Americans Are Richer Than We Think

Our flawed measures of inflation understate wealth and improvements in consumer well-being.

By Phil Gramm and John F. Early. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics. The CPI might overstate inflation because it does not do a good enough job in taking substitution into account and quality changes into account.

Excerpts:

"official measures of inflation are significantly overstated, leading to an understatement of America’s well-being."

"The CPI for All Urban Consumers, or CPI-U, and its derivative CPI for Wage Earners and Clerical Workers, CPI-W, are the most widely used adjustments for inflation. They have been revised over time, but improvements have been applied only prospectively. A second official index, the CPI-U-RS (research series), incorporates many of the CPI-U improvements retrospectively, improving the accuracy of historical comparisons. A third index, the Personal Consumption Expenditure Price Index, or PCEPI, improves on the CPI-U-RS by accounting for changes in actual consumer expenditures in real time."

"the government continues to base its calculations on a variety of indexes rather than use only the most accurate. BLS adjusts average hourly earnings with the CPI-W, which led it to find a 6% increase in real average hourly earnings between 1975 and 2017. The more accurate CPI-U-RS shows real hourly earnings rose 10%, and the still-more-accurate PCEPI shows real hourly earnings rose 23%, nearly four times the number BLS reports.

The Census Bureau uses CPI-U to inflate poverty thresholds and finds the incidence of poverty was unchanged from 1975 to 2017. Using the CPI-U-RS shows a decline in poverty of 14%, and using the more accurate PCEPI produces a 26% decline. The bureau, however, uses CPI-U-RS instead of CPI-U to deflate median family income, publishing its findings of a 21% increase, which would be smaller by more than half using the CPI-U and larger by two-thirds using the more accurate PCEPI.

Even PCEPI significantly overstates consumer price increases. Two recent studies, one by Bruce Meyer and James Sullivan and another by Brent Moulton, combine more than 50 credible studies documenting specific overstatements in consumer price indexes. For example, studies of personal electronic devices showed overstatements of between 3.6 and 5.8 percentage points annually because the value of new features was either understated or missed completely."

"When corrected for documented price overstatements, real average hourly earnings from 1975 to 2017 are shown to have risen some 52%, not 6%—an additional $6.77 an hour. Real median household income increased 68%, not 21%—$17,060 more annually. Gross domestic product grew 253% rather than 216%—$6,312 of additional output per capita. Productivity expanded 142% rather than 117%—$10 of additional value for every hour worked. And published poverty incidence fell by almost half."