Prices Are People: A Short History of Working and Spending Money (2024)
Introducing the 2012 Atlantic Money Report, a month-long project on why things cost what they do
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In the mid-twentieth-century vernacular, the word "bread" means money. But in most years before the twentieth century, people spent so much of their figurative dough on literal dough that bread was functionally synonymous with cash. As late as the 1850s, the typical British family spent 80% of its income on food, Bill Bryson wrote in his entertaining domestic history At Home. The majority of that 80%? It went to bread.
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The last 150 years have experienced all sorts of tumultuous economic revolutions. But the revolution in food and agriculture was perhaps the most important to the family budget. At the end of the 19th century, more than 40% of families lived on farms. By 1950, the farm economy had fallen to a tenth of the labor force. Oh, but the decline wasn't nearly done. This year, farmers account for less than 2% of all workers.
In a century's time, farming has gone from the dominant occupation in the United States to a job whose share of employment equals Tennessee's share of the national population.
And yet, we're not all starving. In fact, most Americans are better fed than our ancestors could possibly be and we're paying less for it. Today we spend as much on home-cooked food as we do on home-used utilities (see the graph below). The price of feeding ourselves has gone way down in the last century. But the price of heating ourselves -- and driving ourselves, and housing ourselves, and educating ourselves, and insuring ourselves, and treating ourselves with health care -- hasn't gone down. It's gone up.
Over the next month, we're putting together a special report, the Money Report, about how and why we spend what we do. Economics is so often the economist-eye view of the world. We're out to recreate the consumer-eye view of the world. We're interested in what things cost, why they cost that much, and why they're getting more expensive and less expensive. If you've got awesome and surprising stories about prices, costs and the flow of money, leave us a tip in the comment section.
To kick things off, we'd like to very briefly introduce one of the themes of the Money Report: Prices are people.
PRICES ARE PEOPLE
Across the 20th century, the labor force has shifted from farmers and foresters to manufacturers and then to professional and service workers. In 1900, we spent much of our manpower growing food and feeding ourselves. By 1950, the major economic industries were manufacturing and construction. But today's labor economy revolves around services, not products. Service industries grew from 31 percent of all workers in 1900 to 78 percent in 1999, the BLS reports.
Here's a snapshot of the employment story since 1939. It's all interesting, but let's focus on the time between 1975 and today. In the time that our education/medical sector has quadrupled, and our business service sector has increased by the same four-fold rate, total manufacturing jobs have fallen. As multinational companies have made better use of global supply chains, manufacturing and other so-called tradable occupations have been in decline. But retail jobs have increased because selling cars and food and furniture is still a face-to-face business that's hard to do anywhere except at the point of sale.
Economist Stephen Rose, writing for The Atlantic this month, surveyed that same half-century period between 1947 and 2007. But instead of looking at people, he looked at prices. It's the same story. Rose reports that spending on items that could be manufactured or produced globally -- food/drink and clothing -- fell the most. But the categories with the largest employment gains in the graph above -- education and health care -- also saw the largest gains in consumer spending in the graph below. Whether spending followed our employment, or employment followed our spending, both have moved in the same direction -- away from appliances and food toward local specialized services.
There is more to prices than employment figures, of course. Productivity and technology matter. Scarcity matters. Demand matters. But labor is such an important cost that at the broadest level, it can appear almost determinative.
Across the economy we can see that items that require fewer and fewer American workers per completion (think: socks) get cheaper, while services that can't find similar ways to replace American workers (think: health care, education, government) don't get cheaper at all. In fact, they often get more expensive.
This isn't bad news, necessarily. A rich economy that needs fewer people to make things can put those people to work doing other important things. We should want workers to move into new industries that serve our needs. But too many workers serving a need leads in one direction for prices: Up. It is only a small exaggeration to say that prices, for lack of a matter word, are people.
Two-thirds (67%) of Americans say that they've cut back on spending, and almost half (45%) say they've put some life plans on hold. A third (35%) have dipped into their savings or investments. And almost two thirds (62%) say that even though they are able to pay their bills, they have little left over for “extras.”
Retail sales surged during the pandemic as home-bound workers clicked “complete purchase” on everything from Pelotons to sourdough starter. In 2020, e-commerce sales rose by 43 percent. Stimulus checks gave Americans newfound savings and excess money to burn. Supply chains couldn't keep up with the demand.
Consumer spending is a key driving force in the economy and a critical concept in economic theory. Investors, businesses, and policymakers closely follow published statistics and reports on consumer spending in order to help forecast and plan investment and policy decisions.
According to the BLS survey, the largest expenditures were housing and transportation, which comprised 26 percent and 13 percent of people's pay, respectively. Another big spending category was food, to which 10 percent was devoted.
Contrarily, the wealthiest 20% of households still maintain cash savings at approximately 8% above pre-pandemic levels. Ultimately, with inflation taken into account, the majority of Americans are worse off financially compared with before the start of the pandemic.
Consumers cited product price hikes and their ability to afford something (whether for personal or economic reasons) as the key drivers behind purchasing fewer items across categories (Exhibit 3). Consumers cited price as the top reason for reducing the number of grocery items they purchased.
Nearly half of mandatory spending in 2022 was for Social Security and other income support programs such as the Child Tax Credit, food and nutrition assistance, and federal employee benefits (figure 3). Most of the remainder paid for the two major government health programs, Medicare and Medicaid.
After decades of running below 3%, starting early 2021, the Consumer Price Index increased rapidly as the economy opened back up after Covid-19 related lockdowns. It peaked at 9.1% in June 2022 and then declined to its current level of 3.2%, per Bureau of Labor Statistics data.
But many American consumers are spending beyond their means. Household debt reached a record $17.5 trillion in the fourth quarter of 2023, and has increased by $3.4 trillion since the end of 2019, according to data from the Federal Reserve Bank of New York.
Half of respondents said that their essential cost levels have meant that they have had to cut their non-essential spend in the first quarter of the year. Eating out (72%), clothing (62%), and takeaways (58%) were the three most common non-essential cutbacks reported.
According to a recent CNN survey, 71% of Americans identify money as a significant cause of stress in their lives. Further, 76% of households live paycheck-to-paycheck and credit card debt is growing.
The nature of our global economy is such that people's income derives from other people's spending. So when shopping stops, the economy stalls. There's less demand, and that means less work to do. That doesn't necessarily have to mean mass unemployment, however.
The wealthy invest in retirement consistently, and they also invest in education. They take care of their health and, more often than not, pay their healthcare bills without incurring medical debt. They also tend to purchase high-quality products and food.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Increased consumer spending helped propel the U.S. economy to grow by an annualized rate of 1.6% in 2024's first quarter. Spending on goods during the period was relatively flat, but services spending grew solidly.
The personal saving rate fell to 3.6% in February, the lowest level in more than a year, and in recent years it has hovered below levels seen in the decade before 2022.
The first-quarter slowdown in inflation-adjusted growth in gross domestic product, compared with the robust pace set at the end of last year, largely reflected a pullback in growth in consumer spending, as well exports and outlays by the government.
Consumers are finally slowing their spending and experts say that's a warning sign of the economy. Americans have propped up the economy with a powerful spending spree in the last two years. But consumer confidence is starting to wane amid elevated inflation and a weakening job market.
Introduction: My name is Lidia Grady, I am a thankful, fine, glamorous, lucky, lively, pleasant, shiny person who loves writing and wants to share my knowledge and understanding with you.
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