Why it's hard to measure if living standards are rising

Adjusting for quality changes isn't a fully objective process.

You can buy a 2-bedroom condo in this building for $180,000. It’s located in West St. Paul, Minnesota, near where I went to high school. The same unit sold for $154,500 in 2006—$226,000 in today’s dollars—so it has actually gotten cheaper in real terms.

Back in June I wrote an article called “24 charts that show we’re (mostly) living better than our parents.” It was not universally popular. Many people strongly believe that Americans do not, in fact, enjoy a higher standard of living than our parents. Here are two of the most common critiques:

• People questioned whether the metrics I chose—especially in the car industry—represented genuine progress.

• Some were incredulous at my claim that housing has not gotten more expensive over the last 30 years.

Let’s take each of these in turn.

Not all goods are actually good

This chart probably attracted the most criticism on Twitter:

I did not expect this one to be controversial! I knew that if I only showed the horsepower chart, people would object that today’s more powerful trucks are gas-guzzlers that are worsening climate change. But as the miles-per-gallon chart shows, pickup trucks today actually guzzle less gas today than they did 20 or 40 years ago.

But some critics raised a different objection. A big reason these cars and SUVs are getting more powerful is so they can also be larger and heavier. And this makes them more dangerous to others on the road—especially pedestrians.

You can raise similar objections to many other consumer products. Government statistics on economic output include products like tobacco, alcohol, guns and ammunition, and gambling that many consider harmful. And while they don’t have their own categories, spending on junk food, pornography, and abortions is also factored into official statistics.

Depending on your politics, you probably believe that at least some of these products have negative impacts on customers or the broader public. If these products become cheaper and more abundant, that isn’t necessarily something to celebrate.

Another example: in a recent (paywalled) post, Matt Yglesias observed that drugs like fentanyl and methamphetamine have gotten more potent and hence more abundant over time. While this is technological progress of a sort, few people would argue it has promoted human flourishing. Matt also worries that online video streaming is crowding out face-to-face interactions, leading to reduced participation in the workforce, dating market, and civil society more generally.

All of which is to say that statistics like gross domestic product are an imperfect way to measure a society’s overall wellbeing. You could imagine a statistical agency trying to compute an alternative measure of economic output that takes these concerns into account. Maybe it would exclude categories like tobacco and junk food. But this would quickly become a quagmire. Liberals, for example, would want to count abortion but exclude guns, while conservatives would want to do the opposite.

To return to my original example, people would sharply disagree about whether heavier trucks and SUVs represent an increase in quality (since they are more comfortable and safer for their passengers) or a decrease in quality (since they are more dangerous to pedestrians and bad for the environment).

So for all their flaws, I think traditional measures of living standards are valuable. “Are we producing more stuff than we did last year” is a fairly objective question that can be answered more or less objectively by an impartial government agency. “Are we buying too many harmful products” just isn’t.

My original piece was framed as a response to politicians like Bernie Sanders and Donald Trump who claim that our standard of living has been falling in recent years. That’s a claim that incomes are declining—it’s not a claim that our incomes are rising but we’re buying too many cigarettes, donuts, and gas-guzzling SUVs.

Is housing getting more or less affordable?

In recent years, I’ve written many articles about America’s growing housing shortage, and I continue to think this is one of the biggest problems in the American economy. So I was surprised when I started digging into the data underlying this chart:

Since 1989, rents have grown about as fast as the wages of non-supervisory workers, while the main costs of buying a home—the down payment and the monthly mortgage payments—actually grew more slowly between 1989 and June 2022.

So why did so many people think housing was rapidly getting less affordable? One issue is that national media is concentrated in a few big cities—especially New York, Washington DC, and San Francisco—with particularly severe housing shortages. There’s no question that housing has gotten less affordable in San Francisco and New York, especially relative to the national median income. On the other hand, there are a number of other cities, including Dallas, Minneapolis, and Atlanta, with healthy economies and relatively affordable housing.

The other issue is that it’s hard to do apples-to-apples comparisons between today’s homes and those of 30 or 40 years ago.

If you point out to people that there’s plenty of affordable housing in St. Louis, Cleveland, and Detroit, they’ll respond that there aren’t many good jobs in these metropolitan areas. This is true, and it represents a genuine change since 1980. Back then, economic opportunity was spread more evenly across the country.

Someone just starting out in their career in 1980 could get a cheap apartment in a working-class part of almost any major metropolitan area and commute to a well-paying job in a more affluent neighborhood. By the 2010s, job opportunities had become more concentrated in a few big cities. With housing supply constrained, rents in those metropolitan areas rose accordingly, while rents in less prosperous metropolitan areas declined.

This means that it can be harder for someone with modest financial resources to get on the first rung of the economic ladder in Silicon Valley or Wall Street. Or at least it was before 2020—perhaps the remote-work revolution will change this.

This kind of thing is hard to quantify in a rigorous way.

Government agencies try to correct for changing housing quality in inflation calculations. For example, larger homes tend to be more valuable, so if the average home gets bigger, the government will try to account for that in its estimates of the housing inflation rate.

Theoretically, statistical agencies could do the same thing for location-based features of homes. They could “quality adjust” home prices for factors like the strength of the local job market, the crime rate, or the quality of local schools. But they don’t, and for good reason. There’s probably no way to do it in a rigorous way. More fundamentally, it’s not what a consumer price index is supposed to measure.

And this means that merely looking at inflation-adjusted housing prices isn’t going to settle debates about whether it’s becoming more or less affordable to buy a home in a “good” neighborhood. The bundle of amenities you get with a typical home in 2022 is just different than what you would have gotten in 1982. Whether it’s better or worse depends on who you are and what you care about.

But I do think people tend to be overly biased towards pessimism on this kind of question. One reason is that it’s easy to view our childhoods with rose-tinted glasses. When I point to data showing that housing hasn’t gotten less affordable, a common response is something like “My parents had little trouble affording a house in a good school district on the salary of a cop and a schoolteacher. Now I have a law degree but I can’t afford a home in a neighborhood like the one I grew up in.”

When I read something like this, I always wonder if they’re truly making an apples-to-apples comparison. Maybe they grew up in Omaha but are now trying to raise a family in New York or San Francisco. Maybe the “good school” they went to wasn’t actually as good as the ones they’re hoping to send their kids to. Maybe in the process of going to law school, they picked up a fancier peer group with higher lifestyle expectations than their parents had.

Most parents try to give their kids a sense of stability and security even if they are actually stressed out about their precarious financial situation. So when we look back from a vantage point 20 or 30 years later, it’s easy to underestimate the challenges our parents faced and the sacrifices they made.