Carpe Diem

Access to good life for low-income Americans comes from ‘miracle of the marketplace,’ especially manufacturing

basics

AEI’s Kevin Hassett and Aparna Mathur wrote in yesterday’s WSJ about how the “access of low-income Americans to devices that are part of the ‘good life’ has increased” over time, here are some examples from their article:

1. The percentage of low-income households with a computer rose to 47.7% in 2009 from 19.8% in 2001.

2. Appliances? The percentage of low-income homes with air-conditioning equipment rose to 83.5% from 65.8%, with dishwashers to 30.8% from 17.6%, with a washing machine to 62.4% from 57.2%, and with a clothes dryer to 56.5% from 44.9%.

3. The percentage of low-income households with microwave ovens grew to 92.4% from 74.9% between 2001 and 2009. Fully 75.5% of low-income Americans now have a cell phone, and over a quarter of those have access to the Internet through their phones.

Kevin and Aparna conclude that “We would hazard a guess that if you were to ask a typical low-income American in 2009 if he would like to trade his house for its 2001 version, he would tell you to take a hike. How then is he worse off in 2009?”

What explains the fact that “access to the good life” has increased so significantly over time for low-income Americans?  One main reason is the “miracle of the marketplace,” especially the miracle in the manufacturing sector.  Thanks to significant advances in technology and gains in worker productivity, the costs of most manufactured goods have consistently declined year after year, making goods produced in our factories ever more affordable relative to our income, especially for low-income households.  Greater global access to consumer products like low-cost clothing from abroad has also contributed to the increased affordability of manufactured goods for Americans.

The chart above illustrates the increasing affordability of manufactured goods over time.  As a share of disposable personal income, spending by families and individuals on life’s “basics”: food, motor vehicles, clothing and footwear, and household furnishing and equipment, has declined from more than 40% of disposable income in 1950 to about only 15% in recent years.  Whereas almost 40 out of every 100 dollars of disposable income were spent on household “basics” from the manufacturing sector in 1950, only about $15 of every $100 of income is spent for those “basics” today.  The increased affordability of “food, clothing, transportation, and household items” means that even low-income households now have greater access to the “good life” than at any time in history, an often-overlooked achievement in all of the discussions on income inequality, stagnating income, and the supposed decline of the middle class.

Here are a few examples of the decline in the price of some typical household items using historical price data from the 1983 Sears Christmas catalog and today’s prices from the Sears website:

1. In 1983, an 18 cubic foot Sears refrigerator retailed for $500 when the average hourly wage was $8.19.  Today, the same size refrigerator, almost 30 years later, is available from Sears for even less, only $490 in nominal dollars.  At today’s average hourly wage of $19.81, that would mean a typical worker today would have to work for less than 25 hours to earn enough income to purchase an 18 cubic foot refrigerator, compared to the 61 hours of work at the average wage in 1983.  Measured in the time working at the average wage, today’s refrigerator is about 60% less expensive than in 1983.  Likewise, a standard adjustment for inflation also shows a 60% decline in the real price of the refrigerator over the last three decades.

2. A 1.4 cubic foot microwave oven from Sears was advertised on sale at $350 in 1983, which would have required more than a full week of work (43 hours) at the average hourly wage then to purchase that microwave.  A comparable microwave today is available for only $170 from Sears, which would translate to only 8.6 hours of work at today’s average hourly wage.  Measured in time worked, today’s microwave is 80% cheaper than the 1983 model, which helps explain why more than 92% of today’s low-income households own a microwave.

3. Purchasing a TV today is also about 80% less expensive today than in 1983. A 25-inch Sears TV in 1983 sold for $550, or 67 hours of work at the average wage.  Today you can buy a 32-inch LED HDTV for $260, or only 13 hours of work at today’s wage.

Similarly, the prices of other manufactured goods like food, clothing and cars have declined consistently over time relative to income, which has made those goods increasingly more affordable, especially for low-income households.  This increased affordability of household devices and basics that contribute to the “good life” is a testament to the remarkable productivity of the manufacturing sector, which has led to steadily declining prices for manufactured goods relative to household income, and has increased our standard of living.

