Are we better off?

Yes. But not as much as we ought to be.

"1991 Five Former Presidents Gerald Ford, Richard Nixon, George H W Bush, Ronald Reagan, & Jimmy Carter" by Beverly & Pack, CC BY 2.0

Every once in a while I take a crack at the question “How much, if any, have typical Americans’ material living standards improved since the 1970s?” So here I am, trying again. It’s become something of an article of faith on the political left — and not just the radical left, but regular Democrats — that living standards in the U.S. have stagnated since the days before Reagan, when unions were strong and finance was restrained. But no matter what measures I look at, I always find the reality to be much more complex.

Often, when people tell the story of America’s economic fall from grace, they’ll show you a graph of real average hourly compensation for production and nonsupervisory workers in the private sector. That looks like this:

Now that certainly does look like a fall from grace, doesn’t it! An absolute economic catastrophe for two decades straight.

But there are some problems with using this measure. First, it’s not clear whether the definition of a “production and nonsupervisory worker” changed during this time. If a bunch of higher-wage workers were reclassified as supervisory, it would make average wages for the ones who remained in the “production and nonsupervisory” category go way down. Also, this measure includes only money wages, not benefits like health care or pension contributions. When you look at real total hourly compensation, it looks like this:

Now we see a bit of a slowdown, but certainly no catastrophe; on the eve of the pandemic it was up by about half since the early 70s. Something weird is going on in that hourly earnings data.

Problem: The total compensation measure includes executives and managers, so it could be that they captured all the gains while regular workers got screwed. In fact, this is a problem that bedevils almost every measure of living standards — averages are a hell of a lot easier to measure than medians, so there’s always the possibility that the line you’re seeing is skewed by inequality. To find the living standards of a typical American or a typical American family, we have to use survey measures.

Fortunately, one of the things where we do have good survey data is income. I like to look at real median personal income, because this is how much a typical American makes. Unfortunately, this data only goes back to 1974:

Here we see some ups and downs, but the ups outweigh the downs, so income rises by about 50% between the late 70s and 2019 (the last year for which survey data is available; COVID is obviously going to change things).

If we want to compare to other periods, there’s something else we can use, called real median family income. This is different than the “median household income” you see quoted in the press a lot. I don’t like to use household income, because it depends pretty crucially on the number of people in the average household. Since median family income only includes households with two or more members, it’s much more stable with regards to these changes. In fact, over the time period since 1974, median family income and median household income have tracked each other extremely closely:

So we can probably use real median family income to get a slightly longer-term picture of the trend:

Now finally we have a picture that we can rely on to tell us a pretty clear story about how typical American living standards have done since the 50s. In the 50s and 60s — the golden era that everyone wants to return to — we had steady income growth. But after 1969 it sort of petered out into a decade-long stagnation. People remember the 70s as a bad economic time for good reason!

In the 80s we get a surge during the Reagan years, but then near the end of the decade there’s another decline that coincides almost exactly with the presidency of George H.W. Bush (poor H.W.!). After four years of that, growth picks up again under Clinton, only to flatten and stagnate entirely under Bush (it’s downright eerie how closely a lot of these trend breaks seem to match up with presidential administrations). Then in Obama’s first term income crashes because of the Great Recession, but then bounces back strongly in his second term and continues rising rapidly under Trump. 2019 was the best single year on record.

In general, real median income measures contradict the standard left narrative of the neoliberal age as an economic disaster for regular people. Income goes up and down, but it goes up more often than it goes down, and by the end of the 2010s the typical American is making about half again as much as in the early 70s.

One question we should ask is: How much of this is a function of Americans working more? Unfortunately, there’s no good data on how much people making median income work. But if we look at the average, we see that American workers actually work a lot fewer hours each year than they used to:

So this could mean that living standards are actually rising more than the income numbers measure! If this average trend also holds for people making median income, it means the typical American would be earning ~50% more than in the early 70s, while working about 13% fewer hours! That’s not a solid conclusion, but it’s encouraging. Working less while earning more is good (Please subscribe to my Substack for more brilliant insights like this one! Heh).

Of course, income itself is not a perfect measure of living standards. For one thing, it doesn’t count benefits like employer health care contributions (these are included in the real hourly compensation measure I showed earlier). These have gone up a lot, mostly because health care has gotten so expensive. If you think the rising cost of health care is just price gouging and cost bloat for the same quality service, then this doesn’t matter much to the discussion of living standards; it’s just waste. But if you think some of that spending has gone to actually better health care — and there is some evidence that that’s true — then typical living standards have increased by even more than the income numbers imply.

Also, income numbers don’t include taxes; if the government takes away $1 and then gives it back to you, your income does go up, but your standard of living doesn’t go up. Also, income measures only include government benefits that are paid in cash, not things like health care and housing and government services. People do calculate disposable (i.e. after-tax) income, and that’s kind of interesting, but it doesn’t include things like the government buying you health care; also, I can’t find a good median disposable income measure that goes up through 2019 and also measures at the personal or family level. So whether the typical American’s tax burden has gone up — and remember, that includes Social Security contributions, sales taxes, property taxes, and other stuff that affects the middle class — is not clear. Federal tax receipts per person have gone up in real terms by about 40% since 1990, but it’s highly variable from year to year, and much of that is probably paid by rich people. So we have to regard taxes as a bit of a black box here, as well as non-cash government benefits.

One other thing you can measure is consumption — or, more specifically, real personal consumption expenditures per capita. This is arguably a better measure of true living standards than income, since consumption is actual stuff you use, while income is just dollars. Here’s what that looks like:

Here we see a steady increase — consumption goes up by 140% since the 70s! Now, that’s an average rather than a median, so this could easily be skewed by high-income people buying a ton of stuff. But rich people consume less of their income, so maybe it’s not as skewed as other averages.

But one complaint about rising consumption is that it might not be sustainable. If the typical American’s income went up by 50% since the 70s and their consumption went up by 140%, or even 80% or whatever the number is for the median earner, that means savings rates have fallen. If people are spending down their nest eggs to buy stuff (and there’s evidence that they were doing this, for a long time), it’s just a momentary increase in living standards, not a durable one.

In any case, whether we look at compensation, income, or consumption, the general trend is that yes, the typical American is substantially better off — at least in material terms — than in the 1970s. The narrative of stagnant or falling living standards in the neoliberal age is false.

BUT. (You knew there was a “BUT”, right?) Another, more circumspect leftish narrative — that rising inequality drastically reduced the amount that the typical American was able to share in the economic growth of the neoliberal age — is definitely true.

For example, just look at how median family income has grown relative to GDP per capita:

The two grow in lockstep until 1975 or so, then they start diverging.

Of course, this doesn’t tell the whole picture, because again it leaves out non-cash employee compensation and non-cash government payments and services. Some of this gap is just rising health care costs. But a lot of it is just rising income inequality, which figures prominently in pretty much any economic measurement you look at.

In other words, average Americans ARE better off than they were at the start of the neoliberal age. Don’t let anyone tell you living standards have gone down. But by the same token, Americans aren’t as MUCH better off as they could be, given how much the country has grown economically. The people on the left who want to recapture the magic of the 50s and 60s, where rapid growth came without raising inequality, are thinking along the right lines. If we really could recapture the income trends of that era (but obviously without the social inequalities that went along with them), it would be a much better country.

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