A recent study by Christian Broda and David E. Weinstein finds what I have long suspected: the CPI has has not been taking into account increases in technological innovation over the last 25 years.From AEI's intro to the study:
The consumer price index used to compute official measures of real wages and poverty ignores two key sources of increased prosperity: the introduction of new and better products and consumers' ability to substitute between goods. Deflating nominal wages by a cost-of-living index that adjusts for these previously unconsidered factors of prosperity suggests that the real wages of the poor have actually risen by 30 percent since the late 1970s--and that the poverty rate in America has fallen dramatically over the last forty years.The "fact" that economic well-being has been declining is a favorite talking point of op-ed columnists and politicians. What they conveniently ignore is that more people can now afford better goods than their counterparts could 25 years ago. We have all become significantly richer.
How can we account for the discrepancy between standard measures of economic well-being--which suggest a trend of increased poverty--and alternative measures that indicate an upswing in prosperity? As Broda and Weinstein argue, product innovation has long been a key source of prosperity for American households. New and better household appliances, cellular phones, vehicle air bags, medicines, and computers are among the many product improvements that have benefited Americans, including the poor, over the last few decades. Yet current official price statistics capture only a portion of the benefits that these improved goods provide to American households. Broda and Weinstein conclude that adjusting poverty measures to fully account for the benefits of product improvements reveals that Americans in every income group are substantially better off economically than they were a quarter century ago.
Thanks to Tyler Cowen for the link.
