Don’t believe the ‘cost-of-thriving’ doom

There has been a lot of discussion in the last several years – and even more so in the last few weeks – about income trends in the United States and whether, accounting for inflation, the average American family has been falling behind economically. Some critics, both populist and leftist, claim that the basics of American life have become more expensive and out of reach, with the obvious implication that the government needs to intervene to solve this affordability crisis.

But this idea, that the “cost of thriving” has grown out of control, doesn’t stand up to a close analysis. People who make that claim generally only arrive at their conclusions by leaving out important parts of the equation. Some calculations cherry-pick which years they focus on, leaving out the more favorable time periods. Some leave out advantageous data, like declining tax burdens, or double-count household costs, like including both the employee and employer cost of healthcare premiums. Other analyses even leave out or downplay the dollar-value of government benefits that millions of American households already receive, which seems especially dishonest.

Some of this analysis, pointing out the misleading data about allegedly stagnating incomes, was done a couple years ago by Michael Strain of the American Enterprise Institute (AEI). His book, The American Dream Is Not Dead: (But Populism Could Kill It) is a great source for data on this topic.

More recently, Scott Winship of AEI and Prof. Jeremy Horpedahl of the University of Central Arkansas released a study called “The Cost of Thriving Has Fallen,” about how populist critics (like Oren Cass of the group American Compass) are off base, and how their too-pessimistic views on the American economy invite flawed public policy responses that would only make things worse. Winship and Horpedahl wrote recently in The Dispatch:

[Oren] Cass’ approach mostly fails to account for changes in the quality of goods and services over time. Take housing costs. He compares rents for three-bedroom apartments in Raleigh, North Carolina, in 1985 and 2022, but he ignores the possibility that the typical three-bedroom rental in 2022 is much nicer or larger than what was typical in 1985. An increase in what families typically spend that reflects their ability to afford nicer things is not an increase in costs. When we adjust for quality change using price indexes to translate the improved 2022 costs into 1985 dollars and then re-estimate the change in [the Cost-of-Thriving Index], we find it increases by just four weeks.

Cass looks at pre-tax earnings of full-time workers and only considers men at least 25 years old. But people pay costs out of after-tax income. And if the focus is narrowed to full-time workers (eliminating complications related to students’ and mothers’ work participation), there is no reason to exclude women or those under 25.

Winship and Horpedahl don’t just find this populist doomerism unpersuasive. They write that Cass’s claims “bear no relationship to reality.”

Stand Together’s Adam Millsap also recently wrote in Forbes about this debate, citing the AEI research above. Millsap points out, among other things, that one recent cost of thriving critique focuses on expenses like housing and healthcare but omits discretionary spending on consumer goods like TVs, clothing, furniture, phones, and appliances. Those are major household spending categories in which items have gotten both significantly less expensive in real terms and for which quality and features have dramatically increased over time. Anyone who is nostalgic for the supposedly affordable world of 1985 is welcome to replace their 80-inch smart TV with one that was available during the Reagan administration. I doubt they will be impressed.

We covered this topic on Episode 28 of the Free the Economy podcast (cost-of-thriving segment starts 1:03). Michael Strain was our guest on Episode 2 of the show (interview starts 12:57) and Adam Millsap was on Episode 19 (interview starts 12:49).