Is the Glass Half Full?: Positivist Views on American Consumption

Fifty Years of Growth in American Consumption, Income, and Wages

By Bruce Sacerdote (Darmouth)

Abstract: Despite the large increase in U.S. income inequality, consumption for families at the 25th and 50th percentiles of income has grown steadily over the time period 1960-2015. The number of cars per household with below median income has doubled since 1980 and the number of bedrooms per household has grown 10 percent despite decreases in household size. The finding of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator; small biases in any price deflator compound over long periods of time. Using a different deflator such as the Personal Consumption Expenditures index (PCE) yields modest growth in real wages and in median household incomes throughout the time period. Accounting for the Hamilton (1998) and Costa (2001) estimates of CPI bias yields estimated wage growth of 1 percent per year during 1975-2015. Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.

URL: http://EconPapers.repec.org/RePEc:nbr:nberwo:23292
(Click here for a free download version)

Distributed by NEP-HIS on:2017-04-23

Revised by: Stefano Tijerina (Maine)

Contrary to the popular outcry that the gap between rich and poor in the United States has steadily increased since the 1960s and that the quality of life has steadily deteriorated, Bruce Sacerdote argues that the picture is not as grim and that the steady rise of household consumption for households “with below median income” is evidence that the national economy has continued to thrive for all U.S. citizens and not just those on the top.[1] In “Fifty Years of Growth in American Consumption, Income, and Wages” Sacerdote reveals that the focus on wage growth favored by economists and policy makers impedes us from focusing on other aspects of growth, such as consumption and the quality of consumed goods.[2] From his perspective focusing on real wage growth and the inflated rates of the Consumer Price Index (CPI) only tells half of the story and that it is therefore necessary to center on consumption data in order to construct a more holistic picture of the economic realities of the below median income household.[3] From his perspective, “low income families have seen important gains in at least some areas of consumption” thanks in part to a steady growth in consumption of 1.7 percent per year since 1960.[4]

Bruce Sacerdote adjusted the CPI to the bias corrections developed by Dora Costa and Bruce Hamilton who previously worked on similar questions, looking at “the true costs of living” and new ways of estimating “real incomes” in the United States.[5] His findings for the period between 1960 to 2015 concluded that there was an increase of 164 percent in consumption for those below the median household income.[6] A previous consumption measure for the same period of time, excluding the bias measures from Costa and Hamilton, showed a 62 percent increase in consumption.[7] A third measurement that calculated real wages using the Federal Reserve’s Personal Consumption Expenditures (PCE) for the same period of time reversed the claims of wage stagnation furthered by some economists, policy makers, citizens, and labor union advocacy groups. This last measurement showed that when using the PCE to deflate nominal wages, the growth of real wages was 0.54 percent per year.[8] This contradicts the arguments of data sets such as the “2016 Distressed Community Index” that focus specifically on the increasing gap between rich and poor in the United States.[9]

Beside the bias corrections and other measurements, Sacerdote argues that the quality, technology, and durability of current consumption goods is superior to that of previous decades, therefore expanding the relative capacity of consumption of those below the median income. For example he claims that “the number of cars per household has risen from 1 to 1.6 during 1970-2015,” while the median home square footage for this income segment has risen about 8 percent during this same period of time.[10]

His objective of focusing “on growth rates in consumption instead of changes in poverty rates” is achieved by using data and methodologies for analyzing data that shows that “the glass half full” but as it is evident from the working paper, quantitative data can be tailored to fit the researcher’s agenda. Numerous questions surface regarding consumption trends in the United States that lead to further conclusions that indicate that the 164 percent increase of the past fifty-plus years is the result of greater household debt and cheaper consumer goods prices that are tied to the impacts of globalization. Consumer households that fall below the median income continue to steadily consume more, there is not doubt about that, but their wages continue to depreciate while their debt continues to rise. Moreover, globalization has allowed companies to transfer their production overseas, leading to a loss of jobs in the manufacturing sector that potentially offered higher than minimum wage salaries to those households that ranked below the median income. The transfer of production has at the same time guaranteed cheaper products to these consumers that then are able to consume more with their lower wages and their greater access to loans that artificially maintain their consumption capacity while increasing their debt to income ratio.

