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Tuesday, September 19, 2006

Where money goes, then and now

1965, as I had occasion to note in my book American Tragedy, was a pivotal year in American life. In retrospect it marked both the peak and the end of the postwar consensus, as well as the end of the last inflation-free economic expansion for a long time. The top tax rates were just starting to come down, although they were still, I believe, about twice as high as they are now. As Paul Krugman likes to point out, this was one of the peak moments for economic justice in the United States, we have had less of that ever since, with the exception of general gains for all during the 1990s.

Having turned 18 that year myself and begun my own adult life as a consumer, I have many specific memories of what things cost in those days, but I have often wondered what costs less and what costs more, relative to the total price level. According to the official consumer price index, it costs $645 today to buy what $100 bought in those days (although I, and I suspect you too, will be wondering exactly what the CPI means by the time you get to the end of this post.) Thus, if the CPI is meaningful, any good that costs 6.45 times as much today as it did 41 years ago is really equally costly. Using that rule of thumb, it turns out that making out the family budget is indeed a very, very different matter today than it was in 1965.

Has technology saved money? Yes—in a few critical areas, led by electronics. The 21-inch color tv that cost $269 in 1965 costs only $140 today—less than 10% of the 1965 price, adjusting for inflation. (That’s a simple analog tv; most people are now spending much more, but getting much more, too.) A 12 cubic foot refrigerator costs less than 1/3 of what it cost then, partly, I would guess, because Americans are much less likely to make it. But one of the most amazing bargains—and the most inexplicable to me—is air travel. A round trip ticket from New York to Los Angeles cost $290.000 in 1965, or $1870.50 in today’s dollars. You can actually buy one for just $258.00. Since energy costs have NOT dropped (see below), larger planes presumably have a lot to do with it. Of course, your ticket in 1965 almost certainly bought you a non-stop flight and a complimentary meal—but the mechanics, flight attendants and even pilots who got you there, I suspect, were far better off than they are today.

Poverty has become somewhat deceptive, I suspect, because, as I found, basic necessities cost about half what they did then, relative to other goods. A dozen eggs, a gallon of milk, or a pound of ground chuck all cost about half what they did then when inflation is taken into account. Ice cream is also cheaper, although both sugar and coffee are about 20% more expensive in terms of other goods. (That does not, however, explain how lifesavers have gone from a nickel in 1965 to at least $.75 today, and over a dollar at some airports—a relative increase of about 2.5 times.) The sugar increase has also kept the cost of coca-cola at about the same level, although beer is about 33% cheaper than it was. Clothing is also much cheaper, once again because Americans no longer make it or the cloth it comes from. A Brooks Brothers lightweight suit that retailed for $115.00 in 1965 is only $420.00 now—just over half in real terms. (This is an area where research is not easy to do.) Eating out is harder to measure. The double-hamburger special for which I used to pay $1.00 at Charlie’s kitchen now costs $4.95, a 20% drop in real terms, but the Durgin Park Prime Rib has gone from $4.00 to $33.95, a 30% increase. (Of course, it’s no longer anywhere near as popular an item.) Fast food, of course, was only in its infancy then.

Median family income, according to official statistics, has hardly risen at all. The $6,882 figure for 1965 works out to $44,389 today; the actual figure for 2005 was $46,326. I shall have to leave tax calculations for those two families to another time—the data is out there, but it would be a lot of work. The minimum wage was, I am pretty sure, $1.25 in 1965, which would mean $8.06 today, but it is only $5.50. Despite this, a minimum wage earner can eat and dress as well as a 1965 variety because those things cost less, and he could even take an occasional airplane trip. But today’s low earners face other problems.

Getting around is not substantially more expensive today. Gasoline is up now—although it wasn’t long ago that it was as cheap as ever—but it is only up about 50%. We are paying farmers less, oil companies more. No calculation is more difficult than automobiles, but a one-year old Chevy Impala, I discovered, costs almost exactly the same in constant dollars today ($13,500) as it did then ($1,900)—and it certainly provides longer life and more value. Public transportation costs more—twice as much in New York City, even adjusting for inflation, probably thanks to generous pensions. Entertainment is a mixed picture. I can’t remember what the movies cost in 1965—somewhere between $1 and $2, I think—which means that today’s prices are in the same range, and at least as cheap if you take in a matinee. (Of course, in those days your ticket often bought two movies.) Ski lift tickets are only marginally more expensive ($7 then, about $55 now in New England.) But one of the most striking increases is a bleacher seat at Fenway, which has risen from $1.00 in 1965 to $23.00, nearly a fourfold increase with inflation taken into account.

