Rethinking the American consumer(economist.com)
economist.com
Rethinking the American consumer
http://www.economist.com/blogs/freeexchange/2009/10/rethinking_the_american_consum.cfm
7 comments
Housing is a necessity. A given house is not. I find this article hard to wrap my head around, as it really seems to be based on slipping in the idea that it is impossible to cut your housing costs and then going from there to "panic!", but that's not true. You can cut housing costs. You can control the costs of quite a few "necessities" nowadays; very, very few Americans are truly buying the absolute minimum "necessities". My wife and I have managed to cut quite a bit of "necessity" out over the past few years, and economized on several other "necessities".
Before the financial and housing melt down, my wife was in law school and would occasionally file bankruptcy for folks pro bono. As one of the steps for filing, she reviewed all of their expenses. When looking over their monthly expenditures the individual would usually say things like "I need HBO and ESPN, it's a necessity. I need the data and texting plan and on my phone, it's a necessity. I need to lease the car from the bank and not drive a clunker or ride the bus, it's a necessity. I need to eat dinner out four times a week and not bring a sack lunch to work." Yes, these things are nice to have, but they are not necessities. In the end, she would play financial advisor to some of the poorest individuals in the city who spend their money on these "necessities."
If your mortgage is under water (i.e. the principal is more than the value of the house), you can't sell your house. And a large percentage of American mortgages are now under water.
Foreclosure is an option. If it's your only option, it sucks, but it is a way to cut costs. Is it expensive in itself, given the damage it does to your credit rating? Well, yes, but that doesn't mean it's not there, or sometimes the best choice. Should you not have ended up in the position where that was the best choice? Well, yes, but if that's where you are, that's where you are.
It's important to separate the ideal fact that you shouldn't be in that position from the practical fact that it is indeed an option.
It's important to separate the ideal fact that you shouldn't be in that position from the practical fact that it is indeed an option.
You can't sell it without a writing a [certified] check for the difference or getting the bank to agree to a short sale. True that people in dire financial straits may not be able to do the former, but the latter is not out of the question.
Just because we spent as much yesterday as 20 years ago on consumer goods doesn't mean that our spending wasn't frivolous. Our essential costs skyrocketed. We should've cut back.
Housing costs are not always a necessity. The mean sq. footage of a house in the United State went from 1,655 to 2,215 between 1978 and 2008. Did people develop the necessity for larger and larger houses? Or did they want larger and larger houses?
I'll wager on want over need. American culture is too often focused on coveting what others have, and showing off success through the display of material goods. The one case that can be made for larger houses is the number of persons per household increasing from a mean of 2.67 (1987) to 3.88 (2008). What do you all think?
True, it's harder to cut down the cost after making the mistake of buying more house than can be afforded. Myself and plenty of other Americans instead chose to buy more affordable, if less desirable, houses. For us, a large house is not a necessity. (I live in a 900 sqft condo)
Sources: [http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf] [http://www.census.gov/population/socdemo/hh-fam/cps2008/tabA...] [http://www.nytimes.com/1987/04/15/us/average-size-of-househo...]
I'll wager on want over need. American culture is too often focused on coveting what others have, and showing off success through the display of material goods. The one case that can be made for larger houses is the number of persons per household increasing from a mean of 2.67 (1987) to 3.88 (2008). What do you all think?
True, it's harder to cut down the cost after making the mistake of buying more house than can be afforded. Myself and plenty of other Americans instead chose to buy more affordable, if less desirable, houses. For us, a large house is not a necessity. (I live in a 900 sqft condo)
Sources: [http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf] [http://www.census.gov/population/socdemo/hh-fam/cps2008/tabA...] [http://www.nytimes.com/1987/04/15/us/average-size-of-househo...]
"American culture is too often focused on coveting what others have, and showing off success through the display of material goods."
Agreed, but its not just American culture that does this. The type of conspicuous consumption you refer to was one of the major ideas behind the economist Thorstein Veblen's The Theory of the Leisure Class. He claims that it is human nature to emulate those of a higher economic class through wasteful spending. Interesting stuff.
Agreed, but its not just American culture that does this. The type of conspicuous consumption you refer to was one of the major ideas behind the economist Thorstein Veblen's The Theory of the Leisure Class. He claims that it is human nature to emulate those of a higher economic class through wasteful spending. Interesting stuff.
It was nice to hear that American consumers are not quite as prone to frivolity as is commonly believed. At the same time however, this gives me a sinking feeling -- the consequence is that individuals will find it far harder to cut budgets on housing, transportation, and healthcare than on impulse purchases like big televisions. We are, in fact, in worse trouble than we thought. If you have seen suburbia recently, it shouldn't be too surprising to find out that the 'necessities' have become more expensive; the past few decades have seen bigger cars, homes, and commutes than ever before. In order to downscale costs, there is going to have to be some serious downsizing, and this is something that does not come easy for those in the land of the supersizes (especially with regard to living in higher density/urban areas and sourcing locally).
For me, the big take-away from this article is debt-financing. For many years, the U.S. government and its average citizens has been spending beyond their means - acquiring now and hoping to meet the mounting payments in the future. This has certainly demonstrated itself to be a losing strategy, and a habit that is especially difficult to kick. I am interested to see how this country will rise to meet these challenges.
For me, the big take-away from this article is debt-financing. For many years, the U.S. government and its average citizens has been spending beyond their means - acquiring now and hoping to meet the mounting payments in the future. This has certainly demonstrated itself to be a losing strategy, and a habit that is especially difficult to kick. I am interested to see how this country will rise to meet these challenges.
"[A]s Elizabeth Warren has argued, the idea that most Americans have been spending frivolously on consumer goods actually isn’t true. Instead, a hefty chunk of the increase in consumption in recent decades has been the result of higher housing prices"
I don't disagree, but past 1-2 decades have seen commoditization of housing, housing and related products started to resemble more and more like consumer goods in the U.S. than in any other country.
I don't disagree, but past 1-2 decades have seen commoditization of housing, housing and related products started to resemble more and more like consumer goods in the U.S. than in any other country.
Spending on health care is often frivolous. It's just that consumers have no better alternative than to trust their doctor when their doctor tells them that it's prudent to order an MRI, or that an expensive brand-name drug has advantages over a generic alternative.
The article doesn't bring up the fact that a majority of the people in developed countries have plenty of resources to afford their needs. A house is not a necessity. A car is not a necessity. And as one of the commenters pointed out, the rising cost of health care must be in part attributed to _better_ health care. It makes a difference, since many OTC drugs that we take for granted today would be considered life-savers in the 1930s.