According to the U.S. Census Bureau, the median household income for the year 2014 was $53,719.[11] This means that half of Americans earned less than that amount. This population, that represents the central focus of Sacerdote’s research, currently has an average household debt of $130,000 (assuming that those earning below the median income are forced to go into debt to maintain their standard of living).[12] The breakdown of this debt shows that mortgages, credit cards, auto loans, and student loans make up most of the American debt.[13] This could indicate that the steady consumption increase demonstrated by Sacerdote could actually be artificially maintained by the financial system that keeps the American consumer afloat.

Sacerdote’s work could also benefit from qualitative research that would provide more in-depth analysis and at the same time counter-balance his claims on consumer choice and the reliability of products being consumed. Qualitative research could provide a different explanation as to why low-income consumers have opted to hold on to their vehicles for longer periods of time, how they are able to purchase expensive technology such as cell phones and access services such as internet and cable television, if indoor plumbing is a sign of a higher quality of life or simply a response to policy and the standardization of construction norms, and if the increase in housing square footage per household really represents a higher quality of life.  

Selectivity of data and research approach in this case clearly benefits the researcher’s argument but this could quickly be turned around with other sets of data and a different research approach. A focus on credit rates and debt rates over the same period of time shifts the argument around and leads to completely different conclusions, and so would a qualitative analysis of the quality of life of Americans. Although controversial, Sacerdote’s work forces the reader to think more critically about the changes that have taken place in American society in the past fifty-plus years and brings up the question of whether or not this consumption approach is more reflective of the nation’s economic dependence on consumer consumption as a percentage of the GDP.

References

[1] See for example Thomas Piketty’s argument on the increasing gap between rich and poor and the possible threat to capitalism and democratic stability in “Capital in the 21st Century.” Cambridge: Harvard University (2014).

[2] Bruce Sacerdote. “Fifty Years of Growth in American Consumption, Income, and Wages.” National Bureau of Economic Research, working paper series, working paper 23292, March 2017. Accessed April 25, 2017. http://nber.org/papers/w23292, 2.

[3] Ibid.

[4] Ibid., 1-7.

[5] See Dora L. Costa. “Estimating Real Income in the United States from 1888 to 1994: Correcting CPI Bias Using Engel Curves.” Journal of Political Economy 109, no. 6 (2001): 1288-1310, and Bruce W. Hamilton. “The True Cost of Living: 1974-1991.” Working paper in Economics, The John Hopkins University Department of Economics, January 1998.

[6] Sacerdote. “Fifty Years of Growth in American Consumption, Income, and Wages,” 2.

[7] Ibid., 1.

[8] Ibid., 3.

[9] “2016 Distressed Community Index: A Analysis of Community Well-Being Across the United State.” Accessed April 25, 2017. http://eig.org/dci/report. See also for example Gillian B. White. “Inequality Between America’s Rich and Poor is at a 30-Year High.” Washington Post, December 18, 2014. Accessed May 1, 2017. https://www.theatlantic.com/business/archive/2014/12/inequality-between-americas-rich-and-americas-poor-at-30-year-high/383866/.

[10] Sacerdote. “Fifty Years of Growth in American Consumption, Income, and Wages,” 2.

[11] Matthew Frankel. “Here’s the Average American Household Income: How do you Compare?” USA Today November 24, 2016. Accessed May 2, 2017. https://www.usatoday.com/story/money/personalfinance/2016/11/24/average-american-household-income/93002252/

[12] Matthew Frankel. “The Average American Household Owes 90,336 – How do you Compare?” The Motley Fool May 8, 2016. Accessed May 10, 2017. https://www.fool.com/retirement/general/2016/05/08/the-average-american-household-owes-90336-how-do-y.aspx

[13] Ibid.

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12 thoughts on “Is the Glass Half Full?: Positivist Views on American Consumption

  1. Paul Warde

    I don’t think ‘positivist’ is the word you want in the title here – maybe check the definition?

    Reply
    1. Stefano

      Thank you Paul, the “positivist” in this case refers to the theory of International Relations and its dependence on empiricism.

