Monday, May 15, 2006

Economy! Er! Ah! Who is it good for? 

It seems SCTimes local writer Laura Stanley is :channelling the Temptations:
What is the measure of a good economy, and who is it good for?

The January 2006 St. Cloud Area Quarterly Business Report stated, "The new year is expected to begin with strong growth of the area economy, according to the most recent predictions of the St. Cloud Index of Leading Economic Indicators and the St. Cloud Area Business Outlook Survey," and the April edition confirmed steady economic growth.

National economic measures for the past year reflected that report; the U.S. economy grew at a 3.6 percent annual rate in 2005. According to a Federal Reserve report covering up to the first half of April, "The U.S. economy has continued to expand."

Area businesses are doing well, and measures indicate the nation's corporations are booming.

But what are good economic indicators for the average person?
Since the first report she cites is something I write, I guess I should respond.

If the question is "what are good economic indicators for the average person", I thought one place to look might be how much people get to spend on goods and service. I prefer to look at how much stuff people get to consume versus how much they earn. People after natural disasters have very high incomes but don't feel better off -- that's the nature of the broken window fallacy.

The annual Consumer Expenditures survey from BLS does a nice job of that and it says consumer expenditures rose 6.3% in 2004. Given a 2.7% CPI that year, people on average did better.

I find these measures much better than the ones Stanley employs. If you are worried about long-run inequalities and their changes over time, what you are in essence asking is the differences in the consumption possibilities of different families. When looked at in this way, comparisons of the US to the rest of the world appear much better. Income per capita might be higher some places, but we are able to consume a far greater share of the fruits of our labor than most other countries.

Moreover, it isn't apparent that the US cares as much about inequality.

Using a total of 128,106 answers to a survey question about �happiness�, we find that there is a large, negative and significant effect of inequality on happiness in Europe but not in the US. There are two potential explanations. First, Europeans prefer more equal societies (inequality belongs in the utility function for Europeans but not for Americans). Second, social mobility is (or is perceived to be) higher in the US so being poor is not seen as affecting future income. We test these hypotheses by partitioning the sample across income and ideological lines. There is evidence of �inequality generated� unhappiness in the US only for a sub-group of rich leftists. In Europe inequality makes the poor unhappy, as well as the leftists. This favors the hypothesis that inequality affects European happiness because of their lower social mobility (since no preference for equality exists amongst the rich or the right).

I'm not a huge fan of happiness research, and you can get different stories from different studies using happiness surveys, but that story fits my view.

For further reading: Art Carden.