Three Contemporary Economic Myths about Income and Material Well Being

By Horwitz, Steven | Journal of Private Enterprise, Fall 2008 | Go to article overview

Three Contemporary Economic Myths about Income and Material Well Being


Horwitz, Steven, Journal of Private Enterprise


Abstract

A major challenge facing economics educators is helping students critically assess the media coverage of economic issues. The media are often the purveyors of a variety of economic myths that simply do not stack up to the facts. Over the years, I have collected several of these myths and provided empirical data that calls them into question. In this essay, I provide data and economic analyses that undermine three of those myths: Living standards are declining, the rich are getting richer and the poor are getting poorer, and jobs are paying less than they used to.

JEL Codes: A22, D31, D63, E24

Keywords: Recent economic history, Income distribution, Labor markets, Standard of living

One of the problems we face teaching economics is combating a barrage of media reports that the world is always getting worse, when a closer look at the economic data frequently suggests just the opposite. Obviously, bad news and talk of impending doom sell more papers than the longer-run, more mundane, news that life continues to improve for the vast majority of Americans. What follows is a collection of three of the most frequently repeated economic myths of our time, followed by data and analysis that illustrate why those myths are, in fact, myths. Specifically, I offer responses to the following three contemporary economic myths: Living standards are declining, the rich are getting richer and the poor are getting poorer, and jobs are paying less than they used to.

The work below was originally developed as a web page almost ten years ago. What follows is a slight revision of that page, including some more recent data to support some of the arguments. Some of the data remain a bit old, but they are still effective. Both the original web page and this article can be very effective teaching tools in courses dealing with current economic issues.

Myth 1: The cost of living steadily rose throughout the 20th century, especially in the last few decades.

Why would people believe this on its face? Look around: the prices of most things are higher than they used to be. Of course some of this is inflation, but even if you discount the inflation, many things cost more real dollars than they used to. Does this mean the cost of living has risen? Not necessarily. Don't forget the earnings side. Don't we want to know some sort of comparison between wage levels and prices? Isn't that what really matters - how much our wages can buy us? If wages are way up, higher prices may not be a big deal.

The ultimate measure of the cost of consumption of goods is the labor time needed to purchase them. A pair of pants might cost $20, but if the average industrial wage is $2/hr, then those are more "expensive" than if the average industrial wage is $10/hr. Five times more expensive, we might add. When looked at this way, the real cost of living dropped significantly and consistendy over the course of the century, including the last few decades. Tables 1 and 2 provide the labor time cost of various consumer goods over the course of the 20th century and then in the 30 or so years prior to 2006. These calculations are all based on the average industrial wage in the year in question.

How does the process of progressive cheapening happen? New technologies and products spread from the rich to the masses. The rich pay the big up-front costs by purchasing products when they are very expensive. This enables firms to continue to do R&D, cut production costs, and bring down prices. Think of any technological gadget of the last 30 years. Note the way that current new technologies like LCDs and plasma TVs are going through the same process.

Also think about the variety of products available now in comparison to the past. Think of potato chips now vs., say, 30 years ago! Compare all the varieties available now vs. then. Or think about milk, or almost any good you can think of. None of this includes new products that didn't even exist however many years ago. …

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