Many of you have undoubtedly already guessed the punch line. The most expensive big-ticket items are a college education and housing, especially in major urban areas. A year at Harvard in 1965 cost $2,700; today it costs almost $44,000, which works out to a 2.5 times increase. No one knows exactly where all that money is going, but a significant chunk actually lines the pockets of the endowment managers. (The endowment has increased about fourfold after adjusting for inflation, but tuition, remarkably, continues to increase as well.) As for housing. . .a ranch house in Levittown, New York could be had for $18,000 in June 1965. Today a similar-sounding house lists for $475,000. Even accounting for inflation, that is a four-fold increase in real terms—and interest rates are higher, too. Three-bedroom homes in Evanston, Illinois have gone from $25,000 to $340,000—not as bad as New York, but still twice as high, relative to inflation. Krugman has argued that housing costs in much of America have lagged substantially behind, and more data would be interesting, but it seems that the average American family is spending a much higher percentage of its income on housing than it did forty years ago, and much more on education as well. And as many people know, average working people simply can’t afford houses in several of our largest metropolitan areas anymore. We have two nations within our major cities to a much greater extent, I would suggest, than we did a half century ago.

What does this mean? Most of the money spent on housing is retiring debt, and is therefore going into the pockets of the financial industry, instead of the paychecks of farmers, industrial workers, and flight attendants as it might have 40 years ago. We are paying the most for some of the least labor-intensive work, which must be contributing a great deal to the rise in income inequality. Only the banks, one would think, are actually benefiting from this huge increase in housing costs. Meanwhile, the cost of college is forcing more and more young people to incur large debts (something almost unheard of in the 1960s) and to go into the financial industry themselves to pay them off.

Going still further back, I have just read a little campaign rhetoric from the three-way election of 1912. Two of the candidates, Woodrow Wilson and Theodore Roosevelt, talked ceaselessly about the overweening influence of the rich, the problem of Trusts, and the need to give workers and farmers their fair share. Such ideas went into eclipse during the 1920s but the depression brought them back with a vengeance, and from the 1930s through the 1970s or so the federal government did a great deal to make life better for ordinary farmers and industrial workers. During the last 25 years their jobs have been exported at an increasing rate, replaced by lower-paying jobs in retail and service industries. The Chinese and South Americans make cheap clothing and grow cheap food for us all, but more Americans are on a treadmill, and education has never, literally never, been half so expensive as it is today. The soldiers of the Second World War bought a relatively just society with their sacrifices, and it is not clear how or if we will rebuild it now.


Matthew E said...

When I was going to university I wondered myself just what was it that made education so expensive (not that it's anywhere near as expensive in Canada as the U.S.). Nobody had an answer for me. Thanks for confirming that it was a sensible thing to wonder about.

Anonymous said...

Re: 1965 being both "the peak and the end", I've long thought social trends are not a sine wave, but a capacitor discharge: they build up to a peak and flip violently over into the next phase.

One whose data agrees with me is David Fischer in "The Great Wave," economic data back to the middle of the Middle Ages, with some classical data. Frex, a huge price spike in ancient Athens during -- you guessed it - the Siege of Athens.

In 1965 I was a young adult, so your data triggers lots and lots of memories.

Anonymous said...

Also - re housing prices - the population of America has, what, doubled since 1965? And rapidly urbanized because "That's where the jobs are." Also see Richard Florida's article (can't remember which magazine! Atlantic?) on the Creative Class Clusters, where housing prices are through the roof.

And for an old and forgotten but interesting solution to some of the problem, check out ndrosen's live journal. He's a Georgist.

Anonymous said...

For the increasing cost of higher education, this is clearly a multifactorial process but there are at least 3 factors to consider. One is declining state support for public universities. Another is the interesting phenomenon of Baumol's cost disease. Another is increased demand by the baby boom echo. Places like Harvard charge high costs, in part, because they can get away with it.

Dude said...

I was born in 1965 so I can't add much to the walk down memory lane. However I have done a fair bit of economic research and one feature of the post Reagan Revolution Economy is the switch from a manufacturing to a financial, or as some put it, speculative, economy. One key stat I have written about: In 1987, less than 19% of total domestic corporate profits were earned by financial firms, while just under 27% were earned by manufacturing firms. In 2004, 33% of total domestic corporate profits were earned by financial firms while just over 12% were earned by manufacturing firms.

all data: BEA.gov

Anonymous said...

My parents were of the GI generation, and it's true, they never gave an extra dime to a university, including the private university my Dad attended for free on the GI Bill.

Of course, the reason for this is that until major concessions were won from the automakers in 1968 or so, a manager's salary was pretty paltry. We were solidly middle class, but could not afford vacations until long after I'd left the nest in the early 1970's.

Afterwards, my parents enjoyed vacations in the Barbados, a move to a bigger home, etc. Rather than doling out to colleges, they spend the $$ on themselves. Not that I blame them. It was the first time in their marriage that they had come to have serious disposable income. Remember also that this was the generation that suffered as children in the Depression.

I did notice that education began getting expense in the Reagan era, probably because of Federal cuts. Education has always been on the Regan republican hit list.

We have two foes: corruption and right-wing ideology. But who doesn't?

steve said...

Thanks for a well written piece and your information specifically on the massive increases in costs of higher education and housing raise the issue of the "haves" and "have nots" as although the low paid workers can dress and feed themselves with no problem the 2 areas that they are left out of are education and housing due to insufficient income for either of those which will continue to leave themselves and their children falling further behind.

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