He asks how willing you would be to take your income today back to 1973 and buy the goods and services available back then at those 1973 prices, or whether you would prefer to stay in the present.
That is, suppose you were offered a time machine in which you could take your current income and use it to choose from a 1973 market basket. Would you get into that time machine?
The official statistics used to calculate inflation and “today’s real income in 1973 dollars” would say that it’s obvious you should get into the time machine. You’ll be so much richer, buying a new car for less than $5000 and buying gas for less than 60 cents a gallon.
But a lot of people would think twice about getting into that time machine. No Internet, that 1973 car won’t be roadworthy very long, when you go Israeli dancing you’ll be stuck doing the boring oldies (for some reason, Russ doesn’t mention that last example), etc.
The bottom line is that the official statistics probably vastly over-estimate the satisfaction you would get out of getting into that time machine. Russ argues that this means that the official statistics under-estimate the gains in satisfaction that have taken place from 1973 to today.
Another way to run the thought experiment might be to take 1973 income and apply it to today’s goods and services. Suppose that you are in the 65th percentile in the income distribution today. Go back and find the 65th percentile in 1973, in 1973 dollars. Now, give yourself that amount, which might be $25,000 (I am totally making that up). Would you rather have that income today, or would you jump into the time machine to take it back to 1973?
Suppose that with an income of $25,000 you would jump into the time machine, because today’s rents and cost of other basics make that $25,000 look puny. You’ll do without the Internet, the more durable car, and the more exciting dances, thank you very much.
Now ask, how much more than that $25,000 would you need in order to talk you out of getting into the time machine? Suppose you would be content with $50,000. In that case, your subjective cost of living has gone up 100 percent, because you asked for an additional $25,000. But the official statistics seem to say that the cost of living has gone up 500 percent, implying that you would require $125,000 to talk you out of jumping into the time machine. That is a big difference. The official statistics are probably heavily biased to overstate the rise in the cost of living (which means that they understate the improvement in living standards) by a substantial amount.
I know what you’re thinking: these thought experiments are ridiculous. We can’t really use them to measure living standards. But the official statistics, and the claims people make about stagnation or growth based on those statistics, amount to thought experiments.
Thought experiments are all we have. It’s just that some of them are blessed with “official” status. And they are probably way off.
Tyler Cowan linked to a post a few weeks ago that showed that men age 25-34 (or thereabouts) have a median income of ~$40k today but that same bracket made ~$44k in 1980.
So that’s saying that millennial men would pay you to go back to 1980 and be at the same spot in the income distribution. Anyone who has met a millennial man knows that’s preposterous. No smartphones, internet, Xbox, marvel movies, etc. And I’m guessing the median millennial man has health care coverage provided on top of their official salary, so health care wouldn’t really be getting cheaper for them, though it would be getting substantially worse. And even housing isn’t really much cheaper nationally after accounting for the cost of credit. (College would be much cheaper though.)
Honestly, if you offered to triple their salary in exchange for going back to 1980, I’d be surprised if you got many takers. Given that the nominal salary in 1980 is roughly 1/3 of today’s, that would mean that Russ’s thought experiment of keeping your current salary at 1980 prices isn’t too far off.
>—“The bottom line is that the official statistics probably vastly over-estimate the satisfaction you would get out of getting into that time machine.”
This is probably true but is still misleading. Few if any people spend a moment worrying that they don’t enjoy today the advances in living standards that will be common in the future. But, due to loss aversion, a trip to the past would result in a lot of dissatisfaction.
Humans care a lot more about relative status, and the direction of its change, than they care about absolute living standards. Two things tend to make people more dissatisfied today. First, they are constantly bombarded with images of other people living much higher status lives in a way that they weren’t in 1973. Second, they are more insecure about even being able to hold on to their current status due to rapid technological and social change.
This effect has a lot more to do with psychology than economics.
The point about status just illustrated the thought-experiment nature of the exercise of trying to compare real prices and purchasing power across long period of time with lots of important innovations and technological change.
“How much status would that buy me?” / “How would that boost my sexual market value / what kind of girlfriend or wife could I attract with that kind of scratch?” is both (1) Incredibly important to people indeed, perhaps the root meta-want behind all the other consumption preferences, and (2) not in the CPI index (ha!, can you imagine!?)
On the other hand, if it’s a fool’s errand to try to draw these comparisons, then the whole rhetorical effort to justify the critical, central importance of economic growth is fraught with the problem of trying to prove what actually makes people better or worse off. If you are insisting that people are better off, you are preferencing a particular but also arbitrary thought experiment, and why that one?
