Spending More Than Our Income

In our last two articles, we described what two very rich people are doing with their money as they make pledges to laudable philanthropic projects.

This time, we'll come back down to earth and talk about us ordinary mortals. What do people in general do with their money? About a month ago, we examined their mounting debt burden; what are they spending on that generates debt like that?

There are two stories here – we've realized since Ways of the World began that every topic we approach breaks down into at least two stories. So today, we cover some simple facts about spending patterns. Next time, we'll look at motives that psychologists and market researchers have identified as drivers for buying and owning "things".

Necessities or Luxuries?
Analysts of consumer spending frequently divide it up according to the kind of need it meets, a basic necessity or some discretionary item that we might have more choice about. But we'll find as we go through a list of spending categories, that it isn't that cut-and-dried.

Shelter: McMansions for Everyone?
For instance, while it is unlikely to come as any surprise that we spend the most on housing, a very basic necessity, it is also true that there's lots of variation in the size, location and style of our "shelter" which gives it a significant "discretionary" element. In 2005, the average household spent $11,200, according to Commerce Department and Census Bureau compilations. This total includes allotments for mortgage payments and property taxes for homeowners, rent for tenants and utility bills. Along with maintenance, repairs and other household services, shelter absorbed almost exactly 20% of after-tax personal income last year.

Food: Eating More In and Out
Food runs second in size in our budgets, taking $10,700 for an average household last year, 15.6% of income. This share of income has expanded almost a full percentage point in the last five years. Food to eat at home – groceries – and food eaten away from home – restaurants – each accounts for about 40% of that increase, with the rest absorbed by alcohol, especially beer. There's got to be some Freudian point underlying that! But obviously, our necessity/discretionary dichotomy breaks down once again. About all we can say is that some part of our food budget is absolutely necessary, but certainly not all of it.

Health Care
Then there's medical care. The amount we consumers actually lay out for medical care is a fuzzy concept that depends on which set of government bureaucrats is doing the counting. We tried to use a middle-size measure here, something the Commerce Department calls "market-based" consumption of health care services plus medical supplies. This grouping also took about 16% of our income last year.

Clothing: How Low Can the "Waistband" Go?
Another presumed "necessity" is, of course, clothing. For some parents who are trying to talk their pre-teens out of another pair of low-rise Levis, it may be hard to believe that clothing prices have been falling, but they have, and the share of people's income spent on clothing has diminished slightly in recent years, from 4.1% in 2000 to 3.8% in early 2006. Our example here was specially chosen to indicate the kinds of discretion that can creep into this budget item.

Transportation
Finally among basic consumer needs, we need to get ourselves around from place to place. First, the vehicle. Our spending on cars and small trucks has, interestingly, been just about flat since 2002. No kidding: in the aggregate, a moving average of the dollars consumers have spent on cars, truck, and parts has moved very little, hovering around $445 billion over the past three-and-a-half years. This means it has decreased noticeably as a portion of income, from about 6% in early 2002 to just under 5% at the end of 2005.

Fuel, of course, is another story altogether. In 2001, outlays on gasoline and oil were $171 billion, or just over $1,600 per household. This amounted to 2.4% of income. By the first quarter of this year, these outlays had exploded by 74% to roughly $2,700 or 3.3% of income. For the month of May, that gasoline-to-income share was up to 3.8% and it almost surely increased in June and July.

With Spending on Options Up Too, Our Outlays Are Bigger Than Income
With these so-called "basic" categories – shelter, food, medical care, clothing and personal transportation – we have accounted for 58% of after-tax consumer income in early 2006. This is 4% more than the 54% average for 2000. Further, people obviously spend on lots of other items: home furnishings, travel, recreation, education, personal care, just to name some. In these last five years, as "necessities" were taking a growing part of our income, what did we do with the presumably more discretionary sectors? Did we cut back? Well, no: we spent more on them too, and their share of income also increased, from 38% in 2000 to 39% last year. We also make other outlays, for interest payments, family income transfers, and so on. This spending-itis is apparently a progressive condition, and in the first quarter of this year, we shelled out 1.7% more than our income. Oops.

We noted at the beginning here that there's some helpful information about motives for this behavior, and that will follow next time. Unfortunately, for such a dramatic result as consumers in total overspending their income, some of our reasoning looks pretty shallow. To give you an idea, one of our sources is a book titled "Why People Buy Things They Don't Need" and the chapter we will summarize is called "The 14 Justifiers . . ."

What Do We Really "Want"?
Wonder what's really going on here? Why do we think we need to seek out all this gratification from things? Part of it, as anthropologists teach, is that human beings, like other animals, have always and everywhere had some sense of possession and control. But part of this is superficial, and we'll even find out that the gratification we think we might have achieved may fade away before we know it . . . .
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Two technical notes on our numbers. We've used mainly the Commerce Department's concept called "market-based" PCE [personal consumption expenditures] and we've compared it with a modified version of disposable [after-tax] personal income. Anyone who wants to see the calculations is welcome to send me an email. Secondly, as this article was being written, Commerce's Bureau of Economic Analysis released its annual revisions of these data beginning in 2003. We've chosen to ignore the revisions, which were routine this year and unlikely to alter the sense of what we've said here.