Myths
of Rich and Poor: Why WeÂ’re Better Off Than We Think
By W. Michael Cox and Richard Alm
Amazon.Com Price: $17.50
EveryoneÂ’s heard the glum rhetoric:
the U.S.
economy is no longer as competitive as it used to be.
Young adults today will never achieve the standard of
living their parents enjoyed. Large numbers of people are doomed to work
at low-paying McJobs flipping hamburgers.
Economist W. Michael Cox and journalist
Richard
Alm have a reply to such notions: hogwash! Their book, Myths of Rich
and Poor, presents a detailed look at economic trends over the past
25 years that demonstrates Americans are living better than ever.
How can this possibly be when
everybody knows that wages have been stagnant since the 1970s and the
government reports that more than 13 percent of Americans continue to
live in poverty? Alm and Cox argue persuasively that the mediaÂ’s obsession
on what Americans earn is misplaced; instead they argue the real
focus should be no what Americans consume.
Consumption figures clearly show
an America with increasing prosperity. In the third quarter of 1997, for
example, a record 66 percent of American families owned their own homes.
Forty-one percent of poor families owned their own homes. Per capita
ownership of everything from large appliances to books is on the rise,
in large part because the amount of time people must spend working to
buy goods and services keeps declining.
The discrepancy between wages, which
are down, and consumption, which is up, is caused by the ways in which
wages are measured. First, government measures miss a lot of the money
people earn from benefits, income transfer payments and other sources.
Alm and Cox note that while wages are down, per capita personal income
has risen 1.6 percent annually since 1974.
Second, the governmentsÂ’ official
measure of inflation, the Consumer Price Index, overestimates the extent
of inflation by as much as 1 percent. Once adjusted for this effect, the
decline in wages actually disappears and results in a real wage increase
of 12 percent since 1978.
Alm and Cox also dispense with the
horror stories of growing income inequality. Citing a long-running study
of 50,000 Americans by researchers at the University of Michigan, Alm
and Cox note that few people stay in the bottom-fifth of income levels
for long. Of the people in the University of Michigan study who were in
the bottom fifth of income earners in 1975, only 5 percent were still
there in 1991. As Alm and Cox put it, “Â…[the] data suggest that low
income is largely a transition experience for those willing to work, a
place Americans may visit but rarely stay.” Many of those in the
bottom fifth are young people beginning their career or older Americans
who may have large asset holdings but relatively low income.
The real message of Myths of Rich
and Poor, however, is the role that the free market plays in promoting
technological change and invention that improve the living standards of
all Americans. In a chapter appropriately titled “New and Improved,”
they note consumers today can buy many products that didnÂ’t even exist
in the early 1970s, and the 1990s versions of 1970s products are usually
much cheaper and of much higher quality. TodayÂ’s 19-inch color television
is not only much cheaper but also of vastly superior quality than one
consumers could buy in the early 1970s. Bulky calculators that cost $120
in 1972 have been replaced by wafer thin models costing $10 and less.
The improvement in performance and price of computers since 1970 has been
one of the most extraordinary economic events of this century.
Alm and Cox characterize this constant
innovation and improvement as “churn.” But economic churn has
its downside and its detractors – for every improvement in process or
products, some special interest group pleads to be protected from superior
products. Detroit whined about Japanese cars in the 1980s. U.S. high-tech
industry complained about cheap memory chips from Asia. Today big steel
companies complain they are undercut by smaller domestic firms and large
foreign companies. And the cry is always the same – pass protectionist
legislation to save American jobs and firms.
Alm and Cox remind us that adopting
such regulatory regimens would have meant stifling past innovations that
we now take for granted, and adopting them today would mean stifling future
innovations that today we can only begin to imagine. The constant churning
of the economy has created levels of wealth unimaginable at the beginning
of this century – today most of those in the bottom fifth of wage earners
enjoy higher consumption levels than did their middle class counterparts
only a couple generations ago.
This point is made clear in Alm and
CoxÂ’s comparison of European economic performance with that of the United
States. Critics of the United States point to wages which are higher in
some European countries such as Germany than in the United States. But
as Alm and Cox point out, consumption figures show U.S. consumers consume
significantly more than their European counterparts – the United States
continues to lead the world in per capita ownership of everything from
dishwashers to televisions to VCRs to personal computers. How can Americans
earn less but consume more? The answer is that the wage figures arenÂ’t
very helpful since they donÂ’t take into account the cost of living. After
adjusting for this, it turns out the United States leads the world in
per capita income by a wide margin — $28,338 compared to JapanÂ’s $23,667
and GermanyÂ’s $21,594 per capita personal income.
But the picture is even worse for
Europe since job creation has stagnated there since 1980. From 1980-1996,
for example, the United States added more than 27 million jobs. In the
same period, Germany, France, Italy and the United Kingdom managed to
add only 3.4 million jobs (and almost half of those were in the United
Kingdom which privatized many of its governmental functions during the
1980s). The massive regulatory apparatus in places like France and Italy
not only lower European standards of living but also hinder job creation
primarily by hindering innovation.
Myths of Rich and Poor covers
an impressive array of issues, most of which canÂ’t be touched on in this
review, and is required reading for anyone trying to understand the economic
trends of the last 25 years.