Let's Party Like It's 1973!
Published: September 10, 2019Measuring economic progress requires an accurate measure of inflation. But measuring inflation is harder than you might think because rapid changes in quality often aren’t taken into account. When goods and services improve rapidly over time, it is more likely that inflation will be overestimated and changes in the standard of living will be underestimated.
- Watch Episode 1 in this series, How Is The Middle Class Doing?
- Watch Episode 2 in this series, The Paradox of Household Income.
- Watch Episode 3 in this series, Do The Rich Get All The Gains?
- Would you take the deal and go back to 1973 if it meant you could pay 1973 prices while only enjoying 1973 goods and services?
- Why might the poorest Americans prefer living in 1973. Do you think many would? Why or why not?
- What are some examples of improvements to quality of life that haven’t been measured well by prices alone?
- Are there any goods or services where you think quality has gone down, the opposite effect discussed in the video? Do you think this problem is common or rare?
- Do you think people in the past were more or less happy than people today? Would most people in 1973 be excited or sad to live in today’s world with today’s goods and services?
- Read “Do the Rich Get All the Gains from Economic Growth?” by Russ Roberts. Available here.
- Russ Roberts hosts EconTalk with guest Richard Burkhauser of Cornell University and talks about the state of the middle class, available here.
- Read “What Do Economists Actually Know?” by Russ Roberts, available here.
A lot of people claim the average American hasn’t made much economic progress over the last 30-40 years.
In the first three episodes of this series I tried to show that there’s more to the story—the average American and the poor, too, got richer as the economy grew.
But I think those gains, if anything, are even bigger then the cheery numbers I shared.
That’s because all the attempts to measure economic progress--gloomy or cheerful--require an accurate measure of inflation.
Measuring inflation is harder than you might think.
Here’s a Sony color TV from the early 1970’s—21 inch screen—about $600. And here’s a Sony today that’s $500. So it looks like the price of the TV fell by about 14%. But the $500 Sony is more than twice as BIG, Does that mean the price is 28% lower today because I get twice as much for my money? That old TV only got a few channels. Today’s gets about a thousand. It doesn’t break. You can play video games on it. The picture’s about a zillion times sharper.
And what about the 65 inch Sony that’s $1800 today? Is that 3x the price of a 1970s TV? Would you consider the 1970s Sony a bargain?
And then again, I watch almost all my TV shows on my laptop. So is the price of a TV…zero now compared to the past?
So just how much have prices gone up or down? Really hard to measure precisely when the quality of what we buy is improving rapidly.
Ironically, when goods and services get better over time, the more likely it is that inflation will be overestimated and changes in the standard of living underestimated.
It might look like we’re standing still or falling behind when economic life is actually getting a lot better.
To get the full picture (sorry!) behind this problem, let’s use a little bit of economics imagination.
Imagine you have the chance to go shopping TODAY with your current income but paying the prices of 1973.
According to the PCE—a commonly used price index, prices today are about five times higher than in 1973. If that’s right, whatever your income is today, letting you pay 1973 prices means you should be about fivetimes richer.
But there’s a catch. When you go shopping in this imaginary world, you don’t just get the 1973 prices. You also get the 1973 goods and services. So when you go to buy a car, the Honda Civic they show you is the 1973 model. It’s a bit stripped down, sure, but it’s only $19 hundred and 73 dollars. (Really. Clever marketing back then.) Or you can splurge and get yourself a Corvette for under $7000.
The Corvette of 1973 only got about 14 miles per gallon. But that’s OK. Gas is onlyTHIRTY SIX CENTS a gallon!
Your house is going to be a lot cheaper. Health care’s a lot cheaper.
So’s your kid’s education. Stanford tuition is less than $3000 dollars a year. [$2850].
That frees up a lot of money to buy more stuff and load up the cart. You can buy anything you want from the 1973 Sears catalog. Polyester pants, the same as those worn here by golfing great Johnny Miller [picture to come], only $16.95.
You don’t have to settle for the 21 inch TV. You can easily afford the biggest color television in the catalog—a giant 25 incher for $719. Of course it only gets 10 channels and the picture’s not too sharp.
There’s one other catch. You can only buy goods and services that were available in 1973. You can’t have any of today’s goods that middle class consumers enjoy if they weren’t available back then. I’m not talking about yachts and caviar but the everyday goods that most Americans can afford.
So no smartphone. No rearview camera when you’re backing up your car. No GPS, or airbags in that bargain-price Corvette. No Waze to get you home (but you can buy a map for next to nothing at that gas station charging 36 cents a gallon.) No Google Facebook Twitter or Yelp.
And no educational economics videos on YouTube! Or videos on how to carve a turkey, play the malfuf rhythm, or learn the difference between the United Kingdom, Britain, and England!
No Fortnite or MineCraft or whatever’s the hot game when you end up watching this video. But there’s a pinball machine at the convenience store on the corner and it’s only 25 cents. You can play it for hours. Heck, with your income and the prices you face, you can just buy yourself a pinball machine if you want.
For only $24.50, you get a portable cassette recorder that you can carry wherever you go. After all, it only weighs three pounds. No 10,000 songs on the phone in your pocket. No Spotify or Apple Music. But cassettes are pretty light—you can carry a bunch.
If you’re having a heart attack, good news—that visit to the emergency room is a lot cheaper. The doctors will give you aspirin, but no clot busters or stents or balloon angioplasty. None of these were available in 1973.
Would you take the deal? Would you give up the new products and the quality improvements of the last 40 years for the chance to pay 1973 prices? And just to make it fair, let’s assume no one else has a smart phone or Facebook or Twitter or Snapchat or Instagram EITHER so you’re not alone on some kind of tech-free island while your friends are all playing with social media.
If you’re hesitating, and I think a lot of people would, maybe the PCE (and other price indexes that are even worse) don’t accurately capture the change in your purchasing power over time. Paying 1973 prices for 1973-quality goods and services wouldn't make you five times richer. You might even be worse off. That means our measures of inflation and the change in our standard of living aren’t off by a little. They’re off by a lot.
The average American is almost certainly doing a lot better than the standard numbers suggest.
Of course, how much stuff people can buy isn’t CLOSE to all we care about. The motto of life isn't "whoever has the most toys wins.” And even if the typical American is in fact doing a lot better than the numbers suggest, this doesn't mean everyone has a carefree economic life.
And even if the poor and the middle class have made progress over the last 30-40 years, you can still argue that the rich should pay higher taxes than they do now.
But I don’t think our economic system is rigged or broken or that the American dream is dead. Or that we need to throw out the current system and try, say, socialism.
But I do think the status quo needs improving.
In the next episode of the Numbers Game, I’ll suggest some ways to take the crony out of crony capitalism, and how we might increase opportunity and human flourishing. See you then.