Consumption-ability

by Don Boudreaux on March 30, 2006

in Standard of Living

A few months ago I blogged on the affordability of items sold in department stores, using Sears for my experiment.

Here’s a slightly updated version of that point that appears in my column in today’s Pittsburgh Tribune-Review.

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{ 38 comments }

johngaltline March 30, 2006 at 7:04 am

Heretic! Everyone knows the poor keep getting poorer.

"In the early part of this century, the average American had to work two hours to earn enough to purchase a chicken, compared with 20 minutes today." –Walter Williams

http://www.jewishworldreview.com/cols/williams110602.asp

Tom March 30, 2006 at 9:30 am

I would think if we looked at housing per sq ft it would be more reasonable, especially if we added in cost of heating per sq ft. The insulation, windows, and furnaces are much more efficient than 1975.

Tom March 30, 2006 at 9:54 am

1975 average sq ft = 1645 wage = 4.87 4.33x
2004 average sq ft = 2349 wage = 15.70 5.42x

Looks like housing is 25% more expensive.

bbartlog March 30, 2006 at 9:55 am

By some relative measures, such as the total percentage of national income that goes to the bottom quintile of households, the poor are getting poorer.
Focusing mostly on manufactured goods obviously strengthens your argument, since vast gains in productivity (both for manufacturing and distribution) have made them very cheap. I even think that the real cost of car transportation has gone down (price of new cars notwithstanding) thanks to increases in durability and mileage. And you didn't even touch on the fantastic drop in communications costs. But of course people will always be most concerned about things they have trouble affording, whether that's housing or healthcare or education.
By the way, do you have any information on the returns to a college education? You claimed that the increase in lifetime earnings (from getting a degree) is greater than ever before, and in absolute dollar terms I'm sure that's true. However, with so many more people going to college, I would actually be surprised if the inflation-adjusted return for a degree is great as as it was 30 years ago.

Half Sigma March 30, 2006 at 10:26 am

Once you already have a house, adding more square feet has diminishing marginal return, so you can't simply base this on square feet.

Larger houses being built today reflect the scarcity of housing permits. With housing permits so rare, it doesn't pay to build a middle class house, builder put in an upper middle class house.

John Dewey March 30, 2006 at 10:29 am

"By some relative measures, such as the total percentage of national income that goes to the bottom quintile of households, the poor are getting poorer."

How can relative measures be valid? Low income workers are better off in absolute terms and that should be all that matters. Labor leaders and mainstream media do us all a disservice as they continue to ignore absolute income and feed the fires of envy.

Low income workers don't realize it, but they should be glad that the top earners are receiving such income. It is the high rewards for taking risks that allow entrepreneurs to create jobs for low income workers, to invest in equipment and processes that reduce cost of goods, and to eliminate most of the numbing tedious work that past generations were faced with.

Patrick March 30, 2006 at 10:35 am

Don, Once again your research and statistics are remarkable, accurate and dispassionate-the perfect way to prove your point. Certainly no readers of this blog disagree. On the more passionate and emotional side of this argument you find lot's of people both left and right. It's funny how extremely intelligent people so easily believe every myth spouted (like all natural crap pedaled as cures for cancer and the like) because they feel good (this is how the scourge of socialism infects nations-it feels good to "give" everybody health care and such but there are devasting unintended consequences that the feel good emotion buries in many people's minds, until the country is bankrupt anyway).

I remember in 1968 a couple came over to my parent's home for dinner and empathized with them about how "they don't know how a young person affords to get by, buy a home, etc. these days" Through the 70', 80', 90', and into this century I have heard the same line over and over again, often repeated by very smart and competent people, many of whom are in positions of power. The reality is that Americans, especially middle-class Americans, can afford more than ever. What they can't afford, it seems, is their appetite for stuff. Many an employee of mine has confessed a "financial crisis" in their lives. When pressed they admit that, like lot's of middle class families they 3 TV's, cable/satellite, internet, 2 new/newer cars, a home, gym memberships, kids in after care and summer camp or private schools, vacation plans that extend 2 weeks or more, etc. Any crisis of unaffordability today is one of choices not money. The fact is, as a middle class guy in an almost identical position as my father had 30 years earlier I have so much more it's really embarrasing to even recount. Myth and reality in economics, race and politics are almost never compatible in the same room, or sentence, or book, or speech, even when the truth is plain to see.

John Dewey March 30, 2006 at 10:39 am

"Larger houses being built today reflect the scarcity of housing permits."

Is that true everywhere? Builders aren't having any problems getting permits here in Texas. Yet the average sizes of homes have increased more than in places such as California and Maryland.

