2 May 2016

The reality behind American over-consumption

Daniek writes:*

While US families are confronted with increasing debt, they endure rising accusations and condemnations from society. Economist Robert Frank claims that America’s newfound “Luxury Fever” forces middle-class families to “finance their consumption increases largely by reduced savings and increased debt.” Furthermore, politicians and the press such as the Guardian emphasize strongly on“the high price of the western world’s obsession with all things material.”

However, one fundamental principle that is often underestimated by these accusers is that, having more of one thing means having less of another. That is, families are not just spending more of what they earn, they are also spending what they have not earned.

The Over-Consumption story gets support from current economic data on the American families. First, families have more to spend than a generation ago. This is because mothers have entered the labor market, which changes the number of earners in an average income family from one to two. (Figures and references pdf) Moreover, although incomes have increased American families have decreased the amounts of savings. Hence, US citizens have changed from a nation of savers to a nation of spenders. As savings have fallen, debt has risen.

Therefore, because families are making more money than ever and at the same time get in financial trouble, this supports the over-consumption notion. Yet, delving deeper into the household spending gives a different light.

First, clothing, the average family of four today spends 21% less (inflation adjusted) on clothing than a similar family did in the early 1970s. New technology and cheap labor results in lower prices. In 1973, clothing for a family of four took nearly $750 more a year from the family budget than what we buy today for our shirts.

Meanwhile, areas where American families have increased there budget on are big-screen televisions and other technology that did not exist decades ago. For these luxuries, families spend 23% more, and extra $170 annually. However, in terms of food, the average family of four spends 22% less on food (at-home and in restaurant eating combined).

Likewise, other areas are just as balanced. The average family spends more on airline travel but less on dry cleaning. When the numbers are all added up, “there seems to be about as much spending today as there was decades ago.”

Thus, the income has increased, nevertheless, the proportions in the family budget have changed at the same time. Consequently, if middle-class income families are not spending that much more then how can the financial debt be explained? One possible explanation is that the costs to buy a house is much more than it used to. Furthermore, mortgage-costs and health-insurances have increased in the last decades.

Bottom line: while the over-consumtion story is not entirely based on false grounds, politicans and economists should be cautious with their sharp accusations. Since data suggests that we live in an area whereas middle class families are clipping coupons and buying pasta in bulk, while they suffer to pay the bills for their mortgages and housing.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.

1 comment:

Ed Dolan said...

I agree with your cautious conclusion about accusations of over-consumption. What bothers me about the over-consumption argument is that it sometimes fails to make three key distinctions:

(1) Macro vs. micro. From a macro perspective, more consumption and less saving can be beneficial is speeding recovery from a recession whereas long-run macro models traditionally emphasize that less consumption and more saving speeds long-term growth.

(2) Goods vs. services. Environmentalists often criticize over-consumption of goods because of the environmental impact of their production and transportation. However, a switch from consumption of goods to consumption of services (e.g., eating out, beauty services, sporting events) could benefit the environment.

(3) Work-life balance. Maybe the path to better welfare is not just to consume less of what we earn, but to work less, earn less, and enjoy more leisure.

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