Jewish World Review Feb. 8, 2006 / 10 Shevat, 5766

Thomas Sowell

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Consumer Reports

Myths of rich and poor

http://www.NewsAndOpinion.com | There is a fundamental difference between seeking the truth and scoring points. In politics, the truth is strictly optional and that also seems to be true in parts of the media.


Much of what is said about the incomes of Americans is said to score points. For example, it has been repeated endlessly that the average American family's income has not increased significantly for decades and that real wages are actually going down, not up.


That is great stuff for scoring points. You can just imagine the words and the music: The economy is stagnating, the American Dream has become a nightmare, our best days are behind us, etc.


The fact that the conclusions are totally false has not cramped anyone's style. Best-selling authors reap the profits of doom by writing such stuff. Politicians show how compassionate they are by promising to rescue us from economic disaster. Those who want to show how hip they are by disdaining American society get their jollies by scoring such points.


A book titled "Myths of Rich and Poor" by W. Michael Cox and Richard Alm exposes such nonsense for the fraud that it is.


Despite the statistics that show real wages going downhill over time, somehow Americans are consuming more than ever and have a larger net worth than ever.



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As of 1970, for example, only about a third of American homes had both central heating and air conditioning, while more than four-fifths had both in the 1990s. Moreover, the homes themselves were more than one-third larger.


Just over one-fourth of American households had a dishwasher in 1970 but more than half did by the 1990s. Only 34 percent of households had color television in 1970 but 98 percent did in the 1990s.


How could this be, with lower real wages? Were we just going deeper and deeper into debt? Actually the net worth of Americans more than doubled during those same years.


Was there some kind of economic Houdini who could perform such magic?


No. Actually a lot of the point-scoring rhetoric involves misleading statistics. Wages are only part of total compensation — and increasing proportions of that total compensation is taken in the form of fringe benefits. Total compensation has been going up while average real wages have been going down.


Even the decline of real wages has to be taken with a grain of salt. Real wages are calculated by taking the money wages and adjusting for changes in the consumer price index.


Only an economist can get excited by the consumer price index. Other people's eyes are more likely to glaze over when the term is mentioned. However, an inaccurate consumer price index is part of the reason for the appearance of declining real wages.


When the consumer price index says that inflation is 3 percent a year, it may really be more like 2 percent or 1.5 percent. As anyone who has had to pay off a mortgage knows, a difference of a percentage point can add up to real money over a period of decades.


Economists' estimates of how much the consumer price index exaggerates inflation range from an estimate of one percentage point by former Federal Reserve chairman Alan Greenspan to an estimate of 1.5 percent by Michael Boskin, former chairman of the Council of Economic Advisers to the President.


Even if we take the lower estimate of one percentage point, over a period of 25 years, that under-estimates the real income of the average American by nearly $9,000. In other words, a working couple will have their real income under-estimated by nearly 18 grand, using the consumer price index to correct for inflation.


No wonder the income statistics look so bad, even while the standard of living is rising and Americans have a higher net worth than before. Nothing is easier than to turn reality upside down, especially if you are just trying to score points, instead of getting at the truth.


My comment on this book has been reprinted on its cover: "Cox and Alm deserve a medal for bringing some sanity to a subject where insanity is the norm."


If making a whole society's rising prosperity look like a disastrous decline is not insane, what is?

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