John Dewey March 30, 2006 at 10:57 am

Here's some data on new U.S. housing units authorized by building permits:

(single unit houses only)

1980 710,390
1986 1,077,596
1992 910,679
1998 1,187,602
2004 1,596,443

I couldn't find pre-1980 data at the census bureau's website:

http://tinyurl.com/nte5d

bbartlog March 30, 2006 at 10:58 am

I also doubt that the increasing square footage has anything to do with building permits; it's not as if areas where tons of new houses are being built/allowed have lower square footage on average.
As for the validity of relative measures of poverty, anyone who has studied human nature knows that people measure their wellbeing not only in absolute terms but in comparison with their neighbors. You may deride it as envy and wish it were otherwise, but it is what it is. Expect people to be happy with a 10% gain in income when everyone else has gained 50%, and you will be disappointed.

John Dewey March 30, 2006 at 11:12 am

bbartlog,

I'm not denying envy exists. But I believe labor leaders, ethnic leaders, and mainstream media make it more important than it would be otherwise.

I also believe that social mobility is fairly easy in today's merit-oriented society. I've met way too many highly successful people who came from blue collar backgrounds to believe otherwise. Mainstream media continues to ignore this, focusing on those "left behind" rather than on those who achieved.

Broocks Wilson March 30, 2006 at 1:13 pm

Mr. Dewey,

The reason building permits aren't as scarce in Texas as they are in Conneticut or the Northeast I think is for a number of reasons. In Texas we have much more room to build and expand our cities. I also think that the State of Texas does not actually hand out the building permits but leaves this to cities. Given that our largest city and economic center, Houston, doesn't even have zoning laws means that gaining a building permit in a city like that is much easier, since I think the only obstacle to a building permit would be either safety or the feelings of a neighberhood.

I don't mean to say that the poor are getting poorer, I certainly don't believe that. However, I don't think that it is a good idea to write off trying to increase equal income distribution in our country. Despite the fact that our poor are getting richer and the country, it still remains that an astoundingly large amount of our population lives in poverty.

johngaltline March 30, 2006 at 2:10 pm

"Despite the fact that our poor are getting richer and the country, it still remains that an astoundingly large amount of our population lives in poverty."

When you define poverty as a relative term, then an artifact of this thinking is that as "the rich get richer" your poor automatically become more "impoverished" — even if they, too, are getting richer.

It's zero-sum-game thinking. It's fallacious, and the bottom line is that policy should not reward people who believe it.

John Dewey March 30, 2006 at 2:20 pm

Mr. Wilson,

No doubt it's easier to obtain building permits in Texas than just about anywhere else. By Half-Sigma's logic, that would imply that housing size should not have increased as much in Texas as in the Northeast. But we know that's not true.

Housing permit statistics show great variance in the Northeast. But we cannot say they were more scarce now than years ago:

(single unit housing permits – Northeast)

1980………….75,727
1983…………112,324
1986…………203,761
1989…………129,669
1992…………108,468
1995…………104,545
1998…………124,107
2001…………117,680
2004…………131,393

It certainly appears that scarcity of permits is not the reason for housing size increases the past 25 years.

I don't know why housing boomed in the Northeast in 1986. The period 1984 to 1987 appears to be the peak years for that section of the country. But current construction levels are still historically high.

One more thing:

Houston may be the largest metro area in Texas, but not by much. Dallas-Fort Worth is just as much an economic center, in fact probably more so because of its diversity of industry. Austin-San Antonio is not very far behind. Texas is much more than just an energy economy.

John Dewey March 30, 2006 at 2:34 pm

Correction for my fellow Texan:

2000 metro populations

Houston…………4,715,407
Dallas-FortWorth…5,161,544

July, 2004 estimates

Houston…………5,180,443
Dallas-FortWorth…5,700,256

Not only is my metro area larger, but the lead is increasing. Neither Dallas nor Fort Worth annexed all their suburbs as Houston has done, so the city limit population of Houston does exceed that of the other two.

Half Sigma March 30, 2006 at 2:37 pm

Even though there are plenty of houses being built, the historically high prices for houses indicates a shortage of supply. So therefore, the permits will be used to build a "luxury" house because it produces more profit.

A second reason houses may be getting bigger is because, after you ignore the zoning issues, actual construction costs are lower because technology makes home building more efficient, and all manufactured items including the finished lumber that is used to build the house have gone down in price. In a logical world houses wouldn't appreciate in value any faster than inflation, evidence of a bubble.

And now, changing the topic, a poor person is not rich just because he owns a few thousand dollars worth of consumer electronics that would have cost over a million dollars in 1950. This is an obvious example. Less obvious is the general argument that poor people are better off today because the prices of some items that he consumes has decreased.

