On Radio 4's Broadcasting House yesterday, Bonnie Greer said that the UK's living standards are the "lowest since 1870." This is, of course, absurd pish: she's confusing the level with the rate of change. However, this confusion isn't confined to her. Two things tell us that people put great weight upon changes in incomes rather than levels.
One is that China's Global Times said recently that the UK is “no longer any kind of big country" and is only “suitable for tourism and overseas study”. In fairness to it, Cameron's visit to China did seem like a supplicant pleading with a rich man. But this misses the fact that the UK is massively better off than China. UK GDP per person is, according to the IMF, four times that of China. It's us that's should be lecturing them, not vice versa.
Secondly, everyone seems to agree that we have a cost of living crisis, on the basis that the real income of the median (pdf) non-retired household is 6.5% below its 2006-07 level. However, those same incomes are 18.6% higher in real terms than they were in 1998-99. And yet then was a time of high optimism - the tech bubble - whilst now is one of anxiety.
Rates of change of income thus have a big impact upon public mood. China's big growth - from a low level - breeds optimism and arrogance. Our decline from a high level gives talk of a crisis. All this vindicates Adam Smith:
The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining, melancholy.
What's going on here is a reference effect. When we ask "how well off am I?" we tend to compare our incomes to those of recent years. By this metric, most Chinese are doing well and most Brits not - even though a look at levels of income says the opposite.
This helps explain the Easterlin paradox. If our well-being depends upon the change in incomes rather than levels, then the same rate of GDP growth will give us the same level of well-being, regardless of the level of income.
However, I'm not sure there's a necessary, logical reason for this. My real income is barely half what it was 20 years ago and yet I feel comfortably off. One reason for this is that I was never stupid enough to confuse the size of my pay cheque with the size of my talent, so I saved a lot - and compound interest (and house price inflation!) is a powerful force. For me, my income of a few years ago is not the reference point. Instead, it's: "how much do I need to be comfortable?"
This, I think, helps explain a paradox - that at the same time as many are talking about a cost of living crisis and secular stagnation, others are speaking of abundance and the desert of plenty. There's less contradiction here than you might think. If your reference point is your income a few years ago, you might well think there's a crisis. But if it's the amount you need to be comfortable, then if you're an older person who's had years of top-quartile earnings, abundance is near.
In this sense, talk of abundance and crisis coexist not merely because of differences in class and generation - important though these are - but because of differences in how we frame our incomes.