The Bad Math Behind Economic Doomerism

It’s a big week for American Compass, a think tank founded in 2020 that fancies itself as the “pre-eminent alternative to the Old Right’s market fundamentalism.” On the heels of its new policy book, Rebuilding American Capitalism, it hosts an event on Capitol Hill today with multiple Republican senators. It’s the latest sign of the intellectual confusion afflicting the right today. 

American Compass is a grantee of the Omidyar Network, started by Ebay founder Pierre Omidyar and his wife, Pam. The network’s website states that “the current form of capitalism is fundamentally broken” and Omidyar seeks “to shape a new, inclusive economy.” It has been a leader, with the William & Flora Hewlett Foundation—an even bigger American Compass donor—in bringing foundations together to “advance goals that include a bigger federal government, higher taxes on business and the wealthy, and an active regulatory state that reins in corporate influence.” That’s one alternative to the straw man of market fundamentalism.

More than any other organization, American Compass has blurred the lines between conservatism and progressivism by trotting out the same factually incorrect doomerism the left has relied on for decades. Three paragraphs into the new book, American Compass founder Oren Cass writes:

The economic system’s malfunction has dire human consequences. Whereas 40 weeks of the typical male worker’s income in 1985 could provide the middle-class essentials for a family of four, by 2022 he needed 62 weeks of income—a problem, there being only 52 weeks in a year.

These claims—of an unattainable standard of living for sole breadwinner families after three-and-a-half decades of costs outpacing income—come from Cass’ report from earlier this year, “The 2023 Cost-of-Thriving Index.” Indeed, Cass argues more broadly that it has become harder for working families generally to purchase the basic necessities of life. These claims are badly wrong.

In a new report for the American Enterprise Institute, we critique Cass’ Cost-of-Thriving Index (COTI). The index takes the combined cost of five essential goods and services—groceries, transportation, housing, health insurance, and higher education—and divides it by the median weekly earnings of full-time male workers.

We first improve on Cass’ cost estimates by correcting conceptual and measurement errors and using better source data. For instance, while Cass uses the average sticker price of attending an in-state four-year public university as his education estimate, we account for the fact that institutional and federal grants reduce the average considerably. Cass’ health insurance estimate treats the part of the premium paid by employers as if it were paid by workers. (One might argue that it actually does come out of worker pay, but then one has to include it in earnings, too.) Improving his estimates in these and other ways knocks down the increase in COTI from 22 weeks to 10 (and puts the 2022 COTI below 52 weeks).

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 COTI, 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. 

When we either accounted for federal income and payroll taxes or expanded the scope to all full-time workers (including women and younger workers), COTI actually declines slightly from 1985 to 2022. That means it has become easier, not harder, for a worker to afford Cass’ essential goods and services. Accounting for taxes and expanding to all full-time workers results in COTI falling by 7.5 weeks. 

Finally, we argue that—these refinements aside—the COTI approach to assessing costs, affordability, and changes in living standards is all wet. In looking only at five categories, Cass ignores nearly half of what families spend their money on, and the cost of many of these other goods and services has risen more slowly than earnings (or even declined). Furthermore, our quality adjustments are not fully adequate in accounting for quality improvements, and the Cass approach precludes families switching between goods and services as their relative prices change.

While Cass’ estimates imply that cost-adjusted earnings have fallen by 36 percent, when we apply conventional inflation adjustment to median weekly earnings and look at all full-time workers, we find an increase of 33 percent before taxes and 53 percent after taxes. Cass objects to conventional inflation adjustment to assess changes in costs, but we devote an entire appendix of the paper to explaining why countless economists over the course of a century are right and he is wrong. 

Even official statistics using an inflation measure that overstates the rise in the cost of living find that income rose by 21 percent from 1985 to 2021 among families with a sole breadwinner. Because marriage has declined, single-earner families have become more common since 1985 relative to multiple-earner families, not less common. Median earnings have risen both for men and women. None of these facts suggest that it has become more difficult for a sole breadwinner to afford essential goods and services.

Cass’ claims bear no relationship to reality. The doomerist basis of national conservatism is empirically unfounded, and therefore so are many of the policy priorities it has borrowed from liberal doomers, such as protectionism and industrial policy. Elected conservatives should think twice before following American Compass down a road that proceeds from such a dubious signpost.