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Tuesday, October 16, 2007

The Definition of Discretionary

Oh, Lord, I'm laughing so hard I feel ill.

I finally realized why I find so much of today's economic analysis so bizarre. While I was hanging out like a potted plant during my drooling era, you all went and changed the definition of "discretionary purchases" on me. See, back way back when, buying a house was discretionary, i.e., the consumer's choice, while eating was considered a necessity rather than a choice. But now, according to "Bankruptcy law expert and Harvard University Professor Elizabeth Warren", those definitions have changed, so our lives are really much harder:
Despite all those $200 sneakers you hear about and the long lines at Starbucks, consumers are actually spending less of their income — much less — on discretionary items like clothing, entertainment and food than their parents did. In fact, after taking care of essentials like housing and health care, today’s middle class has about half as much spending money as their parents did in the early 1970s, Warren says.
Ya get that? Food is discretionary. Housing and health care is essential. Back in the way back then yonder, people knew that if you didn't eat you would get sick and even die. Maybe we've forgotten that, which would explain why we now think health care is essential but don't worry about people not having enough money to buy food. Also it would explain the calculus of the mortgage moguls, who apparently thought people would go to work naked and stop eating rather than stop paying their mortgages. Or at least that was what they seem to have been counting on considering the Debt To Income ratios they feel are viable.

I want to believe that this article is just a case of truly terrible journalists misquoting a professor but I can't really make a good case for that. Nothing is included for food in the little table of fixed costs sourced from the esteemed Warren of Harvard. I guess at Harvard, modern humans are like Spanish moss - they just inhale and grow.

Toward the middle of the article the reporting staff seems to be making the opposite case and doing a very good job of it if you look at the statistics offered, which do not match the rhetoric well.

I'm guessing that Harvard really has no clue that humans need to eat. If this is what Harvard's talking about, it does explain why the presidential candidates all sound as if they've just been beamed down from the mother ship and are still a bit disoriented. Every campaign they stop by the Ivy League to get their talking points, because they know journalists are snobs and only talk to Ivy League professors when writing puff articles. If there's ever a terrible flea outbreak at Harvard, you can bet your bottom dollar that we will get free insect treatment campaigns rushed through Congress after it has become the issue in a campaign cycle.

Heck, even Greenspan mentioned that maybe gas and food are important components of consumer inflation.


Comments:
I took that to mean restaurant food is discretionary. Not so?
 
Mama,

Could you elaborate a bit on the meaning of the phrase,
“Consumers are actually spending less of their income…”
Does spending = cash outlay + credit?

What percentage of income is “spent” on food, or and other category of purchases if spent includes credit?
 
Anon - reminds me of a thread over at NJREReport where some man commented that he could get a steak and salad cheaper at restaurant then if he bought the ingredients and cooked them at home. That may be true, but of course most people buy cheaper stuff to cook. I'm really not sure what they meant.

Tom - if you read the article and look at the tables it's pretty self explanatory. I think the only way to meaningfully analyze this stuff is by income brackets and regions. The proportions of income spent on necessities change greatly by percentile, for obvious reasons.

I couldn't figure out how they came up with the average figure for health care annually. That looked way off, unless it assumes that an employer pays all or almost all of the insurance.

If you look at current CPI-U weightings, food is 14.9%, housing is 42.7% (shelter 32.7%), gas is 4.3%, total private transportation is 16% and medical care is 6.28%. The housing thing is a real pastiche.

Just taking the gas will show you how much it really varies. Take a single adult with no child working for $10 an hour. Weekly income is $400. After tax is going to run around 78-79% at best, so let's call it $340 a week. Assume the person gets decent gas mileage and travels 30 miles to work one way, plus another day's travel for errands and shopping. At about $2.75 a gallon, this person will be spending $2.75 * 2.5 (daily) * 6 or $41.25 a week. That is over 11% of take home. Then there is the cost of the car, which generally at this point doesn't go much below $2,000 a year, assuming the person buys used and very carefully. Call that $38 a week. We are now up to about $80/$360 or 22% of income before car insurance, which varies quite a bit. Use a low ball of $18 a week, which takes us to $98 a week or 27%.

