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Economically
speaking, are we better off than we were ten years ago? Twenty years ago?
In
their thirst for evidence on this issue, commentators seized on the recent
report by the Census Bureau, which found that average household income rose by
5.2% in 2015. Unfortunately, that conclusion puts too much weight on a useful,
but flawed and incomplete, statistic. Among the more significant problems with
the Census's measure are that: 1) it excludes taxes, transfers, and
compensation like employer-provided health insurance; and 2) it is based on
surveys rather than data. Even if precisely measured, income data exclude
important determinants of economic wellbeing, such as the hours of work needed
to earn that income.
While
thinking about the question, we came across a recently published article by
Charles Jones and Peter Klenow, which proposes an interesting new measure of
economic welfare. While by no means perfect, it is considerably more
comprehensive than average income, taking into account not only growth in
consumption per person but also changes in working time, life expectancy, and
inequality. Moreover, it can be used to assess economic performance both across
countries and over time.
The
Jones-Klenow method can be illustrated by a cross-country example. Suppose we
want to compare the economic welfare of citizens of the U.S. and France in 2005.
In
2005, as the authors observe: real consumption per person in France was only
60% as high as the U.S., making it appear that Americans were economically much
better off than the French on average. However, that comparison omits other
relevant factors: leisure time, life expectancy, and economic inequality. The
French take longer vacations and retire earlier, so typically work fewer hours;
they enjoy a higher life expectancy, presumably reflecting advantages with
respect to health care, diet, lifestyle, and the like; and income and
consumption are somewhat more equally distributed there than in the U.S.
Because of these differences, comparing France's consumption with the U.S.'s
overstates the gap in economic welfare.
Similar
calculations can be used to compare the U.S. and other countries. For example,
this calculation puts economic welfare in the United Kingdom at 97 % of U.S.
levels, but estimates Mexican well-being at 22%. The Jones-Klenow measure can
also assess an economy's performance over time. According to this measure, as
of the early-to-mid-2000s, the U.S. had the highest economic welfare of any
large country. Since 2007, economic welfare in the U.S. has continued to
improve. However, the pace of improvement has slowed markedly.
Methodologically,
the lesson from the Jones-Klenow research is that economic welfare is
multi-dimensional. Their approach is flexible enough that in principle other
important quality-of-life changes could be incorporated—for example, decreases
in total emissions of pollutants and declines in crime rates.