Great old Krugman article

Dan Kohn (
Wed, 3 Sep 1997 19:34:17 -0700

[* I missed this in December because I was on vacation, but it's one of
Krugman's best articles. Thanks to Xander for the catch. Krugman
starts by looking at overstated inflation data, and goes on a riff that
appears to end with a call for radical communism. You gotta love
articles with lines like "In a land where anyone can become president,
anyone who doesn't become president is a failure." - dan *]

The CPI and the Rat Race=20
New evidence on the old question of whether money buys happiness.=20

By Paul Krugman=20
(1,422 words; posted Saturday, Dec. 21; to be composted Saturday, Jan.

=A0=A0=A0=A0=A0=A0 Let's talk about inflation indexing and the meaning =
of life.=20

=A0=A0=A0=A0=A0=A0 Early this month a panel of economists, led by =
Stanford's Michael
Boskin, made semiofficial what most experts have been saying for some
time: The Consumer Price Index overstates inflation. Nobody really =
by how much, but Boskin and company made a guesstimate of 1.1 percent
annually. Compounded over decades, this is a huge error.=20

=A0=A0=A0=A0=A0=A0 This conclusion is controversial. Some people are =
upset because
any reduction of inflation estimates will reduce Social Security
benefits, which are indexed to the CPI. Others are upset because a
revision of recent price history would mean abandoning a worldview on
which they have staked their reputations. Quite a few people have
committed themselves to the story line that productivity is up but real
wages are down. If inflation has been lower than was previously =
that means the real value of wages may have gone up after all. And some
economists with no particular ax to grind simply have doubts about the

Boskin may be right or wrong, but one argument by his critics is =
wrong. They say: Suppose it's true that inflation has been less than =
official increase in the CPI over the past few decades. If you assume a
lower inflation rate and recalculate real incomes back to--say,
1950--you reach what seems to be a crazy conclusion: that in the early
1950s, the era of postwar affluence, most Americans were living below
what we now regard as the poverty line. Some critics of the Boskin
report regard this as a decisive blow to its credibility.=20

=A0=A0=A0=A0=A0=A0 The idea that most Americans were poor in 1950 is =
indeed absurd,
but not because of Boskin's numbers. After all, even if you use an
unadjusted CPI, the standard of living of the median family (50th
percentile) in 1950 America appears startlingly low by current
standards. In that year, median-family income in 1994 dollars was only
about $18,000. That's about the 20th percentile today. Families at the
20th percentile--that is, poorer than 80 percent of the population--may
not be legally poor (only about 12 percent of families are officially
below the poverty line), but they are likely to regard themselves as
very disadvantaged and unsuccessful. So even using the old numbers, =
families in 1950 had a material standard of living no better than that
of today's poor or near-poor.=20

We can confirm this with more direct measures of the way people lived.
In 1950 some 35 percent of dwellings lacked full indoor plumbing. Many
families still did not have telephones or cars. And of course very few
people had televisions. A modern American family at the 12th percentile
(that is, right at the poverty line) surely has a flushing toilet, a
working shower, and a telephone with direct-dial long-distance service;
probably has a color television; and may well even have a car. Take =
account improvements in the quality of many other products, and it does
not seem at all absurd to say that the material standard of living of
that poverty-level family in 1996 is as good as or better than that of
the median family in 1950.=20

=A0=A0=A0=A0=A0=A0 What do we mean by this? We mean that if you could =
choose between
the two material standards of living, other things being the same, you
might well prefer the 12th percentile standard of 1996 to the 50th
percentile standard of 1950. But does that mean that most people were
poor in 1950? No--because man does not live by bread, cars, =
or even plumbing alone.=20

Imagine that a mad scientist went back to 1950 and offered to transport
the median family to the wondrous world of the 1990s, and to place them
at, say, the 25th percentile level. The 25th percentile of 1996 is a
clear material improvement over the median of 1950. Would they accept
his offer? Almost surely not--because in 1950 they were middle class,
while in 1996 they would be poor, even if they lived better in material
terms. People don't just care about their absolute material level--they
care about their level compared with others'.=20

=A0=A0=A0=A0=A0=A0 I know quite a few academics who have nice houses, =
two cars, and
enviable working conditions, yet are disappointed and bitter
men--because they have never received an offer from Harvard and will
probably not get a Nobel Prize. They live very well in material terms,
but they judge themselves relative to their reference group, and so =
feel deprived. And on the other hand, it is an open secret that the
chief payoff from being really rich is, as Tom Wolfe once put it, the
pleasure of "seeing 'em jump." Privilege is not merely a means to other
ends, it is an end in itself.=20

My fellow SLATE columnist Robert Wright would undoubtedly emphasize =
our concern over status exists for good evolutionary reasons. In the
ancestral environment a man would be likely to have more offspring if =
got his pick of the most fertile-seeming women. That, in turn, would
depend on his status, not his absolute standard of living. So males =
a predisposition to status-seeking left more offspring than those
without, and the end result is Bill G-g-g---I mean, Ronald Perelman.=20

=A0=A0=A0=A0=A0=A0 Is my license as a practicing economist about to be =
Aren't we supposed to believe in Economic Man? And doesn't admitting
that people care about fuzzy things like status undermine the whole
economic method? Not really: Homo economicus is not a central pillar of
my faith--he is merely a working assumption, albeit one that is
extremely useful in many circumstances.=20

=A0=A0=A0=A0=A0=A0 But admitting that people's happiness depends on =
their relative
economic level as well as their absolute economic resources has some
subversive implications. For example: Many conservatives have seized on
the Boskin report as a club with which to beat all those liberals who
have been whining about declining incomes and increasing poverty in
America. It was all, they insist, a statistical hoax. But you could =
well make the opposite argument. America in the 1950s was a =
society in a way that America in the 1990s is not. That is, it had a
much flatter income distribution, so that people had much more sense of
sharing a common national lifestyle. And people in that relatively =
America felt good about their lives, even though by modern standards,
they were poor--poorer, if Boskin is correct, than we previously
thought. Doesn't this mean, then, that having a more or less equal
distribution of income makes for a happier society, even if it does not
raise anyone's material standard of living? That is, you can use the
fact that people did not feel poor in the 1950s as an argument for a
more radical egalitarianism than even most leftists would be willing to

You could even argue that American society in the 1990s is an engine
that maximizes consumption yet minimizes satisfaction. In a society =
a very flat distribution of income and status, nobody feels left out. =
a society with rigid ranks, people do not expect to rise above their
station and therefore do not feel that they have failed if they do not
rise. (Aristocrats are not part of the peasants' reference group.)
Modern America, however, is a hugely unequal society in which anyone =
achieve awesome success, but not many actually do. The result is that
many--perhaps even most--people feel that they have failed to make the
cut, no matter how comfortable their lives. (In a land where anyone can
become president, anyone who doesn't become president is a failure.) My
European friends always marvel at how hard Americans work, even those
who already have plenty of money. Why don't we take more time to enjoy
what we have? The answer, of course, is that we work so hard because we
are determined to get ahead--an effort that (for Americans as a =
is doomed to failure, because competition for status is a zero-sum =
We can't all "get ahead." No matter how fast we all run, someone must =

=A0=A0=A0=A0=A0=A0 If one follows this line of thought one might well =
be led to some
extremely radical ideas about economic policy, ideas that are =
at odds with all current orthodoxies. But I won't try to come to grips
with such ideas in this column. Frankly, I don't have the time. I have
to get back to my research--otherwise, somebody else might get that