August 26, 2006

Weekend Question 1: Why Is It So Easy to Think the Economy Is Getting Worse, When Our Eyes Tell Us It’s Getting Better?

Filed under: Economy,Taxes & Government — Tom @ 10:10 am

ANSWER: I wish I knew for sure; Adam Smith has an explanation. Even the guy who wrote a “rich are getting richer” study understands that the economy has improved a great deal for the average person.


In a subscribers-only column in Forbes, Viriginia Postrel goes to 18th-century legend Adam Smith and respected current-day economist Robert Gordon to tell us that “things are getting worse” was wrong then, and wrong now.

First, on Smith (some content is out of order from Postrel’s original column):

Adam Smith was a remarkably insightful guy. He not only figured out how expanding trade allows the division of labor, thereby creating wealth and raising living standards, he also realized how hard it is to get people to believe they’re better off than their ancestors. He discovered declinism way back in 1776.

“The annual produce of the land and labour of England … is certainly much greater than it was, a little more than a century ago, at the restoration of Charles II,” Smith wrote in The Wealth of Nations. “Though, at present, few people, I believe, doubt of this, yet during this period, five years have seldom passed away in which some book or pamphlet has not been published … pretending to demonstrate that the wealth of the nation was fast declining, that the country was depopulated, agriculture neglected, manufactures decaying, and trade undone.

….. Sound familiar?

….. So why do we only hear bad news? Adam Smith knew.

“A continued Series of Prosperity,” he taught his rhetoric students, “would not give us near so much pleasure in the recital as an epic poem or a tragedy which make but one continued Series of unhappy Events.” In the rhetorical marketplace nothing succeeds like failure.

Next, on today and Gordon’s perspective:

….. today’s gloom peddlers can claim to have scientific data on their side. According to the U.S. Census Bureau, the median real income of a full-time working male rose only 4% between 1981 and 2001, from $44,000 to $45,900 in today’s dollars.If so, you have to wonder who’s buying all those flat-screen TVs, serving precooked rotisserie chicken for dinner or organizing their closets with Elfa systems. “Anybody who thinks things are getting worse should go to Best Buy and notice the type of people who go to Best Buy,” says economist Robert J. Gordon of Northwestern University.

Gordon is the author of a much-cited study showing that from 1966 to 2001 real income kept up with productivity gains for only the top 10% of earners. What the pessimists who tout his study don’t say is that, while Gordon does find that inequality is increasing, he’s convinced that the picture of middle-class stagnation is false.

“The median person has had steadily improving standards of living,” he says. But real incomes have been understated. The problem lies in how the U.S. Bureau of Labor Statistics calculates the cost of living.

Do we want to know how much money it would take the typical American to buy today what the typical American bought 20 years ago? If so, what about all those things that didn’t exist back then–not just iPods and mobile phones but everyday items like wrinkle-free pants, effective sunscreens, prewashed salads-in-a-bag or comfy hotel beds?

Price indexes also haven’t kept up with changes in what consumers buy and when and where they shop. Wal-Mart’s share of the U.S. grocery market is more than a fifth and is growing. Wal-Mart and other superstores charge up to 27% less for food than traditional supermarkets, estimate economists Jerry Hausman of MIT and Ephraim Leibtag of the Department of Agriculture. But the BLS doesn’t factor those lower prices into its inflation estimates. It simply assumes that Wal-Mart’s price reflects worse service, and ignores the savings.

Using ACNielsen data from 61,500 households, Hausman and Leibtag calculate that grocery shoppers are 20% better off–not the full 27%–with a superstore shopping trip. “So some of the food isn’t quite as good or the diversity isn’t quite as good,” says Hausman. “But you still get a huge boost.”

Since groceries make up 12% of household spending and as much as 25% for low-income Americans, this distortion significantly understates real incomes, especially at the bottom.

Those savings on “basics” are significant, and they have freed up a lot of money to buy other things.

I don’t think Postrel, the people she interviewed, or even Smith if he were still with us, would advocate actually changing how official inflation indices are calculated (can you imagine what a political nightmare trying to take the additional factors cited into account could turn into?). Maybe there could be some unofficial indicators of some kind published from time to time. Their main point is that we need to open our eyes, look past the official stats, and see that what a person of even modest means can afford to buy today was well beyond the reach of what people in similar positions on the economic ladder could have even thought about having as little as a quarter-century ago.

Positivity: Kidnapped Daughter Finds Father after 26 Years

Filed under: Positivity — Tom @ 9:36 am

A horrible story that began in Bangladesh comes to a happy end, and a new beginning (HT Good News Blog):

Dad and daughter reunited after 26 years
August 25, 2006 07:07pm

A DUTCH lawyer who was trafficked to Europe as a baby has been reunited with her impoverished Bangladeshi father 26 years after he last saw her, a report said today.

Matiur Rahman last saw his daughter Rina in 1979 when she was six months old, according to the Daily Star newspaper, which identified her only by her first name.

The following year Rahman was kidnapped by criminals who he believed belonged to a gang of traffickers.

After escaping from his kidnappers, he went to find his wife and daughter, only to be told by neighbours that his wife had sold the girl.

Years of fruitless searching followed until earlier this year, when he read a newspaper report about a Dutch woman who had returned to Bangladesh with her husband and was looking for him.

“Allah has finally heard my prayers,” the report quoted him as saying.

“I am the happiest man in the world now. My heart was in flames for so many years and now it is over,” he said.

Rina was brought up by a Dutch couple and trained as a lawyer in Holland.

She described finding her father with the help of a local non-governmental organisation as “strange, marvellous” and “above everything,” the report said.

Rahman, who was once a rickshaw puller, works at a hospital in Dhaka.

Rina said she planned to return to Bangladesh to visit her father again soon.

The report said she was attempting to trace her half-sister who she believed was also trafficked to Holland.