As anyone who has been following the news in America over the past year, two of the biggest news stories have been turbulence in housing markets across the land, and what is the the story with petroleum prices. Tory wrote a blog entry back in August 2007 which raised questions on housing and commuting costs in American cities. In turn, his blog post linked to a story carried in Forbes about housing and commuting costs throughout the land. Naturally, much was made about commuting in Houston eating up a substantial part of our household budgets around here.
The Wizard has never put too much stock in such debates, indeed your learned commentator did not even bother to reply to Tory's post. Nor does yours truly think very highly of those who rage about transportation costs incurred from automobile use. And why, pray tell, is that? Let's just pay a visit to a very helpful and insightful website which reveals much: The United States Bureau of Labor Statistics web page which describes household consumer spending over the past 100 years.
Before going any further, we should remind ourselves that the figures from 100 years ago on household consumption are - well - just that. They are 100 years old. Governments of course have been collecting information on their respective populaces for a very long time. Still, there are as always the quality of that information, but the BLS does state that their statistical information on household expenditures for residents in Boston and New York City are amongst the oldest pieces of information that they have been continuously collecting and are of considerable interest when thinking of such issues.
So what does the Wizard believe are the observations of greatest import when it comes to household expenditures since 1900?
1) Rising incomes. American household incomes have gone up 10 fold or more since 1900. Budget constraints have been pushed outwards to astronomical levels. One very famous economist strongly believed - even during the depths of the Depression - that this massive accumulation of human wealth would continue. Regardless of what else you may think of him, on this issue he was absolutely correct.
2) Reduction in family size. The mean size of an American household was 5 people in 1900, whereas it was 2.6 people in 2000. The ramifications of the drop in the size of households cannot be underestimated. In 1901, the BLS says that American households spent some 42 percent of their household budgets on food, but 22 percent on housing (29 percent in Boston).
But reduction in household size also rolls over into housing markets. In the short run, the social demand curve for housing is very inelastic. And why is that? The reason is that very few people are willing to sleep outdoors or in their cars at night. In Houston, there are an estimated 10,000 homeless people out of an urban area of some 4 million people. When I read urban economics with Barton Smith, we discussed the issue of budget constraints one day and he said that poor people are often willing to part with 50 percent (or even more) of their incomes on making sure there is a roof over their heads. They are willing to double up if necessary, to move back in with family, or give up other consumer goods in order to make sure they do not have to face the elements.
Thus, reduction in household size allows for much greater monies for other goods, resulting in some very interesting changes in individual and household indifference curves. One thing I am very confident I can say is that housing is a normal good, as is spending on transportation.
My observations find confirmation if one studies BLS data on household spending for housing and transportation over time. The 1934-1936 data is the first time the BLS displays data for transportation expenditures. The U.S. household percentage was 8.3 percent, while the Boston and New York figures were 5.1 and 5.7 percent. The 1960-1961 data show that U.S. household expenditures for transportation were 14.7 percent, while New York households spent 10.7 percent and Bostonians spent 13.5 percent. The 1984-1985 data show that transportation spending was 19.6 percent, 15.8 percent for New York and 19.3 percent for Boston. The 2002-2003 transportation figures were 19.1 percent for the U.S., 15.4 percent for New York and 17.3 percent for Boston.
The food budget fell from 42 percent in 1901 to 33-36 percent in 1936, then to 24-28 percent in 1960-61, 12-16 percent by 1984-85. Food budgets have stayed at 13 percent since then.
Housing expenditures rose from 23 percent in 1901 (29 percent in Boston) to 32-35 percent by 1934-1936. They stayed at 30 percent in the 1960-61 and 1984-85 periods. They rose however by 2002-03 32 percent across the U.S, and 36-37 percent in Boston and New York.
So what can we say about all of this, besides the fact that housing and transportation are normal goods? It can be pointed out that food production has increased dramatically with modern agricultural methods. Some have pointed out that fossil fuels have much to do with this in terms of providing fertilizer, pesticides, and farm machinery fuel, but one has to wonder whether there are substitutes for these? Can genetic manipulation of crops provide even greater crop yields? The Wizard is watching the work of one man in particular to see what holds in store for the future, not only for agriculture production, but for future liquid fuel production and a lot of other items as well.
But I digress. Clearly household budgeting for food would fall with the decline of family size regardless of any other factors. Also, it does help to remember that not only was food a bigger part of family budgets 100 years ago, but to reiterate that family incomes themselves were lower! Even if our children were to see an era of rising food prices due to an alleged decline in the amount of fossil fuels or phosphorus available (and an implied decline in agricultural productivity), is that not to mean that we cannot put land back into agricultural use?
I ask questions like this because what all of this shows is that there are a number of issues that those who see nothing but doom and gloom for man's future seem to not consider. We do not know what future incomes (and hence household budget constraints) will be; we do not know what technological improvements will happen, nor do we know exactly how fast they will happen (and they may happen very quickly!); we do not know what percentages of household budgets people in the future will be willing to allocate towards various desires.
Are you just dying to see the world's stock of petroleum to run low so that people will stop driving gasoline powered cars, knowing that electric cars are more expensive? Did you ever think that the automobile manufacturers might consider allowing people to carry an 8 year car note instead of 5 years? Did you ever think that Americans might consider downsizing their average house sizes from 2,300 square feet to 1,700 square feet, and perhaps cutting down the size of their house notes 25 percent in the process? If doing so results in a drop in the amount they are carrying on their mortgage by $50,000, that would result in a drop of $300 per month every month for 30 years, if a mortgage is carried at six percent interest. And what will people do with that extra $300 per month? They just might spend it carrying a note on a $35,000 flex fuel car which might be powered up during their work day by an electrical outlet that is provided by their employer's parking lot, but we don't know that do we?
And that is the reason why the Wizard did not put much effort to get worked up about the Forbes article, nor do I worry about such things as how much of American household budgets go towards transportation costs, food costs, or any of the other things that work other people who really have nothing else to worry about into a lather. I am concerned about whether people try to make certain household expenditures more expensive than they need be because of political or aesthetic preferences. People will make adjustments as they want or need to do so, but why force them to make tradeoff decisions that they otherwise might not need to? I would have much more to be concerned about had suffered the genuine misfortune, like 80 percent of humanity, of having been born in a really poor country.
Wizard.