Brookings Big Ideas for America

Michael E. O'Hanlon

• Publisher: Brookings Institution Press
• Year: 2017
• ISBN:
  9780815731320
• Topic: Politics & International Relations
• Subtopic: American Government
• Index: Politics & International Relations

An Agenda for the Nation

What are the biggest issues facing the country as Donald Trump and the GOP-led 115th Congress take office?

Any new administration faces a myriad of issues and problems it must take on as it ascends to power. In this volume, Brookings scholars and others offer their solutions, from Ben Bernanke and Richard Bush to Richard Reeves and Dayna Matthew, from Bob Reischauer and Alice Rivlin to Robert Kagan and Elaine Kamarck, to Belle Sawhill, Doug Elmendorf, David Wessel, Bill Galston, and Carol Graham, as well as many others.

These powerful essays engage and inform readers on a variety of timely, crucial issues that affect the present and the future of the United States. Much of the focus is on the threatened middle-class dream in America. On the domestic front, Brookings scholars tackle topics ranging from health care and jobs to economic opportunity and trade policy, to criminal justice and infrastructure. The alliance system, relationships with China and Mexico, nuclear weapons, terrorism, and the ongoing conflicts in Afghanistan, Syria, and Iraq are among the foreign policies issues addressed.

PART I

The Pulse of America

1

Are Americans Better Off than They Were a Decade or Two Ago?

BEN S. BERNANKE and PETER OLSON

SUMMARY: Traditional proxies of economic welfare, such as real median household income, provide an incomplete picture of economic well-being. This chapter describes an alternative, more comprehensive approach, developed by Charles Jones and Peter Klenow, that translates per capita consumption, leisure, life expectancy, and inequality into equivalent units of consumption, making it easy to compare economic well-being in the United States to that of the rest of the world. Jones and Klenow find with this method that many developed nations, such as those in Western Europe, have welfare levels much closer to that of the United States than traditional measures suggest, while developing or emerging nations fare more poorly relative to the traditional measures. Jones and Klenow also compare the United States to itself over time, an analysis that this chapter extends through 2015. Based on this analysis, Americans’ well-being has improved considerably over the past few decades, but the rate of improvement has slowed in recent years.

Economically speaking, are we better off than we were ten years ago? Twenty years ago? When asked such questions, Americans seem undecided, almost schizophrenic, with large majorities saying that the country is heading “in the wrong direction,” even as they tell pollsters that they are optimistic about their personal financial situations and the medium-term economic outlook.1

In their thirst for evidence on this issue, commentators seized on the recent report by the U.S. Census Bureau, which found that real median household income rose by 5.2 percent in 2015, as an indicator that “the middle class has finally gotten a raise.”2 Unfortunately, that conclusion puts too much weight on a useful but flawed and incomplete statistic.3 Among the more significant problems with the Census’s measure are that (1) it excludes taxes, transfers, and nonmonetary compensation like employer-provided health insurance; and (2) it is based on surveys rather than more complete tax and administrative data, with the result that it has been surprisingly inconsistent with the official national income numbers in recent years.4 Even if income data are precisely measured, they exclude important determinants of economic well-being, such as the hours of work needed to earn that income.

On this question, a recently published article by Charles Jones and Peter Klenow proposes an interesting new measure of economic welfare.5 It is by no means perfect, yet it is considerably more comprehensive than median income, taking into account not only growth in per capita consumption but also changes in working time, life expectancy, and inequality. Moreover, as the authors demonstrate, it can be used to assess economic performance both across countries and over time. This chapter reports some of their results and extends part of their analysis (which ends before the Great Recession) through 2015.6

The bottom line: According to this metric, Americans enjoy a high level of economic welfare relative to most other countries, and the level of Americans’ well-being has continued to improve over the past few decades despite the severe disruptions of the financial crisis and its aftermath. However, the rate of improvement has slowed noticeably in recent years, consistent with the growing sense of dissatisfaction evident in polls and politics.

CROSS-COUNTRY WELFARE COMPARISONS

The Jones-Klenow method can be illustrated by a cross-country example. (Comparisons over time will be discussed in greater detail below.) Suppose that a researcher wanted to compare the economic welfare of citizens of the United States and France in a particular year—following the paper, 2005 will be the sample year.

In 2005, as the authors observe, real GDP per capita in France was only 67 percent that of the United States, and real consumption per capita (a more direct measure of living standards) was only 60 percent as high, making it appear that Americans were economically much better off than the French on average. However, that comparison omits other relevant factors of economic well-being. Jones and Klenow choose to focus on three such factors: leisure time, life expectancy, and economic inequality. The French take long vacations and retire earlier, and so they typically work fewer hours; they enjoy a higher life expectancy at birth (80 years in 2005, compared to 77 in the United States), which presumably reflects advantages with respect to health care, diet, lifestyle, and the like; and their income and consumption are somewhat more equally distributed than is the norm in the United States. Because of these mitigating differences, comparing France’s per capita GDP or consumption with that of the United States overstates the gap in economic welfare.