Broocks Wilson March 30, 2006 at 3:04 pm

Correction for My Fellow Texan:

Population of the City of Houston: 2m
Population of the City of Dallas: 1.2m

The DFW metro area includes two of the five largest cities in Texas, and so therefore the metro area is larger than that of Houston. Beyond that, it's not so much annexation rather than the fact that Houston is growing and seeing that the communities which we annex often take advantage of the aspects of having the third largest metropolitain city in the world 30 minutes away but contribute no tax dollars is just plain selfish.

In any case, although it is true that Houston is the energy capital of the United States (which, if I may add is the third largest industry in the United States behind finance and technology) that is not solely what Houston is good for. For example, Houston has the sixth largest port in the world and was second only to New Orleans (this has obviously changed) in total tonneage and was and still remains to be first in foreign tonnage handled. Beyond that, Houston also has some of the best aeronautical industries in the world based on the fact that NASA is 20 minutes away. Even beyond that, we have one of the best medical research centers in the world. I do also believe that Houston is second only to New York in Fortune 500 headquarters.

Also, in relation to Mr. Galtine, the increase in poverty (on a relative scale) reflects the fact that the rich are getting richer faster than the poor are getting richer, this shows that those who need the money least are getting richer faster than those who need the money most. This is a problem.

johngaltline March 30, 2006 at 3:19 pm

"a poor person is not rich just because he owns a few thousand dollars worth of consumer electronics that would have cost over a million dollars in 1950."

But he is richer than if he didn't have them at all. Now, do you propose to tell him that he is both richer and poorer? That's tough to do if you want to view them as different values of the same indicator.

OTOH, if you want to treat them as different indicators, then we should be careful not to interchange them in discussion for the sole purpose of political convenience.

johngaltline March 30, 2006 at 3:29 pm

"the rich are getting richer faster than the poor are getting richer, this shows that those who need the money least are getting richer faster than those who need the money most. This is a problem."

The inequality is not a problem as long as it's equitable. And it's not inequitable as long as the poor have the option of acting — and becoming — rich.

Half Sigma March 30, 2006 at 3:47 pm

"But he is richer than if he didn't have them at all. Now, do you propose to tell him that he is both richer and poorer?"

All things being equal, then a person is richer having a bunch of consumer electronics that would have cost a million dollars in the 1950s.

But we know that all things are not equal, today housing costs more, healthcare costs more, college costs more. One can't simply use hedonics to say that there's no inflation. This results in the wrong answer, an inflation rate that is lower than it truly is.

If one says that the rich are getting richer and the poor are getting richer but not by as large a percentage, but if one has understated the true measure of inflation, then this might mean that the poor have actually gotten poorer and not richer.

johngaltline March 30, 2006 at 4:21 pm

That may be, but it's hard for me to be concerned about the "poverty" of "poor" people who spend so much of their disposable income on consumer electronics.

Doesn't seem that "the poor's" healthcare, education or housing should be much of a everyone else if it's not a priority for them.

I'm not about to accept that high healthcare and education prices constitutes "inflation."

John Dewey March 30, 2006 at 5:39 pm

Broocks,

I enjoyed Houston and Houstonians when I lived there from 1976-1981. I still do today. Sorry if I gave the impression I wanted to compete. Sometimes I just need to point out to the world that Houston and Oil is a subset of Texas. Or that all Texans do not think alike.

Bob Smith March 30, 2006 at 11:42 pm

In California and much of the Northeast, land is astronomically expensive, mostly due to "smart growth" severely restricting supply, the cost of environmental and municipal regulation, and extortionate fees paid to municipalities for approval (over $100k/house is the average in CA). Once you've got the land, the marginal cost of building a 2400 SF house vs a 1600 SF one is quite low, so it's very much a profit-maximizing move.

>In a logical world houses wouldn't appreciate in
>value any faster than inflation, evidence of a bubble.

A logical world wouldn't have smart growth, city planners who want to mold cities to their personal whims rather than for the benefit of its residents, or environmental regulations that privilege obscure animals over people.

Broocks Wilson March 31, 2006 at 3:19 am

Even if one includes real estate in inflation (which one probably should given it's massive effect on the economy) I don't think that real growth, even for those we consider poor has decreased, but has increased. I think a very radical indicator of this is the fact that it is not just consumer electronics that a poor person can afford in a much shorter amount of time of labor, but that basic things like food they can afford in a much shorter time.

I think that before we say that we shouldn't care about the poor's education if they don't care about is absurd, because in doing that you are creating a whole generation of people who are doomed to fail not just because their parents do not care about them, but because the government doesn't care about them. At that point, we cease to be a political community. Beyond that, it is completely arguable that the poor have been priced out of the housing market and healthcare and this is the reason it is not so easy for them to have such things.

