Are we better off economically than we were ten years ago? What was it like twenty years ago? When pollsters pose such questions, Americans appear indecisive, almost schizophrenic, with the vast majority stating the country is headed “in the wrong way,” yet telling pollsters that they are optimistic about their financial conditions and the medium-term economic prospects. In their search for proof on this topic, pundits latched on a recent Census Bureau report, which indicated that actual median household income increased by 5.2 percent in 2015, as evidence that “the middle class has finally earned a raise.” Unfortunately, that conclusion places much too much reliance on a valuable but inaccurate and insufficient statistic. One of the more severe issues with the Census’s measure is that it excludes taxes, transfers, and nonmonetary compensation such as employer-provided health insurance. Moreover, it is based on surveys rather than total tax and administrative data, resulting in surprisingly inconsistent results with official national income figures in recent years. Finally, even if income data is exact, it excludes crucial economic well-being, such as the hours of work required to acquire that money.
In response to this topic, a recent paper by Charles Jones and Peter Klenow suggests an intriguing new measure of economic well-being. Of course, it is far from ideal. Still, it is far more comprehensive than the median income, accounting for growth in per-capita consumption and changes in working time, life expectancy, and inequality. Furthermore, as the economic researchers, they may compare economic performance between nations and throughout the period. This content summarizes their findings and extends a portion of their study (which ended before the Great Recession) to 2015.
The simple truth: Americans enjoy a high level of economic well-being in contrast to most other countries. This level has continued to improve over the previous several decades despite the severe disruptions of the financial crisis and its aftermath. However, the rate of progress has slowed significantly in recent years, commensurate with the increasing sense of dissatisfaction shown in polls and politics.
According to the data, real GDP per capita in France was only 67 percent that of the United States in 2005, and actual consumption per capita (a more direct measure of living standards) was only 60 percent as high; giving the impression that Americans were much better off economically than the French on average. However, such comparison excludes other important economic well-being characteristics. Jones and Klenow focus on three factors: leisure time, life expectancy, and economic disparity.
The French take more extended vacations and retire earlier, so they typically work fewer hours; they have a higher birth expectancy (80 years in 2005, compared to 77 in the United States), which presumably reflects advantages in health care, diet, lifestyle, and the like. In addition, their income and consumption are somewhat more evenly distributed than the norm in the United States. Because of these mitigating factors, comparing France’s per capita GDP or consumption to that of the United States exaggerates the economic well-being disparity.
How important are these other factors? The researches formulate the following question to quantify their influence in a single measure: If someone had to choose between living in the United States—with its consumption, inequality, life expectancy, and leisure—and living in France, how much would U.S. consumption have to alter before they would be as satisfied with either outcome? Jones and Klenow utilize comprehensive data for each nation to transform the variables into “consumption equivalents,” using a basic model of family preferences and some plausible assumptions about the relative worth of leisure and consumption, for example. At the end of this exercise, they estimate that, in terms of consumption equivalents, a randomly selected French person was really around 92 percent as well off as a randomly selected U.S. citizen in 2005, despite the enormous disparity in consumption per capita between the two nations.
For example, the findings suggest that economic well-being in the United Kingdom is 97 percent of that in the United States, whereas Mexican well-being is just 22 percent. Surprisingly, the comparison revealed that Western European countries like the United Kingdom, France, and Italy are much closer to the United States in terms of economic welfare than differences in per capita income or consumption would suggest, reflecting the fact that Western European countries perform relatively well on the other evaluated criteria (namely, leisure, life expectancy, and inequality). However, disparities in income or consumption per person in emerging and developing economies usually understate the U.S. advantage, according to this metric, owing to higher levels of inequality and shorter life expectancy in those nations.