I guess it is about different value systems. Social value is certainly important but I think the Roberts/Kling thought-experiments with technological value is important too and perhaps underemphasized.
I found the 1973 Honda Civic comparison interesting because I believe that sometime in the late 80’s early 90’s was the last time we saw large leaps in automotive innovation (rust resistance, reliability, quality, and power/efficiency). A 1993 Honda Civic for around $10K might be a very good modern bang-for-the-buck option. That my be a very subjective and non-expert opinion but I don’t think its too far off the mark. If Tyler Cowen thought about cars as much as he thinks about kitchen appliances he could use Honda Civic data as an example of stagnation.
Silicon integrated circuits and Moore’s Law have a very different set of tradeoffs/characteristics/timelines as does near zero-marginal-cost web/mobile/cloud software and services. Understanding these general technological categories is not without merit.
1) Housing, education, and healthcare are more expensive. You know that is what people gripe about, not smartphones.
2) What’s the point of comparing 2019 technology with 1965 technology. You know what people want is 2019 technology combined with 1965 economics and culture. Can’t I have smartphones AND be able to afford a house in a good school district? Obviously, there exists a counterfactual world where that’s true if we made different (non-libertarian) decisions.
3) This feels a lot like libertarians seeing data the contradicts their ideology, then claiming the data must be wrong. It’s like the Soviets fudging statistics to match the goals of the five year plan.
You know what people want. They want a house in a safe neighborhood and good school district, the ability to send their kids to college if they have the talent without crippling debt, and the ability to afford mid-range healthcare if they need it. The decisions we made since 1965 failed to deliver those things. What they delivered (cheap flat screens) is deemed not as important by most people. Learn from your failures, don’t cover them up.
People gripe about their most immediate pain points. Canadians gripe about smartphone plans. Europeans riot over fuel prices. Your American gripes are very real but I’m not sure that libertarian idealism is the underlying cause nor am I convinced that 1960’s American culture/economy was a high-bar. The question is, given the current context of each gripe, how to improve things.
I want to not die, and nobody has delivered that yet.
The attempt may be why it’s impossible to get cheap “health insurance”.
The decisions we made since 1965 failed to deliver those things.
Is this really true? Or are getting way too nostalgic for the Post-WW2 boom that burnt out in 1974?
1) Maybe the 1948 – 1973 economy is the historical outlier in which there was very even share of the growth benefited 90% of the population. There was pent-up technology not sold during Depression & WW2, low labor supply and strong optimism from defeating the Nazis. Did you know the Obama and Eisenhower years had about same percentage of jobs were created? (And Obama had 2009 – 2010 years in there although there a job drop in early Eisenhower due to stopping Korean War.)
2) Long term we don’t know what happens. Living in Socal, our streets are ridiculously more safer than they were in 1992 and all reality a lot of cities have seen a huge drop in crime. And the weirdest part is nobody in 1992 predicted this trend. Or another one, did you single motherhood has dropped from 45% to 38% since 2008?
That is an interesting and important perspective. Another perspective that fits with this timeline is the changing participation of women in the economy and a large shift in child rearing decisions. I think the period between 1973 and say 1994 was when reliable birth control reached the majority of people in first world nations and women’s work lives became as economically important to a nation as that of men.
Well I would say:
1) We exaggerate how well people lived in the post-WW2 boom. More families lived like the Kradems with kids than the Father Knows Best reality.
2) There was no break in reality of women working and by 1970 half the wives were working outside the home. Probably the big difference wasn’t working but that women could achieve the same positions as men like doctors, lawyers and CEOs, etc. Anyway, I still say the great Reagan Revolution reality was working wages generally stagnated but family incomes would increase with higher women working.
3) We also forget (according to Lyman Stone) that the highest net fertility (babies born – babies/children dieing) was the 1950s! So in 1800 the world needed 6 babies per female because 3 children passed away by 5 years old.
So the longer I live the more I understand the late 1960s and 1970s was a giant experiment in job growth in modern times.
Would you really prefer 1970 surgery at 1970 prices to 2019 surgery at 2019 prices?
And of course people gripe about the things that got more expensive rather than the things that got cheaper or didn’t exist but now take for granted. I mean, speaking of education, access to information and knowledge has gotten enormously cheaper. The market value of having access to google Wikipedia is definitely not accurately accounted for in the CPI, that’s not a libertarian fabrication.
