Are you better off than you were twenty years ago? Probably not relative to very rich people today, but what about relative to you, or to someone your age and position twenty years ago? Income inequality has been called the defining issue of our time. Powerful leaders, from President Obama to Pope Francis, have cited it as evidence that the unfettered capitalism that has enriched the wealthy hasn’t been shared. Of course, there’s a difference between the gains in income being shared evenly, shared a little, or making everyone else poorer. In many ways the average American is much better off than he used to be; in other ways he’s worse off. But even if we focus on what’s gotten better, we may still need to worry about the future.
The most common metric used to measure changes in our economic condition is income, but several other factors determine quality of life: health, consumption, leisure time, financial security, and prospects for the future. Which of these factors matters most comes down to personal values. Some people prefer more leisure to income. If they work less, even at the cost of lower earnings, they’ll be happier. Some people are more comfortable with risk; health care coverage and financial security matter less if they can buy more stuff.
In order to assess economic improvement, we must also consider demographics. Over the course of your lifetime, you will probably see an increase in earnings and wealth and accumulate goods. Most people get pay raises as they age and acquire more skills. They also become more risk averse and have more years to collect wealth. In this respect, the relevant question is: are your finances improving at the same rate they used to? Or did people your age used to have more than you do now?
Income statistics are not a sufficient indicator of well being, but they are a good place to start. It’s fairly well known that median household income in America has stagnated since the 1980s. That means while it’s not worse off, the typical American household’s income didn’t grow as much this century as it did in the 20th century. The picture darkens when you consider demographics. Since the 1970s, the median age in America increased about 8 years. You would expect income to increase too. Stagnating income could mean we’re worse off relative to earlier decades. Alternatively, income does not fully capture compensation. When you consider household size, taxes, and the value of non-monetary benefits (like health care) income has increased since the 1970s by some estimates more than 30 percent.
These income figures all account for inflation. That’s because it’s not income itself that matters; it’s what you can buy with it. Some economists argue that even if income has stagnated, people are still better off because they buy more and better things. Flat-screen TVs, air-conditioning and air travel have become ubiquitous among the middle class. David Weinstein, Christian Broda, and Ephraim Leibtag point out that historically, inflation was not measured properly because it only considered prices for a fixed basket of goods. This method doesn’t allow for new, cheaper, and better quality products, and this shortcoming over-estimates inflation, thereby understating real income growth.