From Yglesias, we get this chart showing the declining savings rate, something I think about quite a bit.
Americans have not been saving very much. Part of this chart is a dodge, because it doesn’t include the savings people thought they were getting through home price appreciation. But even correcting for that, we see Americans saving less than they have in the past. There are two thoughts that frame this graph for me. Let me share them with you.
1: Materialism and Wasteful Consumption
The first answer is that we have become more materialistic. This is a standard line on the left, that we are slaves to advertising, work too many hours to buy too much stuff we don’t need, etc. You hear this line a bit in the schadenfreude some have with gasoline prices and the housing collapse: take that, you gas-guzzling McMansion-owner! Here is popmatter’s economic blog, Marginal Utility, in January, putting this argument well: “The danger in a depression now is not so much that people will starve but that we will be deprived of the usual consumerist tokens we have come to depend on to express our identity.” Food is cheap, building an identity out of shopping, an identity as shopper, is not.
This attitude is very much on the “crunchy con” right as well. There’s a hope that, in the wake of all this financial collapse, ‘localism’ and other community-based virtues will spring up to reinvigorate us morally. I’m very skeptical, to say the least, that as we become poorer, hungrier, more desperate and more concerned about our short-term survival we will also become more virtuous. Matt Frost threw some cold water on that fantasy in a great “Nothing But Flowers” post last fall that you should read, and he should definitely follow it up a bit more if he still is in broad agreement, and especially if he is not.
Now note that this attitude has very little direct tension with a more libertarian or economic focused opinion on the matter. McArdle, a year ago: “Now, in fact, I agree that people overleveraged themselves in the last eight years, encouraged by ultra-low interest rates…Americans need to pay down some debt, and that process will be unpleasant. But they have adequate resources to do so, and the debt they have taken on largely represents an improvement in living standards and a transition to an ownership society that I think is overall a very good thing.” Alas, the ownership society. I knew it well Horatio.
McArdle probably has different opinions on consumerist tokens and to what extent going to the store is a good or bad activity for the inner-self, but she more-or-less reads the data and the trends the same way. Some economists, notably Robert Frank, think that Keeping Up With The Joneses is like a prisoner’s dilemma, a game where a person feel no better off if everyone has the same stuff, but a lot better off if just he has the nicer toys, which is a spin on something like the McArdle position.
2: Risk Shifts, Income Traps, Middle-Class Living
There’s another way to read this chart, one more in the vein of Jacob Hacker’s The Great Risk Shift and Elizabeth Warren’s The Two-Income Trap. Here the narrative is switched. People were buying more things, but things are so cheaper now that we spend less on them. The real problem was that the staples of a middle-class existence – education, health care, home – were growing in cost so fast in cost people were getting priced out. Risks that the public or corporate sphere had been absorbing were being transfered to individuals. And Individual income had actually stopped growing, so the only way to increase income to pay for these increases was for the second parent to enter the workforce. You end up with fixed monthly costs being over 50% of your income, so if either of the heads of households lose their job a bankruptcy is more likely – the two income trap. The only way to stay in the game is to become more leveraged, and thus riskier.
For the finance-nerds, translated Warren is saying that as (a) non-secured debt increases, (b) income becomes more volatile, (c) various additional costly risks are transfered to the household in an “ownership society”,and (d) safe income-generating capacity is pushed to it’s ceiling (two-parents working) then (e) bankruptcies increase. That’s like a simple Merton Model of credit risk, where equity is simply a call option on the debt.
Boston Review: What’s Hurting the Middle Class?
