Most people believe that the economic well-being of all but the wealthiest Americans has stagnated or declined over the past twenty-five years. In fact, Americans have become much more prosperous during that period. In Prices, Poverty, and Inequality: Why Americans Are Better Off Than You Think (AEI Press, November 2008), Christian Broda of the University of Chicago and David E. Weinstein of Columbia University demonstrate that the consumer price index (CPI), which is commonly used to develop conventional measures of real income, ignores two important sources of prosperity for American households.
It is true that real hourly wages for most Americans have seen only a small increase over the past few decades, but the CPI fails to factor in the ability of the consumer to purchase items at cheaper prices than their assumed market value or to buy less expensive items that perform similar functions--such as generic brands of food or pharmaceuticals. Research shows that wealthier individuals actually spend more money on the same items than the middle class and poor.
The hastening pace of international trade and China's accelerating role in American markets will extend these trends. "Chinese imports seem to benefit poor U.S. consumers by driving down the prices of goods they tend to consume disproportionately," the authors write. "The bottom line is that if one defines poverty according to a cost-of-living standard, U.S. economic growth has dramatically reduced the share of Americans living in poverty."
Broda and Weinstein conclude that, while the CPI may be inaccurate, Americans are much better off than they were a quarter century ago.
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