Assuming the person doesn't eat out at all, eats a very basic diet without luxuries, and cooks at home, but eats some fresh fruit and vegetables plus recommended dairy, food will run about $50 or close to 14%, whereas CPI has food at home and away from home totalling about 15%. If the person is not all that careful, and for instance drinks a six pack of beer a week, or buys say a gallon of ice cream, and eats lunches out, food will probably be closer to $70 or 19%. If the person goes out once a week on top of that, food & beverages could easily be 25%.

Without very careful management, it is easy for singles on this type of income in most areas to spend between 45% and 55% of their income on the food and transportation, whereas CPI would have it around 32%.
 
And your analysis of both food and gas are pretty close to what it is running us (2 adults, no kids.) I've read that they are finding folks who are choosing not to pay their mortgage if they need the money to pay their credit cards. Wonder what the professor would think of that??
 
Ms Warren may be a Breatharian,subsisting on the rarified atmosphere of harvard and an occasional glass of sherry at a faculty luncheon.
 
Teri - these were my rural averages. For urban generally you can cut down on the transport, but you have to give it back for food and there are generally higher costs for utilities and services. Shelter is of course higher. You can see why this information would be important for lending guidelines. Rules like 36% DTI have to be adjusted for lower incomes to make sure people can eat.

Hungry human beings do not pay their loans back. Human beings who are riding right on the line will certainly pay their credit card bills before their mortgage, because the bank will float them, but the CC cos won't, and if they don't have that credit card for the sudden car repair, they won't be able to get to work and pay the mortgage! Banks around here used to roll that into mortgages, but now they are writing signature loans if they hold the mortgage for stuff like this - but it costs them extra to run another account.

What's absolutely killing people on moderate (I do mean moderate) incomes is that the cost of staples is rising so quickly. Bread, flour, rice, pasta, dried beans, cereals, canned tomatoes and tomato paste, and dairy are all way, way up. The more carefully people WERE handling their money, the worse the relative hit from inflation now. The average on these items ex coop is up well over 20% in two years in most areas.

To give just one example, two years ago you could buy three store brand boxes of macaroni and cheese for $1.00. These are the smaller boxes. Now it's two for $1.15. The cost of eggs, milk and cheese has soared. Eggs have doubled in my area. The cost of fresh vegetables and fruit is way up, but they are energy intensive to transport and sell so that is inevitable.

But it's the gas which has pushed many people down below the making ends meet level, without a question. And it's fine to rave about urbanization, but the reality is that many people can't afford to live close to work. They literally can't make ends meet that way.

There are plenty of families around here who have incomes in the 40,000>48,000 range, very moderate mortgages, and still the adults are going hungry one week a month in order to feed their kids. The decline in their living standards since 2005 is amazing.

At this point, I am becoming a little irritated with Tom's Breatharians. I wish to heck some of these people would try living on these incomes for six months. Just try. We are clearly at the point that the bottom 40% of wage earners are getting in deep, and that explains why shipments of shoes and clothing are dropping.
 
For what it is worth, I attempted to chart the money spent on restaurants vs. the money spent on eating at home today.

Eating Out vs. Eating at Home
 
Mama,

As per usual: thanks for the great post and VERY thorough responses.

“Keep those cards and letters coming folks!”
 
The other reason that food prices are climbing is that they are taking out more and more productive farmland to plant houses. For example, I work in Hood River, OR. This area used to be solid fruit orchards, mostly apples and pears. The major sweet cherry producers for the US are in The Dalles, which is just up the river a bit. Hood River used to have a large Diamond Fruit warehouse by the railroad tracks to move all that fruit out across the country.

Now, what we have are windsurfers and tourists. The orchards are being pulled out and expensive houses coming in. We have a National Scenic Area to protect the trees you can't eat ;) But despite Oregon's so called tough land protection laws, the orchards continue to disappear. The Dalles may be in worse shape, since they now have Google. Cherry growers typically make money one year out of five due to crop losses caused by rain. I also know, from when I left California back in the 70s, that they were yanking out orchards in the San Joquain valley too. At some point, you need to have people in this country producing food and their land protected from developers. It doesn't matter if they can sell cherries grown in Chile for less money now. At some point, the transportation costs will increase and people will be left with no alternatives.

(Luckily for me, my favorite orchard is still in business. 23 pounds of Fuji apples at $15.95 and ripe Comice pears for $6.95. Not everyone has an orchard to buy from like that!)
 
No, definitely not! We got some apples from a Michigander who lives in GA now, but takes trips back in the fall. Nothing like orchard apples.
 
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