Beyond that, although the poor are getting richer, they are the ones who in our society need the money the most. Beyond that, it makes much more economic sense to have the poor getting rich faster than the rich. The poor would be better consumers, and if they were getting rich faster, they would be able to save more and so therefore, if an economic downturn were to occur, would have more to fall back on that just nothing.

Mr. Dewey,

It's always nice to see a fellow Texan, and I actually have quite alot of family in Dallas, and have enjoyed most of the time I have spent there myself. It's just you know, oftentimes, we as the greater city feel the need to put those others in their place. ;-)

Chris March 31, 2006 at 6:10 am

I just read that last night, well done.

bbartlog March 31, 2006 at 9:29 am

The inequality is not a problem as long as it's equitable. And it's not inequitable as long as the poor have the option of acting — and becoming — rich.

I think I would use 'just' rather than 'equitable' here instead of skirting oxymoron. In any case, the post you are replying to pointed out that you were being sloppy when you claimed that the rich getting richer automatically meant that the gap between rich and poor would increase; you are addressing a different issue. As for the poor acting and becoming rich, I think acting rich before becoming so leads to bankruptcy (though I realize you had something else in mind :-) . But in any case, not everyone is endowed by nature with the abilities required to become wealthy, and I think even someone who is a strong believer in free will can acknowledge that.

Half Sigma March 31, 2006 at 9:39 am

"not everyone is endowed by nature with the abilities required to become wealthy"

The NY Times has documented yesterday that intelligence is a genetic trait. The vast majority of the poor are incapable of becoming rich through competition in the free market.

However, the continuing devaluation of labor with respect to capital may condemn even the intelligent poor to poverty if they can never obtain, via labor, the capital required to become wealthy.

John Dewey March 31, 2006 at 10:32 am

Half sigma:
"The NY Times has documented yesterday that intelligence is a genetic trait. The vast majority of the poor are incapable of becoming rich through competition in the free market."

Are you kidding me? Have you read "The Millionaire Next Door"? I'm not sure what your definition of rich is, but plenty of poor people become millionaires. People with below average intelligence escape poverty all the time. Neither the entrepreneurial spirit nor the American work ethic require above average intelligence.

Competition in the free market is exactly what enables social mobility. The Horatio Alger theme is very much a reality in the U.S. It's probabaly still true that those born to wealth will remain wealthy for a generation or two. It's also true that intelligence makes the path to riches a little easier. But your statement above is just not true.

bbartlog March 31, 2006 at 2:58 pm

Let's see -
not everyone is endowed by nature with the abilities required to become wealthy
and
The vast majority of the poor are incapable of becoming rich through competition in the free market

vs

People with below average intelligence escape poverty all the time.
and
Neither the entrepreneurial spirit nor the American work ethic require above average intelligence.

Notice that these statements don't actually contradict each other, though you pretend that they do. Your first statement is hardly meaningful in that *some* people of course are always escaping poverty – but I am claiming only the existence of a large core who can never be wealthy on their own merits; I am not saying there is no social mobility.

As for the second point, I realize that you are addressing Half Sigma's comments about intelligence; I would note that entrepreneurial spirit is also an attribute that a large segment of poor people lack. It might have seemed that I was merely using 'abilities' as a codeword for 'intelligence', but I am aware that other virtues contribute to success. And as I recall from 'The Millionaire Next Door', the millionaires were (while not brilliant) on average about a standard deviation above the norm in intelligence. Someone with an 85 IQ is going to have tremendous trouble succeeding in business, even if well-endowed with work ethic and entrepreneurial spirit.

johngaltline March 31, 2006 at 3:47 pm

"I think I would use 'just' rather than 'equitable' here instead of skirting oxymoron."

Well, it's only an oxymoron to someone who doesn't know that 'equitable' and 'just' are synonyms. That would be their problem, not mine. I used 'equitable' because I've never heard an actual economist refer to "the 'just' distribution of income (or wealth)."

"Despite the fact that our poor are getting richer and the country, it still remains that an astoundingly large amount of our population lives in poverty."

If you want to see an oxymoron, search the above sentence for simultaneous admissions that our poor are getting richer and the number of people in poverty is "astounding." My whole point is that "poverty" and "poor" are relative values which are utterly dependent on comparisons to "the rich." Accordingly, I submit that we can measure the "justness" of the result by comparing the behavior of the poor to the behavior of the rich. That is the *only* rational option unless one truly believes it's a zero-sum game.

