Undercover Economist

Putting pay in perspective

Like all good economists, I am both frugal and insensible to considerations of style, so my battered old spectacles are now more than a decade old. I’d be lost without them, quite literally. My unaided eyes are unable to read a book at a distance of more than four inches. Occasionally, this serves as a superpower – I can take my glasses off in tedious meetings and drift away, as blissfully blind as if I had pulled my jumper over my head. Usually, however, I prefer to be able to see, and so the glasses have followed me into the shower, the karate dojo, and a number of other situations that need not be detailed here. As a result, I rarely mislay my glasses – which is lucky, because they are slim enough that I find them invisible at a range of 3ft.

On the occasions when I do lose them, one thought often leaps into my mind: thank goodness I was born after eyeglasses were invented. Without them I would be severely disabled; with them perched on my nose, that description seems absurd.

The modern world is, of course, full of helpful stuff, from spectacles to penicillin to e-mail – stuff we tend to take for granted, but shouldn’t. The economist Timothy Taylor, editor of The Journal of Economic Perspectives, begins his introductory economics lectures by asking his students whether they would rather be making $70,000 a year now, or making $70,000 a year in 1900.

“$70,000 a year back in 1900, you probably have to multiply that by 10 or more to get how much income it would be right now,” he explained to NPR’s Planet Money show. “So we’re not just talking about just being average rich, we’re talking about really being darn rich – we’re talking about the mansion and the servants.”

Ten times is an underestimate: according to Samuel Williamson’s “measuring worth” database, $70,000 in 1900 is worth almost $2m today adjusted for consumer prices. (Relative to the average unskilled wage, it would be $8.5m today.)

Yet about two-thirds of Taylor’s students would rather have the decent income today than the millionaire lifestyle in 1900. And who is to say they are wrong? Many of the regular things of life – such as central heating, air conditioning, a car, a shower, and restaurant meal – are likely to be as least as good in 2010 on a middle-class salary as in 1900 on a rich man’s income. Even the spectacles would have been awkward and prone to breaking back then. Many modern conveniences would have been unavailable for any money.

This thought experiment is an arresting counterweight to the oft-made observation that we seem to be no happier than our parents or grandparents were, despite the fact that we are richer. Taylor’s students seem to believe they would have been happier than their great-grandparents even if their great-grandparents had been colossally richer.

It also puts into perspective our incessant efforts to adjust nominal prices to take account of the cost of living. By almost any reasonable measure, there has been plenty of inflation over the past 110 years.

A modest pension of $7 a week in 1900 would be worth $184 a week today if it had been linked to consumer prices. Many people believe such index linking is outright stingy, and propose a link to wages. Fine: $7 a week in 1900 would be $1,340 a week today if linked to wages in manufacturing. The idea of such indexation is that $7 was a lot of money in 1900 and it buys very little today.

But Timothy Taylor’s students believe that in some contexts, $7 now is worth more than $7 in 1900. And if you want a mobile phone subscription – or you have an infected abscess and need antibiotics – they may be right. It’s nice to have a justification for looking at the modern world through rose-tinted glasses.

Also published at ft.com.