Bottom Line: Instead of spending so much time obsessing about income inequality and criticizing capitalism for being “rigged,” we should maybe devote more time to celebrating how the “miracle of the marketplace” has brought about rising living standards for all income groups in America, including low-income households.  Falling prices of manufactured goods like food, cars, clothing, household appliances, computers and electronics have probably given low-income households in the U.S. greater access to the “good life” than all of the international government programs and safety nets.

Update: The chart above shows total Personal Consumption Expenditures by families and individuals on: a) food and beverages consumed at home, b) furnishings and durable household equipment, c) clothing and footwear, and d) motor vehicles and parts, as a share of total Disposable Personal Income, on an annual basis from 1950 to 2011.  The data are from the Bureau of Economic Analysis at this link, see Section 2 “Personal Income and Outlays.”  Disposable personal income is available in Table 2.1 (“Personal Income and Its Disposition”) and personal consumption expenditures are available in Table 2.3.5 (“Personal Consumption Expenditures by Major Product Type”).

61 thoughts on “Access to good life for low-income Americans comes from ‘miracle of the marketplace,’ especially manufacturing

  1. Ah, the miracle of capitalism at work. I do need to retract an earlier comment of mine. I said Capitalism is not a race to the bottom. That is untrue. Capitalism is a race to the bottom: for costs.

  2. This also is evidence for something else I’ve talked about before: why do we use income and not consumption as a measurement for economic well-being? The income measurement misses all this.

    • Yeah, and the consumption measurement shrinks the gap between rich and poor. After all, a rich person can only buy a microwave that’s maybe twice as good as one a poor person might buy, even if they have 100 times the income. :)

      • Jon,

        Sorry, I find this line of reasoning third-grade level BS and extrememly insulting. Especially after a weekend driving/delivering for Meals on Wheels. Let’s talk jobs, food and clothes to put into the those appliances…

        And yes, I know already – compared to the poor in third world countries we all supposedly rich – in which case the rich in THIS country have no right to complain about shit…EVER!!
        (not directed at you Jon!)

        • Wait a tic, Moe. Just so I understand your objection, are you saying it would be better to show comparisons to food, clothing, and other necessities before appliances?

          If that is what you are saying (and please correct me if I am wrong), then I can see that. However, if the share of people with appliances is rising, doesn’t that indicate they need to spend less on the necessities?

          • Yes. Most apartments come with appliances…it means squat. People I deliver meals to have microwaves, refridgerators and stoves – just no food to put in them. Because more poeple have appliances does not, in my mind correlate to them spending less on food and clothes – I don’t get the connection there at all.

          • Ok. I have a study back in my own apartment looking at food prices over time. If you’d like, I’ll post some highlights later when I get home.

          • I don’t understand the need to compare here.
            It’s deflecting from the real agument – we are seeing the same thing (maybe not quite as bad YET) that was experienced during the Gilded Age.

            It’s a good thing the costs of food is down, because jobs are scarce and wages have been stagnant for years. One shouldn’t assume people are “buying” these appliances brand new. As mentioned – rental apartments – which are damn well full across the country – most come with appliances. How old are the appliances in your apartment? I live in a house and my appliances are ancient.

            I’m outta here shortly, but will check back here tonight – always good conversing with you.

          • To answer your question, Moe, the appliances that came with my apartment are fairly old. The fridge is probably about 10 years old. The stove is about that. I am pretty sure the dishwasher and a/c unit are older than I am

        • Moe, it’s not clear what your complaint is here. Should a better standard of living for most people not be cause for celebration, or is it cynical to do so as long as there are any poor people at all?

      • Jon:

        And the time luxuries they provide. Less time doing dishes means more family game time.

        Also more time for Moe to spend time delivering meals on wheels to those in need.

          • What a beautiful strawman! That’s not what I said, now is it.

            It’s indisputable that labor saving appliances and cheaper food allow all of us to spend more time and more of our income doing other things we prefer, to doing household chores. It’s not clear why you see that as a problem. In your case one of those things is delivering Meals On Wheels.

            Correct me if I’m wrong, but it’s my understanding that Meals On Wheels programs provide meals to those who are unable to prepare their own, for medical or age related reasons, and is not related to income or ability to pay, so it’s not clear how income inequality is related if that is, in fact, your complaint.