Lastly, it’s pretty ridiculous to see education and housing as libertarian policy failures both because their price increases are largely a product of illiberal policies, but also because there are hard limits on what any policies could do to improve quality or quantity. Land is a finite resource and the value of education is mostly signaling. So Baumol effects are inevitable in those goods. Whatever populist policies you have in mind as alternatives won’t change that.
Ed Glaeser: “In 1983, the 75th percentile 25- to 34-year-old had $45,000 in home value. Thirty years later, that same group had only $21,000 of net housing wealth. Among 65- to 74-year-olds, by contrast, the 75th percentile household’s net housing wealth rose from $150,000 to $225,000 over that period—and the 95th percentile’s climbed from $427,000 to $700,000. Housing is the main store of wealth for most Americans, and regulations have clearly helped redistribute wealth from young home-buyers to old home-sellers.”
I think it’s fair to put the emphasis on illiberal policies and not the finitude of land.
Interesting. The 1983 cohort was born between 1949 and 1958. I wonder how much of this difference is attributable to lifecycle changes (e.g. age of first employment, marriage, first child) and the unique post-war era conditions that others have described in the comments. A comparative analysis with other major economies might be enlightening as well.
Of course these statistics are tough to deal with as the biggest increase since 1973 has been healthcare and education.
And thinking about my family situation, I have two seniors graduating this year:
1) One is definitively college bound and might have been better off in 1973 and learning computers.
2) The other had two brain tumors and with 1973 medicine he might not have made to 23.
The growing number of USA retirees fleeing to Central America (see, for example: https://www.marketwatch.com/story/i-could-live-on-my-social-security-and-still-save-money-this-66-year-old-left-the-us-for-calming-costa-rica-where-he-now-plans-to-live-indefinitely-2019-09-20 ) suggest that although the either/or scenario presented in the Roberts’ video may be a useful thought experiment, a market basket does not capture the relative differences in the importance of various material elements to living standards and therefore, an individual’s subjective weighting might lead many individuals to consider that they were in fact better off in the 1970s even without tech entertainment improvements.
Some examples of how refugees from the US may be closer to choosing to go back in time than you might think.
Health. Although the same procedures available in the US are available everywhere else, they are probably delivered without a lot of expensive frills and by more competent practitioners elsewhere. In some countries, free/near-free health care is available even to non-resident US citizens who register with the local health authority. The hospitals do not have the tens of millions of dollars on art spent by US facilities, rooms are furnished sparingly, visitation is strictly limited and visitors are required to scrub up and wear protective masks. Appointments are scheduled in blocks and long waits are common at clinics. There are no glass revolving doors and many facilities are open air with no heating or air conditioning. Nobody is going to survey you on your experience. You may get a Cuban doctor in Nicaragua but one who is at least as competent as the nurse practitioner or PA you would likely get in the states at a typical practice. And you will have none of the stress and anxiety about the size of the copay that you are going to be charged. No worrying about an out-of-network provider being brought in while you are on the table, etc, etc. Many medicines are available at full cost for less than their copay cost under US health plans. Not a complete switch to 1973 by any stretch of the imagination, yet still a switch many people gladly make, even those with Medicare coverage, that suggests the present market basket value of US health care may be significantly over-valued.
Housing. Very similar to health. Average housing in Central America is not likely to include heating or air conditioning or a hot water heater. The only hot water in the place is likely to be from an electrical shower head heating unit. Gas for your stove is delivered in tanks about twice the size of the propane tank you would use on your gas grill and are attached similarly. Typical residences are very low-cost relative to US prices and the standard building material is likely to be structural terra cotta that went out of use in the USA in the 1950s. Forget about closets, you will need to buy a wardrobe. Homes are much smaller than in the US. But for 3 to 4 hundred per month at most for an average single family residence outside downtown areas, this switch to the equivalent of an earlier era is not at all a hard one to understand why many would make.
And food. Meat and vegetables from local butcher shops and green grocers are probably not much different in price from the 1970s in the US and you will get them hand-trimmed while you wait. Cheese even cheaper and higher quality. At your local bakery you can get fresh bread, cake and pastries for less than a fifth of the US price. You can eat well for a day on what a dozen eggs cost at a farmers market in the US. Although in the cities some US citizens in Central America do choose to shop in supermarkets similar to those in the US, they at least have the choice: the regulatory state has not largely eliminated those low cost options.
All this to suggest that Roberts is absolutely right, metrics do miss a lot. But maybe in both directions. And that even more abstract measures like purchasing power parity are even more suspect.
