even with Marty’s adjustments of the statistics, a decline.

It is not as though median incomes remained a constant fraction of per capita net economic product, is it? And it is not as though the rise in income inequality brought forth anything of the promised increase in the ex-Silicon Valley rate of economic growth, is it? And it is not as though Silicon Valley was in any sense the product of lower tax rates on the rich, is it?

In my view, not reduced marginal tax rates and their result of still less social insurance is the road to faster growth of median incomes. Rather, it is a government that pragmatically identifies the true industries of the future and makes it easy for the economy to move into them that we should seek.

Martin Feldstein: The U.S. Underestimates Growth: “Statisticians are supposed to measure price inflation and real growth…

…Which means that, with millions of new and rapidly changing products and services, they are supposed to assess… exactly how much it costs now to buy the same quantity of “value” or “satisfaction” that $1,000 could buy a year ago. These tasks are virtually impossible…. It is relatively easy to add up the total dollars that are spent in the economy–the amount labeled nominal GDP…. Comparing the increase of nominal GDP to the increase in the price level… is impossibly difficult… particularly… for new products…. The official method of calculating the price index doesn’t incorporate this new product until total spending on it exceeds some threshold level…. The main effect of raising well-being… [by] introduc[tion] is completely ignored…. The result is that the rise in real incomes is underestimated….

Over the past two decades…. the… [measured] increase of [median] real household income [is] down to less than 5%… [in] official statistics also… a 10% decline… since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better…. We should worry less about the appearance of slower growth of middle-class incomes and do more to increase that growth in the future.