            You are a true saint for donating your time and effort helping those less fortunate than yourself, but you can’t just assume others aren’t equally generous. It’s made possible, in part, by those household appliances you scoff at.

            Perhaps if you set aside your outrage for a moment and think about it, you can express your concern in a form others can understand.

    • Wait a second:

      The share of low-income homes with these appliances has risen over the past 20 years. Yet, you are honestly going to argue that these things are somehow more expensive? How does that even make sense?

      I mean, I’ll be happy to find the numbers for you, if you can just explain to me that logic.

      • Marmico may be dredging up the tired old argument that the rich are getting richer faster than the poor are getting richer. In other words, an appeal to emotion and class envy, not logic.

        • Marmico may be dredging up the tired old argument

          Professor Perry is dragging up the issue. The AEI lost the income argument now it resorts to the consumption argument. I don’t recall very many middle class households that didn’t have refrigerators or TVs in 1983.

          But anyway. On to the “cherry-picking”. Professor Perry goes to the price index personal income and outlay Table 2.4.4
          in the NIPA accounts.

          He thinks to himself, I got a great idea. What I’ll do is look for the lowest price increases since 1950 in four categories of consumption outlays and call them the “good life” . Hmmm…. new autos seem good, only up 240%, likewise home furnishings up 125%, clothing up 113%. Hmmm…the “good life” requires food…oops up 640%.

          But the “good life” doesn’t include housing and utilities, a place to put all that “good life” stuff in. Housing and utilities up 860% and if I’m enjoying the “good life” I will need somewhere along the line some healthcare up 2300%.

          It’s about relative prices.

        • Um…that is not the argument at all.

          We are looking at various items’ share of overall income and the number of hours worked to obtain such items. Price increases don’t mean squat if the number of hours worked to afford each item declines.

        • The only ones losing an argument is you guys. You claim “The middle class is stagnant/declining and the rich are getting richer and the poor are getting poorer!” We say “prove it.” You say “Look at income inequality.” We say “So what? They can afford more and the consumption differences between the two are not changing and may even be shrinking, depending on what measurement you use.” You say “But prices are rising!” We say “Costs are falling.”

          Furthermore, check out these data from the Census. This is a chart showing the percentage of households in three different income brackets. As we can see, the share in low income (less than 25K/yr) and middle income (25K-100K) are falling, but those in those in the higher income (100+K) are rising. People are not getting poorer; they are getting richer. What’s more, the consumption gap between the low and the rich is not widening.

  3. Not sure I entirely agree, Bart.

    I’ll pass over the food stuff because, quite frankly, I doubt our food palates are quite the same. We’d likely get bogged down arguing over silly, subjective details like what tastes better.

    But let’s talk durable goods. I propose an alternative hypothesis: Assuming things lasted longer then than now (and I will take your word that they did), could it not have been out of necessity? That old fridge lasted longer because it had to. At that price, families couldn’t afford to buy a brand-spanking new one every time the old one broke. So you fixed it up. Or you brought in a repairman. The whole “tin foil on the rabbit ears” sort of thing. Maybe now, because these things are so cheap, it costs more to repair than buy new.

    The short version of my question is: maybe these things have short life spans because they are cheap, and not cheap because they have short life spans.

    Anything can last as long as you take care of it. My parents just threw out the TV they had when they built their house, some 25 years ago. My car is 12 years old. My fridge is close to 15. I am pretty sure my dishwasher is older than I am.

    Just a thought.

  4. I don’t agree, Bart. Jon has offered one explanation, and I think there’s more.

    I find newer durable goods to be more reliable than ones from years past, especially autos, and I believe the lifetime costs, including repairs, are lower, as Prof. Perry’s chart would indicate. Other than the novelty, and use as a conversation piece, what do you think is attractive about still using a 30 year old refrigerator?

    Which would you prefer – an expensive appliance you repair 5 or 6 times during a 20 year life, or a much cheaper one that works perfectly for 10 years then dies?

