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Tag Archives: John D. Rockefeller

Behold Our Riches! Quality, Prices, Income, and the Purchasing Power of Labor

12 Tuesday Sep 2017

Posted by pnoetx in Human Welfare, Markets

≈ 1 Comment

Tags

Affordability, Consumer Surplus, Don Boudreaux, Human Progress, Income Statistics, John D. Rockefeller, Marian Tupy, Martin Feldstein, Measures of Economic Welfare, Middle Class Stagnation, Non-Wage Benefits, Quality Adjustment, Wage Stagnation

coffeemaker

A steady refrain among pundits is that the American middle class can’t get ahead. The standard of living of average Americans has stagnated over the past 30 years, according to this view. It’s bolstered by government measures of average wage growth relative to consumer prices. But Martin Feldstein describes the flaws in constructing these measures; he says they may have led to an understatement of real income growth of more than 2% per year! Here is a link to Feldstein’s piece in the Wall Street Journal: “We’re Richer Than We Realize“. (If the link doesn’t work, an ungated link can be found on the WSJ Facebook page, posted at 10:30 a.m. on Saturday, Sept. 9th.)

Here are some of Feldstein’s observations:

“If there is no increase in the cost of production, the government concludes that there has been no increase in quality. And if the manufacturer reports an increase in the cost of production, the government assumes that the value of the product to consumers has increased in the same proportion.

That’s a very narrow—and incorrect—way to measure quality change. In reality companies improve products in ways that don’t cost more to produce and may even cost less. That’s been true over the years for familiar products like television sets and audio speakers. The government therefore doesn’t really measure the value to consumers of the improved product, only the cost of the increased inputs. The same approach, based on measuring the cost of inputs rather than the value of output, is also used for services.

The official estimates of quality change are therefore mislabeled and misinterpreted. When it comes to quality change, what is called the growth of real output is really the growth of real inputs. The result is a major underestimation of the increase in real output and in the growth of real incomes that occurs through quality improvements.

The other source of underestimation of growth is the failure to capture the benefit of new goods and services. Here’s how the current procedure works: When a new product is developed and sold to the public, its market value enters into nominal gross domestic product. But there is no attempt to take into account the full value to consumers created by the new product per se.“

It goes well beyond that, however, as great swaths of consumer value are completely ignored by government statistics:

“A basic government rule of GDP measurement is to count only goods and services that are sold in the market. Services like Google and Facebook are therefore excluded from GDP even though they are of substantial value to households. The increasing importance of such free services implies a further understatement of real income growth.“

Some of these criticisms are unfair to the extent that income statistics correspond to what consumers can purchase in terms of market value. That is a fundamentally different concept than the total value consumers assign to goods and services (market value plus consumer surplus). Nevertheless, there are efforts to adjust for quality in these statistics, but they fall far short of their objective. Also, GDP and income statistics purport to be measures of economic welfare, though it’s well known that they fall short of that ideal. It might be more fair to say that that official income statistics are reliable in tracking short-term changes in well being, but not so much over long periods of time.

The graphic at the top of this post is taken from Marian L. Tupy’s “Cost of Living and Wage Stagnation in the United States, 1979-2015“, on the CATO Institute‘s web site:

“… many, perhaps most, big-ticket items used by a typical American family on a daily basis have decreased in price. Over at Human Progress, we have been comparing the prices of common household items as advertised in the 1979 Sears catalog and prices of common household items as sold by Walmart in 2015.

We have divided the 1979 nominal prices by 1979 average nominal hourly wages and 2015 nominal prices by 2015 average nominal hourly wages, to calculate the “time cost” of common household items in each year (i.e., the number of hours the average American would have to work to earn enough money to purchase various household items at the nominal prices). Thus, the ‘time cost’ of a 13 Cu. Ft. refrigerator fell by 52 percent in terms of the hours of work required at the average hourly nominal wage, etc.“

Tupy’s post also covers the huge increases in non-wage benefits enjoyed by many workers over the past several decades, which are not captured in average wage statistics.

It’s clear that standard measures of income growth are distorted by the failure to properly account for changes in the quality of goods and services at our disposal. The narrative of middle class stagnation is flawed in that respect. As Don Boudreaux has said, most ordinary Americans are richer today than John D. Rockefeller was a century ago. The availability and quality of goods and many services today, affordable to ordinary Americans, are vastly superior to what Rockefeller had then or could even imagine. And many of those advancements occurred since the 1970s.

