Monday, November 30, 2009

Steve Horwitz' Exaggerated Claim Of Things Getting Better

Steve Horwitz argues that things have become dramatically better since 1973. Indeed, judging by his table real wages have increased as much as 3,5 fold-at least (and Horwitz argues that the real improvement is bigger since it doesn't account for quality improvements).

But he fails to notice that all items that he lists are durable consumer goods. And durable consumer goods have had a big decline in their relative price. Between the first quarter of 1973 and the third quarter of 2009, the price index for durable consumer goods increased just 59% (even less if you exclude cars, which are not included in Horwitz' table). Meanwhile, however, nondurable consumer goods (like food and gasoline) increased 266% in price and the price of services (such as rent and health care services) increased 447% in price, causing the overall Personal Consumption deflator to increase 319%. And the personal consumption deflator has been adjusted for both quality improvements and price substitution (a principle which partly contradicts the former).

Adjusted for that 319% price increase, an increase in nominal wages from $4.12 to $18.72 represents a real wage increase of just 6.6%. Horwitz wage number doesn't entirely correspond to Q1 1973 and Q3 2009 averages, but adjusting for that would only increase the real wage gain to 8%-which is not much for 36 years. So what his table reflects is almost entirely the declining relative price for durable consumer goods (especially if you adjust for quality), not increasing real wages.

While I largely share Horwitz' conclusions of the potentials of human creativity, he is ignoring the negative factors that are holding back progress-such as Fed policy and other government interventions.