IGM Panel: Real Income Growth is Understated
June 15, 2015
The IGM Forum, a University of Chicago project that surveys academic economists on issues, last month found that economists broadly agree that real median income numbers understate real growth in standards of living.
In short, it’s difficult to measure how production in an economy changes over time. As technology makes new products available, the output of the country changes not just in amount (say, more bushels of grain produced) but in composition (say, more automobiles produced and fewer horse shoes.) The latter kind of effect is hard to measure in any sort of appropriate way.
The thought experiment that inflation adjustments are supposed to measure is one of “how many dollars would make you happier to live in 1980 than today?” This is why you see economists in the IGM talk about the understated benefits of the internet and computing and so forth, in order to make their case.
If your reaction to this debate is that the whole thought experiment seems impossible to answer in a useful way, then you should eschew real income as a system of measurement entirely, and pursue something that better fits the question you’d like to answer.
However, if you think the thought experiment has some value, then it is worth knowing that most economists believe that current measures are biased towards understating growth.