Government statistics paint an excessively grim picture of what is happening to real wages and the growth of real national income. Although most households’ take-home cash has been rising very slowly for decades, their standard of living is increasing more rapidly because those wages can now buy new and better products at little or no extra cost. The government’s measure of real incomes gives too little weight to this increase in what take-home pay can buy.

The common assertion that middle-class households have seen no increase in real incomes for 30 years is simply not true. And contrary to a common fear, most members of the younger generation will have higher real incomes as adults than their parents had at the same age.

The government’s growth estimates are excessively pessimistic for two reasons. First, government statisticians grossly understate the value of improvements in the quality of existing goods and services. More important, the government doesn’t even try to measure the full contribution of new goods and services.

Consider how the government handles manufactured products when their quality improves. Statisticians track a large number of products. For each, they ask the manufacturer two questions: Has the product changed since last year? If so, how much more does it cost to make this year’s model than it would now cost to make last year’s model?

If there is no increase in the cost of production, the government concludes that there has been no increase in quality. And if the manufacturer reports an increase in the cost of production, the government assumes that the value of the product to consumers has increased in the same proportion.