      Reply
  2. Richard Marens

    The argument that stagnant compensation is ameliorated by product improvements and innovation ignores the fact that vast improvements and innovations occurred during periods of wage growth as well. The last twenty years has not been an especially innovative era for consumer goods except, perhaps, in comparison with the twenty years that proceeded that. The first two thirds of the twentieth century saw the introduction and periodic improvements of a cornucopia of products that transformed daily life: radio, movies, television, mass transit, automobiles, air travel, electrical appliances, synthetic fabrics, plastics, long distance service, fast food, antibiotics etc.. etc.. The economic rise of the South had to await the availability of home and office air-conditioning.

    By the standards of American history, contemporary consumer product development does not compensate for disappearance of historic levels of growth in compensation.

    Reply
  3. Pingback: Is Our Increasing Consumption a Sign of Our Prosperity?

  4. Pingback: From The NEP-HIS Blog: Fifty Years of Growth in American Consumption, Income, and Wag | The Long Run

  5. Pingback: Is Our Increasing Consumption a Sign of Our Prosperity?

  6. cardiffkook

    Let’s agree that consumption per household is up by a 100% or more while household size is down quite a bit. Further we can agree that goods tend to be both cheaper and in many cases quite a bit better in quality. More cars, more rooms per person, more channels, more personal entertainment devices, more food , and so on.

    And this ignores the 800 pound gorilla in the statistics of 30 million plus immigrants entering the US pulling down consumption averages and medians considerably. Absent these people bettering themselves, consumption and income trends for those Americans below the median has risen even more considerably. Indeed, over time many or most of those starting below average rose to above average. And for the record many of those way above have dropped below as they reach the retirement lifestage and live off assets and retirement plans.

    What about the effects of globalism? Most economists attribute the improvements in productivity and the loss of jobs in manufacturing to automation. Most agree outsourcing contributed, but again a universal moral ethic (as opposed to a narrow tribalistic one) would applaud this as an opportunity for the truly impoverished billions in the developing world to also participate in the Great Enrichment. Statistics show this is exactly what has happened with a billion people rising out of extreme poverty during this era and related to this globalism. The big trend has been expanding the circle of prosperity larger than most ever imagined possible.

    What about debt? Certainly a person can get in trouble with debt. But your link shows primarily student loans, car loans and mortgages. I would argue that access to credit is in general a good thing, and that it is wise for younger people to go into debt to buy the things earlier. There is no evidence given whatsoever that they are in general being “forced to go into debt to maintain their standard of living.” I think it would even be more accurate to say they are being “allowed or enabled” to double their consumption standards. Nor do I find anything artificial about this. Jeez, give people some credit (literally and figuratively).

    The glass is more full today for people globally and in developed nations than at any time in the history of the human race. I guess if I try hard I can create a glass half full story on this, but it seems pretty tone deaf when considering the actual median improvement in living standards large scale over the past thirty or forty years.

    Reply
    1. Stefano

      I agree with your views, nevertheless my argument was leaning toward the half-empty glass. The world of credit does not force anybody to enter that world but once they are in it, the construct of “doubling” your consumption standards is artificial because at the end is is sustained artificially by an intermediary that holds power within the relationship. Credit generates consumption but there are other methods of consumption that protect the consumer from falling into a spiraling trap. I agree that I must give credit to the consumer, but we must also agree that in the majority of cases the consumer is not well informed and makes incorrect decisions while the lender is highly informed.

      Reply
      1. cardiffkook

        Consumption is in effect advanced and smoothed by the access of debt. By having the freedom to borrow, a person can get access to more expensive items earlier in life which would not otherwise be possible. Imagine two castes or classes, one which is extended the privilege of being able to borrow money and one prohibited. Which class would you want to be born into? The outrage and injustice of the system would be unimaginable. So I am not following how access to credit is anything other than a net benefit.

        I have no idea what the word “artificial” is adding to the discussion. I am not aware that man made institutions and cultural solutions needed to be held to a standard of 100% natural (or could be). Money, rule of law, democracy, equal opportunity and credit are all extremely artificial and extremely brilliant solutions to human cooperative living. Their “artificialness” is not a defect.

        As to “power in the relationship”, both parties gain in a contractual loan. One gains an education (an opening of doors into new careers and opportunities to improve the world in their chosen field of expertise), or a method of transportation, or a place to live and raise a family. The other party gets an agreement to be repaid over time and the power to enforce this obligation contractually. One party knows more about their own needs and values and preferences and gains a life, the other party gets a relatively minor future income stream. Both parties benefit and the relative power balance is checked by competition between sellers. Power adds even less to the discussion than artificial.

