An alternative analysis to Oren Cass’s flawed “Cost of [Not] Thriving Index” with a much different conclusion

By Mark J. Perry.

"February 28, 2020

Is the average American better off today compared to 1985? No according to a recent much-publicized analysis by Oren Cass, who paints a pretty pessimistic picture of wage stagnation, a middle class in decline, rising prices, and an ongoing deterioration in the standard of living for the average American over the last 35 years. Cass, the executive director of American Compass, claims that his findings support the popular perception that: “A generation ago, the [male] worker could be confident in his ability to provide his family not only with the basics of food, clothing, and shelter, but also with the middle-class essentials of a house, a car, health care, and education. Now he cannot.”

More specifically, at the core of Cass’s story of gloom and doom is his claim that “In 1985, the typical male worker could cover a family of four’s major expenditures (housing, health care, transportation, education) on 30 weeks of salary. By 2018 it took 53 weeks. Which is a problem, there being 52 weeks in a year (see the top table above and the second chart).” In his report, Cass creates what he calls the “Cost of Thriving Index” which measures the number of weeks of income required for a single male breadwinner to cover the four major expenditure categories mentioned above for a typical family of four: Housing, Health Care, Transportation, and Education (see top table above). Given Cass’s main pessimistic conclusions about an America in decline, it’s curious that the index wasn’t named the “Cost of Not-Thriving Index,” or the “Cost of Struggling to Survive Index” or some other name matching the negative picture Cass paints with his analysis for an average American.

Let me present a different analysis of economic well-being for the average American that significantly departs from Cass’s analysis in some important ways in both methodology and main conclusions.

The first methodological issue is that Cass creates his own manufactured measures of annual consumer expenditures on four major spending categories — housing, health care, transportation, and education — perhaps not knowing that the Bureau of Labor Statistics has been reporting those data since 1984 in its annual “Consumer Expenditure Surveys” reports (see here, here and here). The second table above (“Alternative Cost of Thriving Index”) shows BLS data on those four major consumer expenditures in each of the same years as in Cass’s report.

The BLS data on consumer spending for the four major spending categories identified by Cass are based on BLS consumer surveys of actual out-of-pocket expenditures and therefore depart dramatically from Cass’s theoretically contrived estimates as explained below.

Housing. To estimate national housing costs for the average American housing unit, Cass curiously uses the “annual fair market rent for a three-bedroom, 40th percentile housing unit in Raleigh, North Carolina,” which increased from $5,560 in 1985 to $15,924 in 2018. In contrast, the BLS estimates of annual housing costs (shelter) for the average American “consumer unit” (see details below on that measure) based on consumer survey data and actual out-of-pocket housing expenses increased from $3,833 to $11,747 over the 1985 to 2018 period. Compared to the BLS estimates of annual housing expenses for the average US housing unit Cass’s estimates are wildly inflated by about 37%. No surprise then that he claims that Americans are increasingly struggling to make ends meet and pay for their basic living expenses.

Transportation. For annual average transportation expenditures, Cass’s own calculations are based on the cost of owning and operating one (or two?) vehicles and driving 15,000 miles per year. According to Cass, transportation costs for a family increased from $3,484 to $8,849 between 1985 and 2018, which is very close to the BLS estimates for expenditures on transportation of $4,319 in 1985 and $8.943 in 2018. Nothing to argue about on this spending category since Cass’s estimates closely match the BLS figures.

Health Care. Here’s where Cass’s analysis gets really problematic. His estimates of annual health care expenditures are about 4 times higher than the BLS’s estimates of actual out-of-pocket expenditures for the average consumer unit because Cass curiously uses the total cost of the average employer-sponsored health care plan, including the portion paid by the employer. In 2018, the BLS estimated that the average consumer unit spent about $5,000 out-of-pocket on health care costs compared to Cass’s wildly inflated estimate of nearly $20,000 per 4-person family.

Many others have reported on Cass’s troublesome calculation of health care costs. My AEI colleague Stan Veuger pointed out that Cass’s health care figures are wildly inflated because he counts employer-paid contributions for health care as if they were out-of-pocket costs faced by workers. On the other hand, Cass doesn’t count those fringe benefits as part of a worker’s compensation? Matt Yglesias writing in Vox says that Cass’s incorrectly calculated health care costs are a “critically important flaw” that present a huge problem since “the growing cost of health care is the main driving force” of Cass’s analysis and conclusions of doom. In his National Review article “Oren Cass’s Chart of Doom” Robert Verbruggen correctly points out that the implication of Cass’s measure of health care costs is that these expenditures “like transportation or housing costs, come out of income, but employers are actually covering most of the bill.” And according to the most recent government data, out-of-pocket spending by Americans for total health consumption expenditures in 2018 was less than 11%, and the rest is paid for by employers, health insurance, Medicare, Medicaid, Departments of Defense and Veterans Affairs. Cass unrealistically seems to assume that Americans bear the full burden of their health care costs, when that’s not remotely true.

