It's a Wonderful Time to Be Alive
In his book The Rational Optimist, Matt Ridley writes that "Life is getting better -- and at an accelerating rate." There are ups and downs, recessions and wars, famines and floods. But for most people most of the time, things get better. "Food availability, income, and life span are up," he explains, "disease, child mortality, and violence are down -- all across the globe."
How many of us notice it? Few, as Ridley points out. The pessimists get the most attention. And since we adapt and become accustomed to circumstances around us, progress is overlooked even when it's life-changing.
Last week, Atlantic writer Derek Thompson shared some great information showing just how much the American economy has prospered over the years. "This is our story today," he wrote. "It is a story about how spending on food and clothing went from half the family budget in 1900 to less than a fifth in 2000. It is a story about how a nation that feels poor got so rich."
Using Census Bureau data, Thompson showed how the percentage of income an average American household spends on various goods changed from 1901 to 2003 (the latest year data are available). It's fascinating stuff. I've re-created it here:
Source: Census Bureau.
To me, two things pop out from this chart.
First is the deflation in relation to income of food and apparel (and most consumer goods, for that matter, which aren't broken out here). Yes, there has been inflation over the last century -- so much that any time inflation is discussed someone feels obligated to point out that a dollar has been devalued by well over 90% in the last century. That's true. But inflation has pushed average wages up by a far greater amount, causing the share of income spent on most consumer goods to plunge. The average household spent 43% of their income on food in 1900, 30% in 1950, and 13% in 2003. Similar data from a 2010 Census survey suggest (link opens PDF file) the figure fell to 12.7% in 2010.
Such shifts are often missed when discussing inflation and wealth. At an investment conference two years ago, Berkshire Hathaway (NYS: BRK.B) Vice Chairman Charlie Munger remarked: "I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I've seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not."
Later that day, a questioner asked Munger about inflation's "devastation" over the past half-century. In 1950, a corned-beef sandwich at a local diner cost $0.55, the questioner noted. Today it's $10. How can a country be anything but a failure when its currency loses 95% of its value to inflation, he wondered.
"If you think the past half-century was bad, you will have serious problems in life," Munger replied. "Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success."
Real disposable income per capita -- that's after-tax income adjusted for inflation -- has increased threefold since the early 1950s. Yes, a corned-beef sandwich may have cost $0.55 in 1950, but the average household income back then was just $3,900 a year. Today, the average household earns that much every three weeks.
Inflation has, of course, run faster than average income growth from time to time. Right now is one of those times; average incomes have not kept up with inflation over the past year. Yet as painful as that decline is, it's not hard to make an argument that the average worker is still far better off today than they were for the majority of the 20th century -- a period of economic nostalgia for many these days.
The other part of the chart that sticks out is the three sectors where we spend more of our income today than in the past: housing, education, and health care. There are two ways to look at that. One is that all three sectors are in a bubble, eroding real incomes as prices surge (or surged). That's certainly true to some extent.
But the quality and usefulness of all three have also increased tremendously over the years. Consider:
- Average life expectancy at birth in America was 49.3 in 1900, 68.1 in 1950, and 78.7 today, according to United Nations data. Advances in medical technology have literally added decades to your life.
- The average square footage of new homes increased from 1,525 in 1973 to 2,169 in 2010. Americans are spending a higher percentage of income on housing because they're buying much more house.
- As Thompson writes, in 1900, "a quarter of households have running water. Even fewer own the home they lived in. Fewer still have flush toilets. One-twelfth of households have gas or electric lights, one-twentieth have telephones, one-in-ninety own a car, and nobody owns a television."
- According to economist Tyler Cowen, "Thirty years ago, college graduates made 40 percent more than high school graduates, but now the gap is about 83 percent." We're spending more on education because, put simply, it pays.
None of this is meant to belittle the problems we face today, which are real and affect people in often devastating ways. Nor is it an ode to the virtues of inflation, particularly because it affects different people in different amounts. But among average workers, the biggest change in recent decades may be in the perception of prosperity, not the objectiveness of circumstances. "We are all subtle victims of the expectations that 100 years of wealth have bought," Thompson writes. It's a wonderful time to be alive, in other words.
At the time this article was published Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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