Genuine Economic Progress is about Higher Incomes AND Lower Prices

A few months back I wrote:

From the perspective of a worker, the point of a job is not simply to have a paycheck; it is to have a paycheck that permits one to buy useful goods and services.

This is an important point to keep in mind because so many policies—from subsidies and regulations to occupational licenses—simultaneously increase the prices paid by consumers and the incomes received by (some) producers. In fact, I’d go so far as to speculate that a majority of policies have this effect. (There are, of course, exceptions; taxes push consumer prices up and producer net-of-tax revenues down). From a public choice perspective, this makes sense: any one of these policies is likely to raise the incomes of a few well-connected producers by quite a bit while it is likely to raise the prices paid by a vast multitude by only a little. Even if, in aggregate, the price increases outweigh the income increases, it makes political if not economic sense for a politician to favor such a policy.

This is tragic because genuine economic progress is about both rising real incomes and falling real prices.

The indispensable Mark Perry makes this point beautifully in a classic and brief post from 2010 (I’m sorry, Mark, to quote the entire thing. But I can’t find anything worth leaving out):

In 1964, here’s what the average American consumer could afford after working 152 hours (almost a full month) at the average hourly wage then of $2.50: a “moderately priced, excellent stereo system” from Radio Shack on sale for $379.95.

In contrast, the typical consumer today working 152 hours at the current average hourly wage of $19 could afford this “cornucopia” of electronic goods:

Keep this in mind the next time you hear a politician plugging some new policy that promises to raise incomes. Will it also raise prices above what they would otherwise be? Is it worth it, on net?

4 thoughts on “Genuine Economic Progress is about Higher Incomes AND Lower Prices

  1. Ronco4275

    Wow, exactly the type of misleading information I would expect from this Koch brother’s funded “think” tank. Your article makes it seem as if the average American earns $19 an hour. How many Americans actually earn $19 an hour or more? You tell me, but I’d guess maybe 20% of wage earners.

    1. Matt Mitchell

      Thanks for the comment, Ronco4275. Thankfully, things have
      actually improved since Prof. Perry wrote his post. According to the Federal
      Bureau of Labor Statistics, the average hourly wage (in all occupations) was $21.35
      as of May 2010. (http://www.bls.gov/oes/current/oes_nat.htm#00-0000)

      Of course, the average is brought up by the higher earners,
      so perhaps you think the median is a less-biased measure of “the typical
      American wage.” According to the BLS, the median hourly rate is $16.27. At this
      rate, after 152 hours, the median earner will have $2473. That would be enough
      to buy everything on the list but the laptop (of course, that’s assuming that
      some of these things haven’t gotten cheaper…the laptop for one seems to have).

      Have a good one.

       

      1. Ronco4275

        So you’ve proven my point. A median wage of $16 an hour means 50% of wage earners earn less than $16. So again I ask you again what is the % of wage earners that actually earns this mythical $21 an hour average, less than 20%. Don’t be fooled by words and numbers you don’t understand.

        1. Matt Mitchell

          I’m accepting the point that mean is not the same thing
          as median. In fact, I am saying that I think median is probably a less biased
          measure of the typical wage—which is why I cite it and reran the analysis using
          the median. Neither I nor Professor Perry are trying to pull the wool over
          anyone’s eyes here. Lots of people use mean as a measure of central tendency. I happen to think the median is a little less biased here. The BLS data don’t break it down any finer than quartiles. The
          median hourly rate is $16.27 while the 75th percentile rate is
          $26.08. In other words, we know from this dataset that more than 25 percent but
          less than 50 percent earn $21.35 an hour.

          I worry you may be missing the point of the post, however. The
          point is NOT to say that the mean wage, the median wage or any other wage is acceptable
          right now. I’d much prefer that it were significantly higher. The point of the
          post is that wages alone don’t measure well-being. A more accurate measure of
          wellbeing accounts for what those wages are able to purchase. This is an
          important point because a lot of policies have two effects: they raise the
          wages of some while also raising the prices and/or lower the quality of things that people buy. Think of
          government-granted monopolies, trade restrictions, agricultural price supports,
          or corporate handouts. If policy X doubles the median wage but trebles the
          prices of goods that the median earner purchases, this is not good for the
          median earner. I would think that this observation would be troubling whatever
          one’s ideological perspective.   

          Thanks again for your thoughts, Ronco. If you or any other
          readers can find a dataset that breaks down hourly wages more finely than
          quartiles, I’d be happy to post it.
          Also, feel free to email me if you have any more questions.

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