I think what you're seeing is that there is no "real economy" - there are lots of microeconomies, in each good or service you can buy. Over the last 20 years, we've seen massive deflation in the markets for consumer goods. My first computer, not quite twenty years ago, cost $2500 and was a desktop with a 20 MHz processor and 2 MB of RAM. I now have a phone worth roughly $400 with a 1 GHz processor and 4 GB SD card.
Meanwhile, there's been massive inflation in services, particularly health care and education. When my mom went to college, a $3000 National Merit Scholarship basically covered a whole year's tuition. When I went to college, tuition + room & board was roughly $40K/year, and is higher now.
People are responding to those price incentives, which is why you see people at the poverty level with blu-ray DVD players, iPhones, and netbooks, but with no health insurance or college education. Prices for consumer electronics have come down so much that it's worth more to them to spend half a month's salary on a phone that they'll keep for a couple years rather than try to get health insurance that they can't afford anyway.
Whether this is a good thing depends on whether you consider phones, computers, and entertainment to be more important than health care and education.
If your mom went to college in 1970, GDP per capita was only $5000. So one year of college cost 60% of GDP per capita, now it costs about 80%. That's an increase, but not a ridiculously large one.
In any case, I don't much care about education by itself, since most people value education only insofar as it allows them to get wealth. If people have more wealth, why would I worry about their education? (That's not to say that education is becoming more scarce - far from it. We are more education today than ever before.)
The same applies to health insurance - I don't care about the cost of health insurance, I care about health. By most measures that I'm aware of, health is increasing. For example, life expectancy went up 8 years since 1970 and infant mortality went down more than 50%:
What you say is true, but over the same period the distribution of wealth within the USA has shifted dramatically. Therefore the median family income has not kept up with per capita GDP.
The figures I have from http://www.davemanuel.com/median-household-income.php go from 1975 to the present. $3000 in 1975 was 25.4% of a year's income for the median family. $4000 in 2009 was 82.5% of a year's income for the median family. My understanding is that tax rates on the median family have increased, making that picture even worse.
Therefore education is much less affordable than it used to be for the median family.
You are correct to use median income, which was about $6500 in 1970, making $3000 = 46% of median income in that year [1]. You are also correct to say that taxes went up, by about 140% (according to Elizabeth Warren's data [3]).
In any case, this only makes the paradox I highlighted more puzzling. College is more expensive, and yet college attendance per capita is up 40% over 1970 [2]. If real income is flat, then people must be giving up other goods and services to attend college. And yet, people seem to be consuming more goods and services of all sorts in addition to college.
This doesn't make sense. I suspect that real income is being incorrectly calculated.
I know multiple trends that address your paradox, and I do not know the relative importance of them.
The first is that the savings rate has dropped significantly. People who do not save can purchase more goods with the same income. (At least in the short term.)
The second is that due to widening income disparities, the ratio in earnings between the median family and the top fifth has increased. Therefore college has not become as proportionately hard to afford for the top fifth as it has for the median.
The third is that the increasing income disparity has come with widespread recognition that a college education is a good way to improve your odds of being in the top fifth rather than the bottom half. This makes education proportionately more valuable. People are willing to spend more on things they value more.
Fourth, the structure of financial aid has changed. It is less often true that students pay the full sticker price for college today than historically. And the poorer you are, the more likely you are to get a break. (Harvard's policy being an extreme example.)
And last but not least, in a very different tangent, income disparity leads to an increased fraction of consumption being accounted for by a small fraction of the population. So changes in total consumption do not necessarily indicate changes in consumption for the median.
The particular paradox I'm describing is not limited to college - it applies to virtually all goods and services. So any college-specific explanation is incomplete.
It's also not limited to any strata of income - the poor today have more goods and services available than the middle class of 1970. This casts doubt on explanations based on inequality.
Decreased savings might explain things, though I think in the long term it would cause inflation. Would need to think about it.
Meanwhile, there's been massive inflation in services, particularly health care and education. When my mom went to college, a $3000 National Merit Scholarship basically covered a whole year's tuition. When I went to college, tuition + room & board was roughly $40K/year, and is higher now.
People are responding to those price incentives, which is why you see people at the poverty level with blu-ray DVD players, iPhones, and netbooks, but with no health insurance or college education. Prices for consumer electronics have come down so much that it's worth more to them to spend half a month's salary on a phone that they'll keep for a couple years rather than try to get health insurance that they can't afford anyway.
Whether this is a good thing depends on whether you consider phones, computers, and entertainment to be more important than health care and education.