Are We Getting Richer or Poorer?

Published July 3, 2023
groceries consumer price index cpi

Economists debate whether typical Americans are better off now than fifty years ago. The debate concerns the reliability of the Consumer Price Index (CPI). The Cost of Thriving Index (COTI) from American Compass and Oren Cass think tank contends that middle class prosperity is becoming unaffordable for American families.

Mr. Cass gained attention with the publication of The Once and Future Worker. He voices the frustration of many conservatives with free markets, particularly emphasizing how markets leave many Americans without jobs capable of supporting families.

The dollar loses value with inflation, making dollar amounts not comparable over time. Economists adjust dollar values using the CPI, yielding “real” as opposed to nominal values. Between 1985 and 2022 the CPI increased 142% and men’s median earnings 145%, leaving real income basically unchanged.

The term “thriving” is deliberately chosen, as the COTI measures the cost of a changing “middle class” life. By contrast, the CPI tries to measure the cost of the same items – a typical market basket – at different times. Mr. Cass contends that being middle class in 2022 does not mean having the same things as in 1985.

The cost index has five components: food, housing, health care, transportation, and education. The COTI compares the dollar value of income and costs in each year and reports the weeks of work at the median wage needed to afford the middle-class life. The COTI stood at 39.7 weeks in 1985 versus 62.1 weeks in 2022. (The cost and weekly earnings were $17,500 and $443 in 1985 against $75,700 and $1,219 in 2022.) Similar results hold for women’s earnings or earnings by education attainment.

In his book Mr. Cass argues that “without access to work that can support them, families struggle to remain in tact or to form in the first place, and communities cannot help but dissolve; without stable families and communities, economic opportunity vanishes.” This is an important consideration. Families transmit values in society, which is why progressives seek to undermine the family. Men with low earnings are less likely to marry and their marriages tend not to last. Remember that these are averages and do not deny that happy families with Mr. Mom.

Competition from imports has devastated many American industrial towns. Free market economists often argue for unrestricted imports and government assistance for those losing their jobs. Mr. Cass points out though that a life on the dole ensures family disintegration.

Mr. Cass further points to regulation in the offshoring of manufacturing. When high labor costs drive jobs overseas, this is efficient since highly valued and paid American workers can take other jobs. This is not the case when regulations increase the cost of manufacturing here. Free trade evades regulations but devastates communities. 

Does the COTI prove that middle class living has become unaffordable? Economists Scott Winship and Jeremy Horpendahl challenge this claim for the American Enterprise Institute. They criticize the measurement of some costs and consider quality improvements.

The healthcare component uses the full cost of employer provided health insurance, including cost paid directly by the employer, but does not add this to earnings. Although this might seem to cancel in comparisons over time, the cost of healthcare has risen much faster than inflation, biasing the measure.

Education uses in-state tuition for public universities. But very few students pay the full tuition price; net tuition, or tuition minus any institution-granted scholarships, better measures cost. Sticker price tuition has increased significantly faster than net tuition, overstating the cost increase.

Winship and Horpendahl further address quality improvements, a major source of economists’ concern over CPI accuracy. Expenditures today purchase bigger houses, more reliable cars, and better medicine. They estimate that a properly measured COTI has increased by 4 weeks since 1985, not 22.

Oren Cass rightly focuses attention on the economic requirements of strong families. The debate over whether American families are better off now than a generation ago is vital. Economists’ difficulty conclusively answering this question is telling, as I doubt there was disagreement in 1922 about whether families were doing better than in 1885!