The Myth Of Declining American Living Standards

by: Cullen Roche

One of the running themes of this website over the last 6 years is the idea that the US economy is not doing nearly as well as it should be - however, that it's also not doing nearly as bad as some people would have us believe. Unfortunately, whenever I publish something like the recent post on the solvency of the USA, I get a lot of pushback from people arguing that American living standards are in some sort of terminal decline. I know politics plays a big role in all of this, and I try to stay as apolitical as I can, but when we look at the operational realities of the monetary system and put the facts in the proper context, I think it's very hard to argue that American living standards are declining.1

First, "living standards" are not homogeneous. What's desirable for one person is not necessarily desirable for another person. However, what we all cherish most is time, since it is the ultimate scarce resource in life. Keynes once argued that we would all be working 15-hour workweeks by now and living lavish lifestyles filled with flexibility and time optionality. He said:

For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter-to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!2

Well, that sure would have been nice. Señor Keynes was off the mark by a wide margin, as the average work week in the USA is now 47 hours. What a dope! But maybe it's not that bad... Maybe Keynes wasn't as wrong as we might think based just off these rough figures.

The main argument against a broad increase in living standards is the fact that real median household incomes have stagnated for much of the last 30 years. This is undeniable, and not a good sign for living standards. But the quantity of money we make isn't necessarily a sign of being better or worse off. Instead, we should look at what those dollars buy, and whether they afford us a better use of our time. In other words, do our current incomes give us more freedom to buy the things we want rather than the things we need. By this measure, it is irrefutable that American living standards have improved dramatically even during a period when median incomes have stagnated.

A 2003 study from the BLS on American spending trends will help put this in some perspective. In the year 1900, 80% of our expenditures went towards necessities (defined as housing, food and apparel by the BLS).3 Over the course of the next 115 years (I updated their study for the most recent data), we've seen that share of spending on necessities decline to just 48.9%. Therefore, even though incomes have stagnated for the median income earner, that income affords them a higher living standard, because it increasingly goes towards inessential spending.

Click to enlarge

To put this in some perspective, it's useful to look at an (imperfect) example. I've argued that the smartphone is one of the greatest inventions of the last 100 years when it comes to improvements in broad living standards. In the year 1970, a consumer couldn't fathom owning a computer, camera, phone, watch, library, TV, GPS device and all the other fabulous technologies that go into a smartphone. In the 1970s, those purchases would have cost you tens of thousands of dollars. The average 1970 income of about $11,000 might have gone entirely towards such devices. But today, anyone and everyone can own all of these items in one device for less than $100. In other words, our incomes go a lot further than we could have ever imagined, thereby making our incomes and time much more valuable, even though we haven't seen a nominal dollar increase.

Of course, none of this means we are doing as well as we could be. I have been highly critical of government policy over the years, precisely because I think the US economy is operating at a much lower capacity than it could be. It's also clear that the growth in living standards has been highly unequal. The upper quintiles of the income range have dramatically improved their position both in real income terms as well as in the quality of goods and services, while the lower quintiles have experienced little to no real income improvement and only improvement in quality of goods and services. So, there are still big problems in the USA. However, I would argue that some of the persistent doom over the current state of the economy is vastly overdone and fails to put the state of American living standards in the proper context.4

Footnotes:

1 - This long-term perspective should be apolitical, as it crosses over many political candidates and their policies.

2 - See John Maynard Keynes, Economic Possibilities for our Grandchildren

3 - See 100 Years of U.S. Consumer Spending.

4 - If this post hasn't convinced you, then I'll let Louis CK convince you.