        I borrowed money dozens of times through my life for various large purposes. My life is better because of it. It was a positive sum, mutually beneficial win win arrangement between me and the lending agency.

        I also have no idea why you assume that in “most cases” consumers are not adequately informed to take out loans. As above, I can’t imagine how impoverished my life would have been if I didnt have the freedom to borrow. I am sure millions of individuals later regret their decisions, and that millions of lending agencies come to regret some of their actions as well. But i see absolutely no evidence that most people regret most loans.

      2. Stefano

        I once again see your point but you make the assumption that humans want to consume and “access more expensive items earlier in life,” as part of their vision of freedom. I do not agree that creditors provide debtors with credit for purposes of extending their liberties and reducing the gap between rich and poor. Creditors have constructed credit as another mechanism to increase the value of their money through interest. Your idea of “brilliant solutions”, of which credit seems to be one of them, is only “brilliant” if you are on the winning side of the equation, I do not deny the benefits of credit but it does not mean that it is a win-win situation. There are advantages to saving as a strategy of consumption; buying your car when you have the cash or paying your way through college in order to avoid debt. If you want to access an expensive item “earlier in life” they you may pursue the credit route, but what the blog is talking about is a culture that lives beyond its means, only able to pay the minimum payment on one or many credit cards, while believing the lie that your purchasing power is the overall credit line and not the monthly net income.

  7. cardiffkook

    “I once again see your point but you make the assumption that humans want to consume and “access more expensive items earlier in life,” as part of their vision of freedom. ”

    Yes, humans do desire products and services and they prefer them earlier rather than later or not at all. Personally I wanted a car, a home, an education and if I had been required to wait until I could pay cash the world would have been impoverished. This is not some radical assumption.

    “I do not agree that creditors provide debtors with credit for purposes of extending their liberties and reducing the gap between rich and poor.”

    Of course not, Adam Smith explained this over 250 years ago. Their motives are focused on promoting their own well-being and that of their loved ones. Entertainers don’t necessarily entertain for the purpose of making the world a better place either. Their motives in both cases are channeled by institutional rules which explicitly prohibit zero sum actions and promote mutually beneficial, mutually voluntary actions. Those desiring a home gain a home, those desiring entertainment gain entertainment and the producers of loans and entertainment gain income.

    The mutually beneficial, non zero sum dimension of markets is essential to grasping how and why the institution of markets works (And how they can fail when these conditions are not met)

    “Creditors have constructed credit as another mechanism to increase the value of their money through interest. Your idea of “brilliant solutions”, of which credit seems to be one of them, is only “brilliant” if you are on the winning side of the equation, I do not deny the benefits of credit but it does not mean that it is a win-win situation. ”

    An honest, mutually voluntary action between two parties is expected to be positive sum, aka mutually beneficial. Otherwise the two parties would not have agreed to consummate the cooperative arrangement (or they would have chosen another party to cooperate with). And that is exactly what most loans are — expected, mutually beneficial, voluntary cooperative arrangements between two parties. Sure there are exceptions, but in general, credit is not just brilliant, it is one of the institutional solutions which modern prosperity depends upon. A society without credit would probably lead to the deaths of billions of humans.

    “There are advantages to saving as a strategy of consumption….”

    There sure are. That is why nobody should be forced to take out loans or coerced to get their loans from a privileged party. Billions of people buy things without loans every day. The point is they have options, it is voluntary.

    “…what the blog is talking about is a culture that lives beyond its means, only able to pay the minimum payment on one or many credit cards, while believing the lie that your purchasing power is the overall credit line and not the monthly net income.”

    By not countering my hypothetical of two castes I am assuming you agree it would be morally reprehensible to prevent some (or all) people from getting credit and that you agree that people in general are not just better off but substantially better off with the ability to consume and invest based upon future income streams. Certainly the amount actually loaned is dependent upon expected future income, as lenders like to recover their loans.

    In moral terms, we would rationally choose a world where people are free to borrow and lend over one where they are not free to do so.

    Reply

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