Yesterday, in the Wall Street Journal, Marty Feldstein argues reasonably that conventional price indices underestimate real income growth because they take inadequate account of quality improvements and new products. Marty asserts very plausibly that properly measured real incomes and wages have not been completely stagnant in recent decades.
This must be right to some extent. It’s said that automobiles entered the CPI only in 1935 and similar phenomena are surely happening today. We say there is much inflation in health care costs but I’d rather buy today’s health care at today’s prices than 1990 health care at 1990 prices or 1970 health care at 1970 prices.
Even accepting Marty’s argument three further observations are appropriate.
First, there is little basis for thinking that biases have increased over time. So the conclusion that the economy is performing much less well than it once did looks valid.
Second, if we are unsure about absolute levels of income, the case for looking at relative incomes is reinforced. And so, Marty’s arguments reinforce the importance of the emergence of inequality as a central issue for economics and economic policy.
Third, it is odd for a monetary policy hawk like Marty to be making the case that inflation is overstated. If the biases he describes are important, inflation is now surely running below 1 percent. Why then should policy be in any hurry to tighten?
May 20, 2015