    As to food, as Jon says, it’s mostly subjective, but I’ll bet that in a properly conducted double blind taste test, you’ld be unable to identify GMO corn. I think the taste is more related to time since plucked from stalk than anything else.

    The good part, is that since GMO corm IS a lot cheaper, millions of people world wide may get enough to eat who wouldn’t otherwise. You and I, incredibly wealthy by global standards, can choose to pay more for fresh picked, local “organic” corn if we prefer it.

    Choice is great, ain’t it?

    Now if we could just give up the silly idea of putting corn in our fuel tanks.

  5. How do you measure quality changes of mobile phones?

    “In 1995, mobile phones…huge in size and with a pretty long antenna. It is similar to today’s cordless phone. It must seem real odd to us now, but back then this cell phone was the craze of the day.

    2012 – No one could have imagined that in a mere 17 years, mobile phones could have made the leap from just being the alternative to landlines to becoming a computer, GPS, radio and our lifeline to the Internet, and still be able to fit in your pocket.”

    http://www.hongkiat.com/blog/evolution-of-mobile-phones/

    • However, mobile phone service, like internet service, has become a significant household expenditure, while firms, like Apple, made huge profits:

      How cell phones have changed your budget
      Oct 12, 2012

      “According to the Bureau of Labor Statistics, Americans only spent an average of $210 per year on cellular service back in 2001. That’s less than $20 per month.

      The average cell phone bill is now more than $63 per month or $760 per year as of 2010…on an annualized basis, these figures reflect an increase of more than 15% per year from 2001-2010…annual household expenditures only grew around 2% during that same time frame.

      Alongside the rise of mobile devices has come the fall of landlines, which see far fewer dollars devoted to them today versus 2001.

      In recent years, many people have cut back on discretionary expenses such as dining out and clothing purchases. However, spending on mobile phone services has grown at a steady pace. As a result, mobile phone expenditures have increased as a percentage of household expenditures.”

      • If I recall correctly, I paid around $20 a month 10 years ago for 500 minutes using a mobile phone that basically only made phone calls, and upgraded to 1,500 minutes for over $40 a month.

  6. I’m currently teaching and doing home energy audits. The new refrigerators save $100 to $300 a year in electricty cost over old refrigerators. It’s a trade-off because new refrigerators last 10 to 20 years instead of 20 to 40 years like the old ones, and they are now throw away instead of repair. Still, the payback is quick. Likewise, new air conditioners and furnaces save electricity and gas over the old ones. Newer is usually better if you want cheaper to run for most appliances.

      • Mark, thanks for spending a huge amount of your time on this blog. Running both online and on-ground college courses, I know how time consuming any communication medium can be.

        “Thoughtful” comments probably depends on who you ask, but I will say I offer a different perspective to a lot of posters here.

  7. But the “good life” doesn’t include housing and utilities, a place to put all that “good life” stuff in. Housing and utilities up 860% and if I’m enjoying the “good life” I will need somewhere along the line some healthcare up 2300%.“…

    Well marmico there’s always Cuba and N. Korea out there waiting for smart guys like you…

  8. Americans aren’t blaming government enough for driving-up the cost of living through taxes (my California State Tax alone is thousands of dollars each year) and regulation (particularly, driving-up prices in health care, education, and energy), along with wasting trillions of dollars, including in the housing crisis.

    • It’s not only taxes, at the state and local levels, it’s also fees, fines, fares, and tolls.

      And regulation:

      The Regulation Tax Keeps Growing
      September 27, 2010

      “The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008…new policies enacted in 2010 for health care and financial services will increase this burden.”

      ******

      Over-regulated America
      The Economist
      Feb 18th 2012

      “A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee.”

    • You’re absolutely right that housing affordability is going the opposite direction. What else would one expect when housing is highly subsidized through Freddie/Fannie mortgage deductions and numerous other ways. Politicians continue to talk about getting housing prices back up. Ironically if they are successful they will have reduced the standard of loving.

  9. Interesting article.

    However my only concern is that this is only part of a holistic reality when trying to shed some positive light against the argument of a rising income inequality.

    1st off the “extra” income households have been seeing due to production efficiencies and lower all-in retail costs has resulted in the allocation of consuming MORE of these goods.

