Living Standards in 2012

Matt Yglesias is skeptical that living standards have stagnated, in spite of the fact that median income levels are actually lower now than they were in 1989:

MedianHouseholdIncome

Consider that since 1989 houses have gotten bigger. We own more cars than we did in 1989, and the cars are better (safer, more fuel-efficient, etc.). Obviously our entertainment options have improved in terms of better televisions, MP3 players, on-demand video, messing around on the Internet. The murder rate is lower, elementary and high school students are doing better, and we are earning bachelor’s degrees at a slightly higher rate. There seems to have been a small increase in the share of the population that lacks health insurance since 1989. On the other hand, there are treatments for illness available in 2012 that weren’t around in 1989. And thanks to Obamacare, the uninsurance rate is falling and should continue falling for the next several years. The food (whether judging by what’s in supermarkets, by what’s in restaurants, or the spread of things like farmers markets) is better in 2012 than in 1989.

So where’s the offsetting decline? I suppose it is possible that the quantity and quality of apparel and furniture owned by the average American family has declined so rapidly as to offset the improvements in housing, transportation, and entertainment. But it doesn’t seem to me that you hear people waxing nostalgic about the great refrigerators they used to be able to afford in 1983 and how much better they are than the crap they have to settle for today.

So Matt Yglesias is wondering where the decline in living standards is, if median wages have stagnated in spite of the fact that we seem to have more stuff, better stuff, and other societal indicators seem to be improving. I have a couple theories:

First–educational indicators and crime rates really have nothing to do with median income, so though its fantastic that those are improving, it’s sort of a non-sequitur in a discussion about stagnating income.

Second, there is a reasonable explanation for how Americans are able to afford bigger houses and more cars without higher incomes–the graph below is YOY % change in personal consumer expenditures per capita vs YOY % change in CPI:

FRED Graph

Basically, American spending has risen at a much faster rate than inflation over the past 25 years. This has primarily been driven by significant increases in housing expenditures. How is this possible if incomes have stagnated?

From FRED:

Graph of Personal Saving Rate

American saving-rates have dropped significantly over the past 25 years–correspondingly, debt levels have skyrocketed–see the NYFed Quarterly Report on consumer debt.

This is pretty straightforward to me–median income levels have stagnated over the past 25 years, but Americans have continued to increase their living standards by sacrificing their savings and loading up on consumer debt. I wonder why we’ve had two massive asset bubbles in the last 25 years…

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