Saturday, December 22, 2012

We won one from the Gipper

Put a fork in it. The Easterlin Paradox (the belief that absolute improvement in one's economic well-being doesn't matter as much as one's comparative position); it's done.  Thanks to Nicholas Oulton of the London School of Economics.

In this stunning refutation of the common belief that the average Joe in America hasn't benefited much from the growth in GDP since the 1970s, he shows that infant mortality, life expectancy and, yes, even equality, improve with per capita household consumption.

Further, the real Golden Age of the post-war era was during the Presidency of Ronald Reagan, if we look at the Levy Institute Measure of Economic Wellbeing (LIMEW);
The period 1959-72, supposedly the golden age of economic growth, was actually a comparatively poor one for households. And it was followed by a fall in living standards over 1972-82.
Far and away the best time for households was the period 1982-89, which coincides roughly with the Reagan administration. 
Which is pretty much what one would conclude by just looking around and noticing the improvement in living conditions for everyone over the last three decades.  Even given the recent unpleasantness in the economy.

In a nutshell, we have more stuff, so we live better, even if we have modest comparative incomes. Then comes the conclusion that refutes Easterlin;
After all, most consumer expenditure nowadays goes on products that were not available in 1800 and a lot goes on products not invented even by 1950. Today, only about 10% of the family budget goes on food – and even within the food basket, many items (such as microwave-ready chicken tikka masala, the UK’s national dish) were not available in 1800.
In summary, people’s choices between labour and leisure demonstrate that they value higher consumption in an absolute sense, not just a relative sense. So rising GDP per capita would be in accordance with people’s desires and preferences. Philosophers and social critics may object that the average person’s desires and preferences are trivial, ill informed and misguided (an attitude which can be traced back at least as far as Plato’s Republic). 
Which comes after the most amusing observation from Oulton;
...if people care mainly about their relative position, why has there been so much fuss about the financial crisis? After all, for most people in the UK, the drop in income has been (on this view) trivially small, no more than 8% – and at least initially, it fell disproportionately on the rich.
In fact, there is more griping about the rich now (when they're comparatively down and out) than ever.  Especially by the current occupant of the White House, and his party.

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