    So while a family bought a dishwasher for much cheaper those extra savings from lower prices went to households having more TV’s (or something or other).

    Cheaper laptops or computers equal MORE computers. Now kids have their own computer etc etc.

    Just to put so much of my thinking into a short response, I would like to see percentage of debt service to income against the same period under consideration in this article. Im sure those numbers trend the opposite direction.

    My quick thinking is that manufacturing efficiencies kick-started a feeding frenzy we now see today (faster and more things). Coupled with easy lending practices this only exacerbated the frenzy further.

    Now we have a fat kid sitting at the table throwing up half of the chocolate cake due to overeating. But the cooks kept cooking not wanting to stop cause they have their own fat ass kids to feed. But alas….a new normal will have to be forged out of this terrible spectacle. Incomes and consumption levels will eventually normalize.

    My own little theory there….

    • Just to add.

      Yes, in terms of being able to afford “good life” things the household purchasing power of these products has increased.

      The income inequality we see today is a self-induced one. Not by the rich. But by excessive consumption of households.

      The poor bought the products and the rich bought the companies that make the products.

      • Obviously, if everyday items take much less labor to buy, people will buy more of them. What is your point? You seem to think increased consumption is evil per se. I disagree.

        The whole point of this article is that “income inequality” is a rather vapid complaint. As the cost examples illustrate, today we do not so much “haves” versus “have nots” — we have “have lots” versus “have less”. If we want to improve life for the poor, shouldn’t we focus more on the standard of living than on class-warfare rhetoric?

        • This isn’t class warfare rhetoric.

          My point is that I actually agree with the article’s criticism and to some extent I wanted build on it by highlighting a point.

          That point being that the income disparity between the rich and poor households is the result of capital misallocation. The poor have consumed more and disproportionately to their incomes. This is not to mention the the trending household decreased savings rates and increased debt service costs that we’ve seen over the last 20 years.

          More consumption isn’t evil insofar as that increase is matched by a proportionate increase in income or less. Something the poor doesn’t understand as well as the rich.

          Your focus is right on however when you state “If we want to improve life for the poor, shouldn’t we focus more on the standard of living”?

          I agree. But I am pretty sure I’ll be preaching to the choir when I say that standard of living has hardly anything to do with how much stuff you have.

          • Actually, the income disparity between rich and poor is an indication that the rich allocate capital better than the poor. People become rich by providing a good or service that many others want and are willing to spend money on. The more valuable that good or service is to others, the richer the provider becomes.

            The poor, on the other hand have shown that they are not providing anything that others value very much as evidenced by the small amount others are willing to spend on their good or service.

            As for low savings rates and high debt, that’s exactly what is to be expected when interest rates are held artificially low. Little incentive to defer consumption and little incentive not to finance consumption at a cheap rate.

          • Yep. I agree with that too Ron. But when you say,

            “As for low savings rates and high debt, that’s exactly what is to be expected when interest rates are held artificially low”

            The only critical variant here that affected this counterintuitively was that households were reaching their debt thresholds. And, Low rates or not, were bound to deleverage given housing prices went to hell.

            If household debt levels were low I am of the mind that economic activity would have picked up as consumption moved to time period 1 from time period 2 would have provided the boost we needed. But no. In a deleveraging that is not what we’re seeing. Instead households are continuing to payoff debt while commodity and hard asset prices are skyrocketing (due to monetary easing) only squeezing the deleveraging households tighter.

            As for the income disparity, not only have we seen within the last 20 years a misallocation of capital in terms of incomes and savings, but intellectual capital as well and labor from the poor. This is because 30% of the rich’s income comes from (average as per economist about 5 months ago) their savings and investments and the rest from their incomes.

            My thoughts here.

        • Actually housing prices didn’t just “go to hell”, they returned to a more realistic level from their sky high bubble level, not supported by fundamentals. A combination of factors including easy access to credit, low interest rates, and transfer of risk from primary lenders to taxpayers, among others, caused what should have been a predictable increase in demand, thus an increase in price.

          The excess money supply was bound to end up somewhere, and as luck, and the conditions listed above, would have it, it ended up in real estate.