Education. Likewise, Cass’s estimates of consumer expenditures on Education are wildly inflated by a factor of about 7X because he considers the cost of college (including room and board) as spending on “Education” under the flawed assumption that the average American household or family faces those educational costs year after year when that’s not close to reality. Robert Verbruggen criticized Cass’s faulty calculation of education spending because it omits (and adds) many key factors including the financial aid most students receive including scholarships and loans, the fact that many students live off-campus at home with their parents, the fact that many students earn money of their own, and the fact that most young Americans don’t go to four-year colleges.

Regarding a second methodological issue that helps to create a pessimistic picture of middle-class decline, Cass’s measure of income is curiously the “median weekly earnings for men working full-time.” While Cass claims that there are some “sociological and statistical reasons” for using only male earnings, the earnings of only men don’t realistically measure the income of the households (or “consumer units”) that most Americans actually live in. The majority of Americans live in a household with more than one earner. The BLS income data used in my analysis measures the average income of the 130 million “consumer units” represented in the BLS’s annual Consumer Expenditure Surveys.

Note: According to the BLS, Consumer units” are either: 1) all members of a particular household who are related by blood, marriage, adoption, or other legal arrangements; 2) a person living alone or sharing a household with others or living as a roomer in a private home or lodging house or in permanent living quarters in a hotel or motel, but who is financially independent; or 3) two or more persons living together who use their income to make joint expenditure decisions. The Census Bureau’s estimate of the number of US households in 2017 (128 million) compares closely to the BLS’s estimate of 130 million consumer units in that year, suggesting that there are only minor differences in those two measures.

Comparing average annual out-of-pocket consumer expenditures on major expenses by consumer unit to average annual income by consumer unit is a more accurate and reasonable methodology to gauge the economic well-being of an average American than Cass’s fictional, contrived approach that compares the median earnings of men only to an improvised, manufactured measure of consumer spending on the four major categories.

The difference in data sources and methodologies described above explain the significant differences between my and Cass’s analysis and conclusions:

While Cass claims that the number of weeks of income needed to cover a year of household expenditures on the four major categories has increased over time by 77%, from 30 weeks in 1985 to 53 weeks in 2018, my analysis using BLS data suggests the opposite: The number of weeks of income to cover a year of major expenses for the average consumer unit has declined since 1985 by 9.6%, from nearly 20 weeks (19.8) to fewer than 18 weeks in 2018. That’s two-thirds less than the 53 weeks of income Cass claims is necessary to cover major family expenses (see tables above) and a whopping difference of 35 weeks! According to Cass, the average male worker would have to work until the first week of 2021 to cover major family expenses this year, while my analysis shows that the typical American household would only have to work until the first week of May this year to pay for annual major expenditures on housing, education, transportation, and health care.

The top chart above shows graphically Cass’s “chart of doom” based on his “table of doom” from above (although Christopher Ingraham glowingly called the chart the “best explanation of middle-class finances you will ever see” in the Washington Post) and the bottom chart shows graphically the stark difference using BLS data on actual out-of-pocket spending and income for US consumer units. Cass assumes the typical family faced major household expenditures of more than $54,000 in 2018 compared to BLS estimates of only about $27,000 in spending on housing, education, transportation, and health care, exactly half of Cass’s wildly inflated figures. And while Cass’s chart shows that covering major consumer expenditures is now out of reach for a fictional household with one male earner (53 weeks of income are required to major annual expenses), my chart (along with the data in the table above) shows that covering major household expenses based on BLS data is actually now more, not less, affordable than in past periods.

Bottom Line: Cass claims that his analysis using a fictional one-earner family and contrived, improvised expenditure data demonstrates that “The U.S. economy of recent decades has eroded, rather than reinforced, the American model of thriving, self-sufficient fami­lies. In the decades to come, we will need to do better.” My alternative conclusion using real-world BLS data on actual out-of-pocket consumer expenditures and income for the average, typical consumer unit that more realistically represents the experience of a typical American is much different. The average American household is flourishing and thriving today compared to 25 or 35 years ago and is actually able to cover a year of major expenses with two fewer weeks of income than in 1985. While Cass recommends that policymakers rely on his COTI to “interpret the nature and quality of economic progress,” I recommend that policymakers ignore the COTI because it’s contrived and flawed as I and many others have concluded. Instead, policymakers should rely on better and more realistic analyses and data to assess what I conclude is the ongoing economic progress of average Americans as they continue to enjoy an ongoing, upward trajectory in their rising standard of living."