How exactly do we measure U.S. economic well-being?

The Initiative on Global Markets at the University of Chicago’s Booth School of Business from time to time will release the results of a survey that poses statements to prominent academic economists and asks them to agree, disagree, or state their uncertainty. The results of the IGM Forum can often give us insight into how these economists think, and where their views diverge and converge. While most of the attention to these results zero in on a consensus or a lack thereof among economists, digging into why they agree or disagree can be quite instructive.

The most recent release from the forum is a great example. IGM presented the panelists with the following:

“The 9 percent cumulative increase in real U.S. median household income since 1980 substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.”

70 percent of the panelists, on a confidence-weighted basis, agreed with the statement, 21 percent were uncertain, and 9 percent disagreed.

If you look at the responses of the economists who agreed with the statement, several mention problems with the U.S. Consumer Price Index, which is used to adjust for inflation in the measure of household income. Some economists argue the index overstates inflation, resulting in inflation-adjusted or real growth in household income being understated. And as Yale University finance and economics professor Judith Chevalier points out in her answer, if we want to look at household income as a measure of well-being then it’s more appropriate to look at disposable household income by taking account of government transfer programs such as unemployment insurance or government pensions

Of course, that assumes that looking at growth in household income– even after these considerations– is the best way to think about household economic prosperity. As Matt Yglesias points out at Vox, there are a host of issues that can arise when you looking purely at a snapshot of household income. Households with the same income may face quite different economic situations due to household size, net worth, and even their age.

There are even broader considerations that several of the economists bring up in their responses. First, there’s what we might call the “iPhone problem.” The U.S. Bureau of Labor Statistics tries to adjust the price of goods in its calculations of inflation to account for these goods’ increasing quality as well as for new products. But the invention of products such as smartphones or the broader Internet are advances whose benefits might not be captured in the BLS’s so-called “hedonic adjustments.” In economics speak, these technologies have created a large increase in consumer surplus (the gains in utility consumers get over the price they paid for an iPhone) that might not show up in income statistics.

Then there’s the question of how life expectancy fits into measurements of the U.S. standard of living. Several economists point out that life expectancy has increased quite a bit since 1980. This improvement, while quite unevenly distributed, is certainly an economic improvement but it won’t show up in annual income statistics. The same goes with declines in crime or improvements in air quality that other respondents cite. They’re quite important to the quality of life and living standards, but aren’t going to show up in income statistics.

This isn’t to say that the IGM question was framed incorrectly. Rather, by having the statement shift from an income statistic to economic well-being it provoked interesting responses that show how some economists think about income and its connection to well-being. While there has been quite a bit of thinking about measuring economic well-being, more thinking, debate, and arguing seems worthwhile.