Wednesday, October 07, 2009

Where the money really went...

A firm understanding of the plight of consumers is becoming fixed in many minds, especially those who are naturally more frugal. The Consumer, they they pronounce sternly, spent foolishly and "lived beyond their means".

In retrospect this looks obvious, but serious questions are now arising about whether flat-screen TV's are the reason, or whether another, I think more serious, spending pattern is at work.  Elizabeth Warren looks at decades of consumer spending data for the evidence.

For example, did we blow too much on clothes with fancy labels?
Start with clothing. The stories of Americans overspending on clothing are familiar: the malls are overflowing, every teenage foot is clad by Adidas or Nike, and designer shops thrive selling nothing but underwear or sunglasses. Even clothing for little children now carries hip brand names, with babies sporting “Gap” and “YSL” on their T-shirts and sleepers.
And yet, when all is added up—including the Tommy sweatshirts and the Ray-Ban sunglasses—a family of four spends, on average, 21 percent less on clothing today than in the early 1970s, according to our analysis of data from the Bureau of Labor Statistics.
How can this be? What the finger-waggers have forgotten are the things families no longer spend money on. There’s no more rushing off to Stride Rite every three months to buy two new pairs of sensible leather shoes per child (one for church and one for the week), plus a pair of sneakers for play. Today’s toddlers often own nothing but a pair of five-dollar tennis shoes from Wal-Mart. Suits, ties, and pantyhose have been replaced by cotton trousers and knit tops, as “business casual” has swept the nation. New fabrics, new technology, and cheap labor have lowered prices. Discounters like Marshall’s and Target have popped up across the country, replacing the department stores of a generation ago. The differences add up. In 1973 a family of four would spend, on average, nearly $750 more a year on clothing than such a family would today. 
As farmers loudly proclaim, the misconception about food is equally wrong.
If Americans are not overspending on clothes, the problem must be food. Designer brands have also hit the grocery shelves, with far more prepared foods, high-end ice creams, and exotic juices. Families even buy bottled water, which would have shocked their grandparents. Besides, who cooks at home anymore? With Mom and Dad both tied up at work, Americans are eating out (or ordering in) more than ever before.
Here the over-consumption camp has it right, but only to a point. The family of four, on average, spends more at restaurants than it used to, but it also spends less at the grocery store—a lot less. Families are saving big bucks by skipping the T-bone steaks, buying their cereal in bulk at Costco, and opting for generic paper towels and canned vegetables. Those savings more than compensate for all that restaurant eating—so much so that today’s family of four is actually spending 22 percent less on food overall than its counterpart of a generation ago. 
Similar results show up when you look at appliances and even cars.

Where to point the finger? Clearly houses, but not for the apparent reason.

Even as middle-class living conditions have improved only modestly, the burden of paying for a home has increased dramatically. Over a generation, the average number of rooms in a home increased by seven percent as average mortgage expenses increased by 69 percent—at a time when other family expenses were falling. The impact of rising mortgage costs has been huge. The proportion of families who are “house-poor”—that is, who spend more than 35 percent of their incomes on housing—has quadrupled in a single generation. Today it often takes two working people to support a mortgage. A police officer or elementary-school teacher earning an average salary could not afford to pay the mortgage of a median-priced home in two thirds of the nation’s metropolitan areas.
Why such a staggering increase in the cost of housing? That is a long, separate discussion, but one point is worth underlining here: when a family buys a house, it buys much more than shelter from the rain. It also buys a public-school system. Everyone has heard news stories about kids who can’t read, classrooms without textbooks, and drug dealers and gang violence in school corridors. Failing schools impose an enormous cost on the children who are forced to attend them, but they also impose an enormous cost on those who don’t.
Talk with an average middle-class parent in any major metropolitan area, and she’ll describe the time, money, and effort she devoted to finding a slot in a decent school. In some cases, the story will be about mastering the system. In others, it will be about leaving the public-school system altogether and opting, as middle-class parents have increasingly done, for private, parochial, or home schooling. But private schools and strategic maneuvering will only help a minority of families. For most middle-class parents, ensuring that their children get a decent education means buying a home in the small subset of well-reputed school districts. 
In fact, I would consider much of the "splurging" on housing as education expense. The other big drains are health care and higher education.  So the result is a little different from the picture of frivolous spendthrifts.
Most interestingly, as Elizabeth Warren has argued, the idea that most Americans have been spending frivolously on consumer goods actually isn’t true. Instead, a hefty chunk of the increase in consumption in recent decades has been the result of higher housing prices, the rising cost of medical care, more spending on education, and childcare. A generation ago, Warren says, basics (housing costs, health insurance, transportation, education, and taxes) accounted for fifty-four per cent of the average family’s income. Today, they account for seventy-five per cent of it. Now, some of those costs arguably do reflect a lack of frugality—homes are more expensive in part because they’re so much bigger. But the fact that more than fifteen per cent of personal consumption expenditures now go to medical care, when in 1930 only three per cent of personal consumption did, isn’t a reflection of frivolity, and that’s not going to change any time soon. In fact, when you actually look at what Americans spend money on today versus what they spent it on fifty years ago, it’s striking that Americans today actually spend less of their income on goods—including everything from furniture to clothing to food to appliances—and much more of their income on services. For the savings rate to get back to ten to twelve per cent, in other words, will require a lot more than having people stop buying flat-screen televisions.
As far as the question of the Depression’s impact goes, it’s difficult to reconcile the idea that the Depression made Americans permanently frugal with the reality that, in the years after the Second World War, the U.S. saw an absolutely massive boom (see pp. 24-26) that was driven largely by consumer spending. According to one account, in fact, “nearly the entire increase in the gross national product in the mid-1950s was due to increased spending on consumer durables and residential construction.” And, as this historian argues, the nineteen-fifties was when American consumer society as we know it was born. It’s true, of course, that even as people were consuming, they were also saving (in contrast to the past few years), but that, again, was in large part because of demography, and because there were a lot of things (childcare, health care, and education) that they were spending significantly less on. The point, in any case, is that the Depression did not make people turn away from household consumption in any sense.
As I mention in the column, recessions (which usually entail a drop in consumer spending) often give rise to forecasts of a new consumer mentality. Here’s Fortune, from 1991, on “the death of conspicuous consumption,” and Time on Americans’ supposed embrace of “simpler pleasures and homier values.” What’s striking, really, is how similar the language in those articles is to the language people are using today. [More]