I want to call everyone’s attention to this excellent Fall 2005 issue of the Boston Review with the series of essays What’s Hurting the Middle Class?, from many people including Jacob Hacker (a favorite around here). From Elizabeth Warren’s lead essay:
As American families have sunk deeper into debt, they have endured relentless criticism from economists and sociologists, lobbyists and politicians, and the popular media. The accusations are sharp, the assertions are confident and unambiguous, and the tone of condemnation is unmistakable….If the problem is that today’s families are blowing their paychecks on designer clothes and restaurant meals, then the data should show that more is being spent on these frivolous items than ever before….
a family of four spends, on average, 21 percent less on clothing today than in the early 1970s, according to our analysis of data from the Bureau of Labor Statistics….so much so that today’s family of four is actually spending 22 percent less on food overall than its counterpart of a generation ago….Manufacturing costs are down, and durability is up. When the microwave oven, dishwasher, and clothes dryer are considered together with the refrigerator, washing machine, and stove, families are actually spending 44 percent less on major appliances today than they were a generation ago…Furniture may now be leather and super-sized, but its cost has shrunk—by 30 percent in a single generation. Today’s families pay more for their new car than their parents did, but they hold onto it longer too…
A 2000 study conducted in Fresno, California, (population 400,000) found that, for similar homes, school quality was the single most important determinant of neighborhood prices —more important than racial composition, commute distance, crime rate, or proximity to a hazardous-waste site.
People buy more stuff. But stuff is a lot cheaper than it used to be; for many things, a lot cheaper. So the idea that American households aren’t saving enough because they are spending on luxuries loses some of its charge when you look closely. What does stand out, when you look closely, is spending on housing, especially as proxy for children’s education, health care, and the cost of having a second car, a necessity for two working people living in most suburbs. And what stands out is that the flexibility of the American workforce also makes it more volatile and much more likely to have bad spells where savings get exhausted and bankruptcy ensues.
Now this is in tension with the first argument. Here’s Juliet Schor, author of The Overspent American (which I discuss here), someone very much in the first camp above, with a rebuttal (my underline):
Let’s start with three questions and three answers. First, does the United States have a problem with declining quality of life, a shrinking and more insecure middle class, rising poverty, and an escalating failure to provide for people’s most fundamental needs? Yes. Second, does the United States have a problem with “consumerism” as defined, for starters, by an excessive orientation toward spending, as well as consumption-related problems with the environment and global equity? Yes. Is this “consumerism” the cause of rising bankruptcies in the United States? No…
Consider apparel, a commodity that Warren and Tyagi discuss. The number of new apparel items purchased on a per capita basis has increased dramatically. In 1991 the average American bought 33.7 pieces of apparel; in 2002 that number was 48. Rising acquisition has been followed by rising waste, a trend some in the industry have called “disposable clothing.” Many discarded clothes end up in the weekly trash bin—in 2001 the EPA estimated that the average household discarded 30 kg (66 pounds) of textile waste…
So part of the story is that American homes are filling up with stuff because stuff has gotten so cheap. The government’s index of department store prices, a broad measure of consumer prices, fell from 542.9 in February 1993 to 494.3 in February 2005. Durable goods prices at department stores have fallen even more, from 457.6 to 381.0….
This brings me to issues of consumer culture and materialism. For me, the most distressing aspect of Warren and Tyagi’s paper is their abrupt dismissal of the “moral” question of “whether families are . . . consuming too much of the world’s resources.” While it may not concern them, I believe it is the paramount consumption issue of our time. With less than four percent of the world’s population, Americans account for roughly a quarter of resource use, greenhouse gas production, and other environmentally degrading activities. Scientists have recognized for some time that most of the world’s ecosystems are in precipitous decline. The United States bears more responsibility for this decline than any society on earth, and to make matters worse, U.S. corporations are aggressively promoting our lifestyle around the globe.
So when I think of that declining savings rate, these are the two arguments that go through my mind, and will hopefully now go through yours. Years ago I was much more concerned about attitudes of consumerism as a poison on our mental well-being. As I’ve gotten older, I became a lot more focused on the broad second set of concerns with access and the sustainability of a middle-class life in this country.
