The poor get richer, but slowly

THE BALTIMORE SUN

WASHINGTON -- The budget battle has a good side. It has brought attention to some new data that should shake the credibility of the central economic argument of our time, espoused by politicians as diverse as Bill Clinton and Pat Buchanan. Not a moment too soon.

The idea that in recent years Americans have made little economic progress or have actually lost ground -- that the rich got richer while the poor got poorer -- is wrong and harmful.

Take, for example, the Bureau of Labor Statistics data showing that price-adjusted median weekly earnings of all full-time workers from 1979 to 1994 has decreased by 6 percent. It sounds bad.

But most economists have long acknowledged that the Consumer Price Index has been overstated in recent years. That is, actual inflation has been somewhat lower than the published rate. Now, with balanced-budget negotiations at center stage, that idea is suddenly very much in play.

An interim report from the Advisory Commission to Study the Consumer Price Index says that the CPI as now constructed is likely to overstate future inflation by 1 percent per year. (The panel, appointed by the Senate Finance Committee, is known as the "Boskin Commission," after former Chairman of the Council of Economic Advisers Michael Boskin.)

A Boskin-revised CPI would lower the deficit by $85 billion in 2002. Most of the additional moneys would come from somewhat lower cost-of-living adjustments (COLAs) paid out by the Feds (particularly in Social Security) and from more taxes by taxpayers moved into higher federal tax brackets (as their real incomes were recalculated upward).

Accepting such a readjustment and picking up some loose change would make it easier for Republicans and Democrats to reach budget accord. The bad news is that even a minor Social Security cut and a tax hike is fraught with political danger unless all sides agree to back it simultaneously. We shall see.

But the labors of the Boskin Commission highlight something more important concerning the past, not the future. The commission estimates that in the last few years inflation has been overstated by 1.5 percent per year. That doesn't sound like much, but when compounded retroactively, the magic of compound interest makes for some big numbers.

The decrease is an increase

Economics columnist Jonathan Marshall of the San Francisco Chronicle has used the 1.5 percent Boskin assumption in conjunction with data from the Bureau of Labor Statistics (which had already been adjusted for previous miscalculations in housing costs).

Mr. Marshall finds that the tale of recent economic gloom is inaccurate. Remember that 6 percent decrease from 1979 to 1994? When the data are corrected for the 1.5 percent overstatement of inflation there is an increase of 18 percent, not a 6 percent decrease! Among other things, that works out to "the poor getting richer," although probably at a slower rate than the rich are getting richer.

That's a swing of 24 percent, which is a big swing indeed, particularly since it takes into consideration a deep recession in the early 1980s and a mild one in the early 1990s. Moreover, there are some other considerations that tend to boost the idea of recent income gains. These include the (uncounted) rise in non-cash benefits and the (uncounted) growth of moneys earned in the "underground economy."

Real growth may well have been around the 30 percent range -- still not as good as in some previous times, but not bad at all.

Consider the political effects. Take Pat Buchanan. (Please.) He has made headway with the issue of "economic nationalism." He says that free-trade policies have crushed working-class Americans. Indeed, there are many factory workers who have been hurt as their jobs moved abroad. But many others gain from the vast growth in exports, and on balance, the country has done quite well, thank you, during a time of economic turmoil.

President Clinton favors free trade. But much of his economic policy is based on the idea that "there are no low-wage jobs available" and that major government "investments" are needed turn things around.

"Like dreams, statistics are a form of wish fulfillment," wrote the French essayist Jean Baudrillard. Alas, quite so. A gloomy interpretation of American economic statistics serves the wishes liberals and many conservatives. It provides them with a political reason for being. Wouldn't it be nice if they could make it mesh with economic reality?

Ben Wattenberg is a syndicated columnist and the host of the weekly public television program, "Think Tank."

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