My point is not that most consumers were innocent victims, but if you were raising a family and worried about their schools and health and road safety, those concerns were heavily marketed to. Consumers are still responsible for overspending of course, but ascribing some lack of moral character is usually a theme attached to younger consumers by those who got their families raised during the relatively cheap 70's and 80's.

Farmers are being reminded again by David Kohl about their profligate tendencies. This perennial tut-tutting from an older (but as he reminds us often - still in great shape!) voice to younger families, has become predictable and off the mark, IMHO.
One final view from the Minnesota data is that total living expense has jumped from $55,119 in 2003 to $89,147 in 2008, similar to the increase reported in the last article from Nebraska data. Living withdrawals are now $5,000-8,000/month, not including any co-mingled personal expenses and other perks of living on the farm or ranch. The question then becomes, “What salary level would one need to earn at an off-farm job to have a similar living standard?” The answer is probably higher than one would think. [More]

He is absolutely correct in his cursory analysis, of course.  But I see few suggestions to address the issue of living expenses.  I suspect it is because solitary action may not really dent the problems. It is fair to say cutting back $20,000 on living expenses could be needed, but most farm families I know are way more fugal than average in my opinion.  What we need are options for health care, child care (so the extra earner can keep some of the wages), higher education costs for universities such as where Dr. Kohl enjoyed an illustrious career, and the growing chunk of the budget spent on services.

The biggest single answer would be to improve our education system so that school districts don't finance by real estate taxes so that good systems have expensive homes and expensive homes provide money for good schools.  Shifting from real estate taxes to another source of funding, adding a truly viable voucher system and realizing schools exist to educate, not to provide jobs or anchor communities are all part of the solution, I think.

Here on our farms, I have written about where I see expenses getting out of hand, and $3000 more per year for auto expenses because gas went up or $5000 in medical expenses pale in comparison to just my potash bill, to name one real problem.

Consumer habits are changing perhaps, but the idea of the new frugality may be overblown, as consumers don't have many choices to cut back in the areas most rapidly escalating. The choice of doing without is a little more morally ambiguous when it is health insurance and not a 50" TV.

Consumers are making spending decisions about as well or poorly as ever, I suspect. What is different is how the system has evolved to make the most crucial and productive expenses the ones it is hardest to control.

1 comment:

Anonymous said...

I am a 1959 born central Illinois farm raised person. I raised 2 children one born in 85 and the other in 88. I recall struggling to pay bills and still provide a reasonable lifestyle for my family. We bought our first house for $50,000, sold it for $75,000 5 years later, then bought the next one for $110,000 and sold it for $135,000 6 years later; then we 'downsized' to a $100,000 house (with a little land for me to play with); so the wife could be a stay at home Mom. We divorced 7 years later, I bought her out of the house, which I owe in mortgages $100,000 on. It is probable worth $125,000. There were medical bills, tuition bills and house repair bills. It sure seemed like the thing to do at the time,but, bottom line, I think the use of home equity loans is not a particularly wise idea. I imagine that is where most folks got smoked. I can still pay my bills, but just imagine if we would have stayed in that $50,000 house and never took out a home equity loan? There would be 4 years left on a very cheap 30 year mortgage. DUMB!