This is not strictly an either/or situation. You can want better access to health care and education for more Americans, while also being concerned about how wasteful we are with our gasoline consumption and meat production (neither priced anywhere near their externality cost). There’s a switch one can do also, and assume that the middle-class life itself is the ultimate unaffordable luxury, an accident of a historically contingent Fordist distribution agreement, and it should be given up as a socially just goal, in favor of a simpler life. I don’t make that switch, at least not when there is more fighting to be done, and when the second group of issues can be resolved with a more rigorous social contract.
Rortybomb 
Although my cultural sympathies lie with Warren and Schor, their arguments have major internal contradictions.
Firstly the Warrens’ idea that house prices go with public school districts would imply that you simultaneously have lots of people numerous enough to bid up house prices in certain areas, while still being insufficiently numerous to establish intermediate districts with OK schools (or else her argument is limited to Orwell’s lower upper middle class).
With Schor, much as I like her books, on an individual level it’s amazingly easy to opt out and work less and consume less, whereas she always makes it seem the prisoner’s dilemma is in full force at all points of society, and again, she fails to distinguish between oppressive keeping up from people basically having fun. Her ascetic inclinations are pretty realisable, the problem is most people don’t want to.
From my 2003 review of Elizabeth Warren’s “The Two-Income Trap”
Warren and Tyagi report: “A study conducted in Fresno … found that, for similar homes, school quality was the single most important determinant of neighborhood prices …”
They go on to say:
“Bad schools impose indirect—but huge—costs on millions of middle-class families. In their desperate rush to save their children from failing schools, families are literally spending themselves into bankruptcy.”
But what causes “bad schools”?
Here the authors play it coy. I can hardly blame them. Almost everybody uses “bad schools” as a euphemism. Who wants to become a pariah for telling the truth? …
Still, euphemisms get in the way of solutions. So I’m going to rush in where W&T fear to tread. I’m going to explain exactly what Americans mean by the term “bad schools”—and the one crucial thing that can done be to slow their decline.
I’m a reductionist. I believe in simple explanations and simple solutions. The more conceptual moving parts an idea requires, the more likely it is to fail. This insight has been the basis of Western science going back to the English monk William of Ockham in the 14th Century. …
What do homebuyers mean when they say “bad schools?” Occasionally, they do have highly specific criticisms: the principal might be disorganized, the teachers unmotivated, the textbooks incomprehensible. Overwhelmingly, though, Americans use the term “bad schools” to mean—“bad students.”
That’s the single most important key to the “two-income trap.” Parents spend huge amounts of money to keep their children away from dim and dangerous fellow students.
Maybe Americans are wrong, on factual or moral grounds, to do this. But it’s how they behave.
What, then, should we do?
W&T propose a statewide voucher system. You won’t have to live in an expensive municipality to send your kids to school there. You could live in South Central LA and send your kids to school in Beverly Hills!
The problem with this idea, of course, is that Beverly Hills schools would no longer be Beverly Hills schools if they were full of students from South Central.
If we eliminated the legal right of suburbs like Beverly Hills to protect their residents’ children from bad, big city students, parents who could afford it would just flee to remote exurbs—to defend their children through sheer distance.
No, the fundamental problem with America’s schools today is the sheer number of bad students.
So let me propose one crass but extremely simple way to at least lessen the harm done in the future:
Let’s stop importing bad students from the rest of the world.
America has all the bad students it needs right now.
When you find yourself in a hole, the first thing to do is to stop digging.
I’m curious about how decreasing prices for material goods impacts middle class wages. This psych/socy major assumes that if Wal-Mart drove prices to zero no one would have a job and thus still couldn’t afford to buy anything.
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“That’s like a simple Merton Model of credit risk, where equity is simply a call option on the debt.”
In the Merton Model equity is a call option on the *assets* of a firm. Anyway, seen at a thousands feet distance, it’s “like” a Merton Model. but then in default modeling everything is. Seen up close, I am not so sure.