Socialism Is Concentrated Power

10 Thursday Mar 2016

Posted by pnoetx in Big Government, Capitalism, Markets

≈ 1 Comment

Tags

Charles Tiebout, Chelsea German, Concentrated Power, crony capitalism, Don Boudreaux, FEE, Foundation for Economic Education, John D. Rockefeller, Marian Tupy, monopoly, Police Power, Privilege, rent seeking, Richard Rahn, State Control, Tiebout Hypothesis, Vote With Their Feet

Power

Nobody likes to defend concentrated power, yet socialists earnestly crave power concentrated in the state. And state power is absolute power. They must imagine that those wielding state power, now and always, will be the sort of nice, benevolent folks they imagine themselves to be. Well, if only more power can be concentrated in the state, it will be alright. Good luck with that! Once granted, watch out.

While this sort of magical thinking might seem naive, another paradox of leftist thinking is even more befuddling: the never-yielding distrust of capitalism and private initiative, a system under which power is largely dispersed. The attitude is more than a little misanthropic. It’s as if socialists expect us to believe that someone forces us to engage in transactions with private sellers, transactions that are always unfavorable in some way. But every transaction in a private economy is voluntary, dependent only on how both parties assess benefits relative to costs. Anyone can make a bad deal, of course, and you might get ripped off by an unscrupulous buyer or seller from time-to-time. But you are free to perform due diligence. You are free to assess risks.

The left goes so far as to blame capitalism for poverty, demonstrating a complete disconnect with reality. For a better perspective on the economic miracles made possible by capitalism, I  recommend a few timely pieces of reading: economist Richard Rahn makes note of the incredible bounty of products and technology brought to us by capitalism. This includes transformative breakthroughs in almost every area of life: communication, computing, transportation, refrigeration, safety, food, medicine and on and on:

“Almost all of the great innovations came from those in the private sector who created them out of the desire for more wealth or just intellectual curiosity. The socialist countries have produced almost nothing — except for bread lines, coercive and destructive taxation and regulation, and gulags. Yet politicians all over the world proudly proclaim themselves to be socialists and attack the capitalist wealth creators and innovators — as if the real world had never existed.“

At the Foundation for Economic Education (FEE), Chelsea German and Marian L. Tupy offer ample evidence of capitalism’s successes as they shred an absurd opinion piece in Forbes magazine claiming that  capitalism “will starve humanity“:

“Throughout most of human history, almost everyone lived in extreme poverty. Only in the last two centuries has wealth dramatically increased. Early adopters of capitalism, such as the United States, have seen their average incomes skyrocket.“

German and Tupy have a more detailed post here with statistics showing dramatic increases in the standard of living enjoyed by poor households in the U.S., increases for which capitalism is largely responsible.

Last month, Don Boudreaux reflected on the well being of average Americans today compared to an individual at the extreme high end of the wealth distribution 100 years ago. Boudreaux catalogues the many ways in which John D. Rockefeller’s comforts were drastically inferior to those available today. He concludes that trading places with Rockefeller would be a questionable deal:

“Honestly, I wouldn’t be remotely tempted to quit the 2016 me so that I could be a one-billion-dollar-richer me in 1916. This fact means that, by 1916 standards, I am today more than a billionaire. It means, at least given my preferences, I am today materially richer than was John D. Rockefeller in 1916. And if, as I think is true, my preferences here are not unusual, then nearly every middle-class American today is richer than was America’s richest man a mere 100 years ago.“

I maintain that even when power is concentrated in large private companies, the situation is far preferable to concentrated power in government. First, private companies do not have the police power necessary for absolute government authority. They cannot force you to do anything. Second, private companies do not simply shuffle resources and up-charge, as the left might have you believe; they innovate and create value as an inducement to trade, a concept that is rare in state-controlled activities. When any form of competition is present, private companies discipline each other, encouraging better quality and restraint on the prices charged for their wares. Even trading with a monopolist confers gains from trade, despite its drawbacks relative to trade in competitive markets.

Of course, government is generally not confronted with competition, unless it’s prompted by citizens who “vote with their feet”, as described by Charles Tiebout. That kind of responsiveness argues for decentralized government, however. Government services are typically monopolized, but the “terms of trade” are often worse than a monopolist would offer. It’s difficult to refuse a government service or your obligation to pay, no matter how much you abhor it, and quality usually suffers due to the extreme lack of accountability to citizen-consumers.

Capitalism gets a bad rap when private businesses engage in rent-seeking. That behavior is characterized by attempts to influence government policy for the business’ own benefit, promoting subsidies, other public spending or tax policies that go to the bottom line, and regulatory actions that disproportionally harm competitors. Those efforts put the crony in crony capitalism. But note that rent seeking is not an inherent feature of capitalism. It is enabled by the existence of activist government, its control over resources and its police power. What this means is that cronyism is fostered by power concentrated within the halls of government. In other words, private power becomes more concentrated and more impervious to competitive forces when it is favored by government. That is pure privilege.

If you dislike concentrated power, then vote for small government!

 

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