Tuesday, October 02, 2012

The American budget

For more than a century, the Bureau of Labor Statistics has published a list of how an average American consumer spends his or her annual budget. Rather than the raw numbers of inflation we tend to obsess over, it highlights the impact certain goods have on people's budgets in relation to their incomes.

Take, for example, how much of an average consumer's annual budget is devoted to food:

In 1901, the consumer spend 46.4% of their budget on food.  This dropped to 32.5% in 1950.  Then to 22.6% in 1972.  And to 12.8% in 2005.  It may have bottomed though as it was 13.0% in 2011.

How about apparel?  It was 17.6% in 1918.  8.4% in 1972.  3.5% in 2011.  (My budget for apparel is probably like 0.01% or less.)

In 1960, typical consumers devoted 36.3% of their budget to food and apparel (combined). Today, 16.5% of an average budget goes to those two categories. That's a difference of 20 percentage points. And since we aren't eating less or wandering around less clothed; it truly does mean that one-fifth of an average consumer's budget was freed up within with 50 years. And that's just looking at food and apparel alone.

What happened to that 20% of our budget? That's where things get interesting. Spending 20 percentage points less on food and apparel means we get to spend more on other categories. And a lot of those other categories include products and services that have made our lives demonstrably better.

For example, the percentage of our budgets devoted to health care has more than doubled since 1901.
Some will say that's a bad thing. Healthcare, after all, has seen inflation well beyond the rate of wage growth in recent decades. But there's another, deeply positive side to it. The quality of the medical care grew exponentially in the last century. And we can afford to spend more on health care today in part because large parts of our budgets have been freed up thanks to the relative decline in expenses like food and apparel. We've traded expensive pants for penicillin. That's a wonderful thing. And it has helped push average life expectancy up from 48 years in 1901 to 78 years today.

What else are we spending more of our budgets on today? Education:

In 1901, it was 0.0% (!).  1.1% in 1960.  2.1% in 2011.

[And how about cable TV?  I'm pretty sure it was 0.0% in 1901!]

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