Monday, March 9, 2015

No Improvement In Standards of Living

Many people (outside of economics) seem to take as a given the oft-repeated idea that there’s been no real improvement in the standard of living of most Americans since the 1970’s.

I think this is ridiculous, but there’s a lot of people that believe vaccines cause autism too.

Anyway, Scott Sumner, writing at EconLog, has documented how some of the support for that idea comes from people improperly deflating nominal consumption (from GDP) with the CPI (not based on GDP). He even links to a Nobel Prize winner who does this.

I don’t make this mistake, and I didn’t incorporate it into your handbook. But it seems plausible that other people have done this.

But, of course, I did stress that the CPI — because of the method of its construction — is biased towards finding inflation rates higher than they really are and real values smaller than they really are.

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