I don’t find your argument convincing because I don’t think the choice is as obvious as you’ve implied.
I can’t say if I would be happier living today or fifty years ago, especially if my memory was wiped and I didn’t know what I was giving up.
If your trade includes the psychological anchoring/loss then you would also have to include the relative status boost you would receive by bringing 2019 dollars to 1973. I think a lot of people would rather be a millionaire of the past than a middle-class renter today.
And some people, such as the Amish, would probably be happier in the past no matter how you structured the trade.
Actually I realize I just misunderstood(?) the question and the thought experiment is about doing your shopping with 1973 goods, not living there.
I’m not sure you can really disentangle the issue like that though, because being the sole person without access to modern technology is a cost that isn’t relevant to the question.
I see there being two basic consumption baskets (this is an oversimplication of course): a “basic needs” basket (food, energy, clothing, etc) and a “aspirational” basket (healthcare, education, nice real estate). I think most people would take todays “basic needs” but the 1970s “aspirational” basket.
The problem i see is a clash of narratives. Economics focuses on “basic needs” since that still dominates inflation statistics. But the American narrative very much promises an “aspirational” lifestyle. There is a fundamental mismatch in what we promise vs what we deliver.
The ultimate outcome we need to solve for is life satisfaction and I cannot say I feel like that’s gotten better; probably worse.
I agree that the CPI will understate the drop in the cost of new goods and quality improvements. But I suspect the impact is much smaller that is argued.
The big change in computers, for example is not when the item is first brought to market. At that point only “early adopters” are buying computers so if it were included in the CPI its weight would be extremely small. By the time many people were buying computers the BLS would start to incorporatimg it in the CPI and give it a still small weight. As the use of personal computers became widespread the CPI would include it and the drop in computer prices would be reflected in the CPI. So only the first early years of large price declines would be missed.
The bigger impact may be quality improvement in autos. From 1980 to 2018 the actual average transaction price for new cars increased 114% while the quality adjusted CPI for new cars only rose 33%. But new cars only have a weight of 3.7% in the CPI. So the impact of this difference would not be very large.
Maybe to get meaningful comparisons maybe you should look at autos share of medium family income.
From 1975 to 1996 the average transaction price rose from 33% to 46% of meduim family income. Since the 1996 peak this measure has fallen back to 33%.
I’d rather live in the present, but it’s VERY important to note some of what seems to be getting lost.
Stirner about Central America Health Care Services:
they are probably delivered without a lot of expensive frills and by more competent practitioners elsewhere. In some countries, free/near-free health care is available even to non-resident US citizens who register with the local health authority.
I was very satisfied with my Slovak “very good” doctors at the second hospital I got into (thanks to wife being a doctor, connections), much less so at the first hospital. Very low prices; national health insurance required, few insurers.
Normal people want something like that. The US mixed health system has been failing on health care, and the Reps have failed to produce a plan that improves a lot on Obamacare which Reps are willing to push in election programs. Not in 2016 (repeal Obamacare is not much of a plan); not in 2018.
On education, and most things about their children, they want more.
They want a “better than average” school.
Sort of like everybody in Lake Woebegone is “better than average”. Every loving parent wants “equal treatment” for kids, but wants their kids to be treated “more equally” than others.
Ghandi’s wife was NOT happy that Ghandi did NOT treat his wife nor kids much better (any better?) than he treated everybody else.
Some good news — the world is much much richer, and most poor folks are much better off in terms of food, clothing & housing, and even medical care, than ever before in history. Now down to less than 15% living in “absolute poverty”. More folks are more comfy, less in need.
However, outside of really low absolute material levels, relative status becomes more important than absolute material stuff. Creating material stuff is NOT zero sum.
While everybody in the world can, in theory, live in a 2 bedroom flat or house, or better, if everybody did than those in the smallest would likely still complain.
Handle’s point on Sexual Market Value is hugely underdiscussed.
In any local community of 100-1000 people who interact with you each weak, you have a certain level of status. Status is ZERO sum — the more one person has, the less for others. Thee is some ranking from first to last, and to get a better ranking towards #1, best, means others have to go down. [See Dems for President 2020; or Reps for President 2016]
Status changes are NOT captured in any GDP or other econ stats. Insofar as status motivates behavior, and thus economic decisions, the failure to include status considerations in economic measures makes any such status-less measures less useful, if not fairly useless.
I think part of the reason for that is a kind of experiential-apartheid on certain matters, especially as regards some incredibly dramatic changes in the sexual marketplace. The difference is just as stark across generations as it is between contemporary classes in Charles Murray’s Belmont and Fishtown, and most people above, say, 55, even smart and informed ones, simply can’t believe how much things has changed.