How much do these other factors matter? To quantify their effect in a single measure, the authors formalize the following question: If someone had to choose between switching places with a random person living in the United States—with its consumption, inequality, life expectancy, and leisure—or a random person living in France, how much would U.S. consumption have to change before he or she would be equally happy with either outcome?7 To answer this question, Jones and Klenow use detailed data for each country to convert the factors into “consumption equivalents,” using a simple model of household preferences and some plausible assumptions about, for example, the relative value of leisure and consumption.8 At the end of this exercise, they estimate that, in units of consumption equivalents, in 2005 a randomly chosen French citizen was actually about 92 percent as well off, on average, as a randomly picked U.S. citizen, despite the large gap between the two countries in consumption per capita.9

Similar calculations can be used to compare the United States and other countries. Table 1.1 shows the Jones-Klenow estimates of economic welfare, as well as income per capita, in a number of selected countries in the early to mid-2000s. (The exact years of comparison vary based on data availability.) U.S. values are set to 100, so the entries in table 1.1 should be interpreted as percentages of the U.S. level.

Table 1.1 confirms the conventional view that, broadly measured, American living standards are comparable to those of the richest Western European nations but much higher than the living standards in emerging market economies. For example, this calculation puts economic welfare in the United Kingdom at 97 percent of U.S. levels, but estimates Mexican well-being at 22 percent. Interestingly, this comparison shows that Western European countries such as the United Kingdom, France, and Italy are considerably closer to the United States in terms of economic welfare than differences in per capita income or consumption would suggest, reflecting the fact that Western European countries do relatively well on the other evaluated criteria (namely, leisure, life expectancy, and inequality). For emerging and developing economies, however, differences in income or consumption per person generally understate the advantage of the United States, according to this measure, largely due to the greater levels of inequality and lower life expectancies in those countries.

IMPROVEMENTS IN ECONOMIC WELL-BEING OVER TIME

The Jones-Klenow measure can also assess an economy’s performance over time. Since the Jones-Klenow published results cover only the period before the 2007–9 financial crisis and the Great Recession, publicly available data are needed to estimate U.S. results through 2015 based on the Jones-Klenow computer program available online.10 Where the published and the estimated results overlap, they are comparable.11 (Obviously, however, Jones and Klenow are not responsible for either the assumptions that the authors of the chapter made to determine their results or the accuracy of their calculations.)

Table 1.2 shows the results for the 1995–2015 period and for two subperiods. The first two columns report the annual growth rates of per capita GDP and of the data-based estimates of the Jones-Klenow measure of economic welfare. Also shown in the table below and displayed in figure 1.1 is the decomposition of the economic welfare growth estimates into four components: changes in life expectancy, consumption, leisure, and consumption inequality.12

Table 1.2 shows that economic welfare improved at quite a rapid pace over the two decades before the crisis (1995–2007), at more than 3 percent per year, notably faster than the growth rate of per capita GDP, at about 2 percent.13 As shown by the four rightmost columns of table 1.2 and graphically in figure 1.1, the gains in welfare were driven primarily by increases in per capita consumption and by improvements in life expectancy, which rose by 2.3 years over the period, from 75.8 to 78.1 years. Rising consumption inequality subtracted between 0.1 and 0.2 percentage points from the annualized growth rate in welfare during the precrisis period, and changes in leisure/work hours per person (which were stable) made only a very small contribution.

FIGURE 1.1 SOURCES OF GROWTH IN U.S. ECONOMIC WELFARE

Source: Authors’ calculations based on Jones and Klenow, “Beyond GDP? Welfare across Countries and Time”; BEA; CDC; Conference Board; U.S. Census; OECD.

What about the more recent period (2007–15)? As can be seen in the table and the accompanying figure, economic well-being has continued to improve (growth in welfare is positive), but the pace of improvement has slowed considerably, to just about 0.9 percent per year. The biggest reason for the slowdown is the decline in the growth rate of per capita consumption to only about 0.4 percent per year since 2007—about the same as the growth rate of per capita GDP. In other words, disappointing economic growth, including ...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Foreword
• An Agenda for America
• Part I: The Pulse of America
• Part II: Growing the Economy
• Part III: Security at Home and Abroad
• Part IV: Foreign Challenges and Opportunities
• Contributors
• Index