          Only if the market is allowed to correct this mis-allocation of capital, can a healthy market return.

          If household debt levels were low I am of the mind that economic activity would have picked up as consumption moved to time period 1 from time period 2 would have provided the boost we needed.

          But household debt levels are not low because fed policy has encouraged borrowing and spending, not savings. As I wrote, this is what we should expect.

          I’m glad you agree that “monetary easing” is a wrong-headed policy.

          Another view of commodity prices could be that they are not up when compared with each other, so much as that other commodity, the USD is down due to incessant money printing by the Fed in a failed attempt to prevent a correction by pushing on the string that’s sometimes called “aggregate demand”.

          As for the income disparity, not only have we seen within the last 20 years a misallocation of capital in terms of incomes and savings, but intellectual capital as well and labor from the poor. This is because 30% of the rich’s income comes from (average as per economist about 5 months ago) their savings and investments and the rest from their incomes.

          It’s not clear how you view that as a mis-allocation of capital. Surely you’re not suggesting that capital should be evenly distributed.

          My thoughts here.

          • I want to make clear a couple of things to eliminate confusion despite any ambiguity (at fault of my own) in my earlier statement.

            1. Monetary easing is a fitting policy only when certain preconditions are met. We are seeing with the current easing that deleverging is a catalyst preventing monetary stimulus from having its intended effect.

            2. The poor have misallocated capital by consuming more and taking on excessive debt over the last 20 years.

            3. I gave no hint at evenly distributing capital in last paragraph nor was it my intention to do so in the previous post. Was saying that the rich have obviously made better use of any increase in residual income by investing it whereas the poor used it to consume more.

            4. Commodity price increases have many catalysts. But one thing is certainly clear: Central Bank largesse boosts commodity prices like Oil which has a fruther negative effect on households currently in a process of deleveraging.

          • Then we more or less agree, except for some minor terminology, and your point #1. I have no use for a central bank, and see more harm than good from it’s existence. Government control of the money supply is a terrible idea.

            Monetary easing, or the more accurate description “counterfeiting money” is not in our best interest.

  10. Consumption is only one factorial in the analysis of increasingly disparate income, and a minor one at that in a developed economy. How does one justify the increasingly disparate wealth and income of the uber rich and top 1%? Does any one really believe this can and/or should continue to grow based upon an “eat what you kill” economics? Who is to care for the untouchables in our society? The rich, but only when they want to? It appears to me that the AEI argument seeks to ignore the incredible wealth of a small percentage of society as long as the little guy has a microwave. Really? That justifies the increasing inequality? Don’t misunderstand; our society needs to reward the successful…but don’t claim to deny the great rewards being received.

    • Clairpro says: ““…eat what you kill” economics…”

      The top 1% eats much less than what it kills, unlike the bottom third, which eats much more than it kills.

      Do you want to facilitate more or fewer “kills?”

    • From article:

      “The ‘success sequence’: finish school, get a job, get married, have babies…the poverty rate would be cut 70 percent.”

      My comment:

      The failure sequence: Have babies, with multiple partners, get on welfare and drugs, complete a GED, and eventually work at McDonalds.

  11. In 1933 a dozen eggs went for .15, ham cost .15/lb., beef steak was .25/lb., coffee, .30/lb., a movie ticket was a dime, gasoline .15/gal., and first class postage .03.

  12. The ditch digger with heavy equipment makes a lot more than the ditch digger with a shovel. The difference is capital. Somebody figured out how to make the ditch digger vastly more productive, and put his capital behind it.

    The entire economy runs on disagreement about value. Y trades with Z when Z has something that Y values more than Z does, and Y has something that Z values more than Y does. Both sides comes out ahead, and the standard of living of the nation rises by the amount of the disagreement. The disagreement is new wealth after the trade happens.

    The way to maximize disagreement is specialize and trade. The specialist values his output at much less than his buyers do.

    An economically viable job then exists.

    Obama is the master of closing up disagreement gaps, and killing off economic jobs.

    The possibilities for capital disappear.

  13. All those fatasses parading around in the ghettos and ‘hoods put the lie on those FOOD DESSERTS that Michelle is forever talking about.

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