Tuesday, January 10, 2017

Where we spend our money now versus in 1875

I came across this table originally in a paper, Forecasting The Cost of U.S. Health Care in 2040 by Robert W. Fogel. The table is actually from an earlier book of his.

Click to enlarge.

Accompanying explanatory text:
One notable feature of Table 2 is the change in the share of income spent on food, clothing, and shelter, which has declined from 74 percent of expanded consumption to just 13 percent over the 120‐year period.  Another striking change is the share of income spent on health care, which has increased nine‐fold, from 1 percent of expenditures to 9 percent.

For purposes of forecasting, the most important feature of Table 2 is the last column, which presents the long‐term income elasticities for each category of expenditures. The “income elasticity” is defined as the percentage increase in expenditures on a given commodity that will occur with a 1 percent increase in income.  Notice that the income elasticities for food and clothing are quite low, which means that the share of these items in total consumption will continue to decline.  An income elasticity of 1 means that the share of a given item in total consumption will remain constant. Notice that shelter, which includes most consumer durables, is closer to but still below 1.  On the other hand, the income elasticities for health care, education, and leisure are all well above 1. The income elasticity of 1.6 means that income expenditures on health care in the United States are likely to rise from a current level of about 15 percent of GDP to about 29 percent of GDP in 2040 (Fogel 2007).
I find the table fascinating. I knew all the elements already but to have the picture so clear in such a spare table is striking.

Moving from 74% of your income spent on the bare necessities (food, clothing, shelter) to just 13% is astounding progress.

I don't know which is more shocking. That we spend nearly 70% of our income on entertainment or that that is nearly 3.5 times the share in 1875.

That education is only 5% of consumption is a little startling but sort of makes sense.

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