May 29, 2009

The Decline of the Middle Class, Big Screen TV's, and the "Economists" Who Link the Two

I'm back for a brief second to squash the often cited reasons as to why Americans today aren't saving, and are therefore in a financial predicament, compared to thirty years ago.

Law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School and conducted a study a few years back that compared median household incomes and their basic expenses between the 1970's to 2005. Her results were just as I had always suspected.

Note that the data compared families with the same composition: a mother, father, and two child middle class family, all inflation adjusted.

But first, let's examine the main conservative argument used to explain why Americans aren't saving or seeing their incomes rise:

They spend all their money on big screen TV's, designer clothing, and eating out.

Based on this argument, one would naturally deduce that people are consuming much more crap - while maxing out their credit cards - rather than saving their money as families in the 1970's were apparently able to do (about 11% of their income).

However, based on Ms. Warren's data, Americans are actually spending a considerable amount less on those crap items than they were 30 years ago. For example, a family is spending 32% less on clothing, 18% less on food, and 52% less on appliances. So much for the idea that we are consuming more of those "unnecessary items."

So the question is, if all those things went down, where is the family spending more money? Accordingly, there has been a 76% increase in mortgages for the same sized home, 74% increase in health care among healthy families, 52% increase in automobiles, and 100% increase in child care. The last two increases are based primarily on the fact that families today are required to have two working parents; therefore, two cars as opposed to one and, of course, daycare since one parent no longer stays at home.

The real problem we see from this data is that all those items that decreased are all flexible purchases. In other words, families are able to cut back their spending habits on clothing, food, and appliances. In contrast, all the increased expenditures such as health care and mortgages, are not flexible. Additionally, the early 1970's family was spending about half of its income on these big fixed expenses that are very difficult to cut back on, while the family of the 2000's are spending 3/4 of their income on these same fixed expenses.

What this tells us, despite the fact that we now have two working parents, is that today's families have fewer total dollars left over than their one income parents had 30 years ago (wages have remained approximately stable since the 70's, inflation adjusted). The problem does not lie upon unnecessary consumption, but the fact that the large fixed expenses have just gotten so much greater.

1 comment:

arrozconpollo said...

Good post CD. This is the basis of many of the Heavy Drinkers' arguments, and its all laid to waste by, uh, actual statistics and facts.