"But in any case, not everyone is endowed by nature with the abilities required to become wealthy, and I think even someone who is a strong believer in free will can acknowledge that."

You mean they're not all endowed with the abilities to become wealthy enough for *you*. Either way, this is not the problem of those who *are* so endowed — at least, not if we're going to pretend that they're free.

And the fact remains that those who are not so endowed have consistently grown more and more wealthy *despite* their "disadvantages."

I see no problem with this picture except for a bunch of busybodies who wish to use the power of government to override the result of free will simply because combined behavior of free people does not produce the results they would like. Well, here's a newsflash: if people were required to produce the results of your choosing, then they wouldn't *be* free.

Are you sure you're not thinking of a zero sum game???

John Dewey March 31, 2006 at 4:10 pm

bbartlog:
"Someone with an 85 IQ is going to have tremendous trouble succeeding in business, even if well-endowed with work ethic and entrepreneurial spirit."

I'm not so sure that's true. If you changed your statement to say IQ of 75 or even 80, I might agree. But the 25th percentile is just 89 and the 10th percentile is 80. So 85 must be about the 15th percentile.

If by "succeed in business" you mean "succeesd in big business", I might agree. But it is certainly possible for the less-than-bright owner of a very small business to amass a million dollars over a lifetime.

My dispute with Half Sigma is his statement: "The vast majority of the poor are incapable of becoming rich". He never defined "rich" so I used the term "millionaire" as the definition. I believe that almost all, probably 90%, of the U.S. population has the ability to amass $1 million wealth in a lifetime. They just need to desire it enough to be thrifty. And a rudimentary exposure to investment opportunities.

Half Sigma March 31, 2006 at 5:29 pm

"The vast majority of the poor are incapable of becoming rich."

That statement presupposes that the vast majority of those capabable of escaping poverty have already escaped, so those left in poverty are, for the most part, the very bottom of the barrel when it comes to innate abilities correlated with earning a middle class or better living.

"I believe that almost all, probably 90%, of the U.S. population has the ability to amass $1 million wealth in a lifetime."

If you believe that, it explains a lot of your odd statements. It's not true.

johngaltline March 31, 2006 at 6:19 pm

"I believe that almost all, probably 90%, of the U.S. population has the ability to amass $1 million wealth in a lifetime."

Absolute fact. Start contributing to your IRAs in your early twenties, and it's completely achievable. It would not take an extraordinary income to do it — just discipline.

JohnDewey April 1, 2006 at 7:06 am

I think, Half Sigma, you're arguing that everyone who is poor would do what is required to become rich, but cannot because of inability. It's not the lack of ability but the lack of desire. It's not important enough for them. That's why they won't become rich. And that's true for most middle-income Americans as well.

Note that I defined "rich" as the amassing of $1 million. I chose that figure because you never defined what you meant by "rich".

johngaltline April 1, 2006 at 9:42 am

Well, they're reluctant to define 'rich' for the same reason they're reluctant to define 'poor.'

Because in their class warfare they depict "the rich" as fat cats living in mansions. That's in stark contrast to the people they really want to tax — pretty ordinary folks who live in marginally better houses and drive marginally better cars.

It's pathetic, really.

Half Sigma April 1, 2006 at 12:14 pm

I'm not part of any "they," I'm just a realist in search of the truth.

The original truth was inflation, which is understated for political reasons.

And the second truth is that in a meritocratic society, the poor are different than the rich. However, as our society becomes less meritocratic on account of massive immigration and outsourcing devaluting labor, we will find more smart people among the poor.

johngaltline April 1, 2006 at 1:33 pm

"I'm not part of any "they," I'm just a realist in search of the truth."

Then how come everything you say sounds like your mind's already made up? I mean, shouldn't you be asking more questions — and making fewer assertions — if you're just looking for the truth?

"The original truth was inflation, which is understated for political reasons."

I see. So do the politicians revise the economists' figures downwards? Or are you saying the honest economists are simply outnumbered by the politically-motivated ones who are understating the numbers? (Couldn't it be that maybe your foil hat's just inside out?)

"as our society becomes less meritocratic on account of massive immigration and outsourcing devaluting labor, we will find more smart people among the poor."

Well, we may find more *educated* people among the poor, but I'm confident the *smart* ones will always find new things to do when they have to.

AK-econ April 4, 2006 at 3:22 pm

Just wanted to say I enjoyed the column, Don.

The housing quip was interesting too. There's a good case for the increasing quality of education, but I wonder if that's really true of homes.

As far as the site, the framing, and the construction is concerned, not much has changed in 30 years. At least compared to automobiles or other products. So I don't think the 'you pay for quality' argument really works there.

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