Most of the older men I know have been quite stably comfortable financially and romantically for most of their lives, and most everybody they know in their social reference group has been in the same boat. They got (and generally stayed) married, had kids, raised their families, have grandchildren, etc. They tend to think it’s all still normal and more or less as easy as it was for them. But it’s not even close.
To translate into internet-language, this is the “Old Economy Steven” meme writ large.
So, framing the thought-experiment of time-travel in terms of consumption goods is a egregiously truncated way to do it, because the utility of wealth isn’t just for stuff you can buy on Amazon.
What if you get to choose between purchasing power and technological stagnation since 1973 or today’s 2019, but in the stagnation version you get grandchildren, and in the actual 2019 version you don’t? You might as well ask whether you’d like to go live in primitive 1973, or jump to the wonders of awesome 2019 with a comparable income, but paralyzed below the waist.
Your last three sentences can’t possibly be stressed enough.
Thought experiments, and imperfect measures of stuff for comparison.
Yet still important, very important.
See a comparison of Chile & Venezuela
https://humanprogress.org/article.php?p=1923&fbclid=IwAR1buvxjEBQr9LDLverG1gYw9ZP-GJniWYFcr_feZiSjG4XFq5pUCigCL80
We don’t know how to “accurately” describe the truth about the differences, tho it’s clear that there are differences. Nor do we know how to weight such differences. But in order to evaluate effects of alternate policies, we need a reasonably agreed to common language about what the “truth” is, for some point in time (if not any).
official statistics used to calculate inflation and “today’s real income in 1973 dollars”
Comparing different times is more problematic than comparing different countries over the same time period.
It would be fine if economists could agree on better statistics – like total employment rate (63.6%?) rather than the much more hazy unemployment rate (3.7%?, excluding those who stopped looking). GDP & GNP remain at the top for measuring economies.
The only way you could convince me to go back to 1973 with any added income (not even a billion dollars would do it) would be to send me back as an 18 year old (I am 53).
I still think 1973 is the wrong point in time, and most libertarians who argue around that are attacking an argument that the other side is not making.
I think a much stronger point is around 1994/1995, when a lot of the “free trade” side really started getting into gear (NAFTA, etc). At that point, you are still giving up cellphones, smartphones, the internet etc. But I think a lot more people would be okay going back to 1994.
Actually 1973/1974 is the really the best time as that was the last year of the Post -WW2 working class boom before the Inflationary Recession hit in 1974 with the first oil embargo in 1974. (Note I believe 1973-1982 much like 2007-2015 to be Recessionary times.)
After 1974 the model of union manufacturing really started collapsing and we started having our first trade political battle with Japan Inc.
(Most real wages of non-managerial works show a high point of 1974 and a slow drop through 1993/1994 with modest increases since then.)
You’re probably right that 1973 is an inflection point. But I think that, even if 1973-1995 was worse than 1946-1972, it was still “good enough”, and basic standards made large, obvious strides.
For example, take cars and houses. A 1994 car is significantly better than a 1973 car, on pretty much every axis. 1994 houses, supermarkets, appliances, healthcare, same thing. But since then, the question is a lot more murky, and progress seems more like “extra bells and whistles” for everything that not Internet-related.
The 1973 / 74 time frame was the end of post WW II “easy progress” with the first big Middle East oil embargo/ gas price increases.
Erlich’s The Population Bomb from 1968 seemed to be possibly to start coming true, along with the Club of Rome’s dire alarmist predictions.
Currently, the Climate Alarmist religion, and its believers, are the biggest threat to world materialist prosperity. There big influence started in ’73 … along with ending the draft & the Vietnam war so needing a new reason to protest.
This comment thread is full of thoughtful insights. I’d argue that the “Catastrophists” (Silent Sprint 1962, The Population Bomb 1968, An Inconvenient Truth 2006) are part of the Activist movement that makes up Kling’s Progressive axis/language. Perhaps social justice activism goes hand-in-hand with the post-war boomer experience and Kling’s TLP model begins to decline in explanatory power starting with Gen-Xers.
Wait, you mean I can buy plastic straws, women without HIV, sunscreen that works, free disposal plastic grocery store bags, fly (service) without two hours in a security like only to get molested by a government agent pre-boarding, devices that don’t spy on me, etc. Actually everything I care about now I could still get in 1973 but both higher or equal quality then. Where do I sign up?