50 Years of Inflated Expectations
Over my working life, I have seen investments inflate. I have also seen prices inflate. And even though, on the whole, investments inflated more than prices, I have seen something more ominous: I have seen expectations inflate.
Turn the clock back 50 years to 1960. Eisenhower was president. The oldest boomers were turning 14, but the youngest hadn't been born yet. Americans were flocking to suburban tract houses. Shopping malls were in their infancy. The interstate highway system was beginning. I turned 12 that year. My father, who was president of a small denominational college, earned a yearly salary of about $6,000. We had just traded in our 1957 Chevy Bel Air for the 1959 model, with fins. We lived in a house my parents had custom built in 1953 for $14,000. (In 1960 we would sell it for $17,500.) It was almost luxurious: only two bedrooms and one bath, but there were two sinks in the bathroom. In addition, it had a 15x15-ft family room, a covered breezeway between house and garage, a two-car garage, and real redwood siding halfway up the facade. We felt very fortunate. My family was just slightly more prosperous than average. In 1960 the median income for married-couple families was $5,873. The median home price, $11,900. The average new single-family home size, about 1200 square feet. The per capita cost of medical care, $148. In the 1960s, the average household saved or invested 7% of its income.
According to the U.S. Bureau of Labor Statistics inflation calculator, $1 in 1959 would be worth $7.43 50 years later. Using 7.43 as a multiplier, the median married-couple household income would be $43,535 today; it is actually $69,404. (My father's salary would be $44,580; the current president of the college he worked for earned $119,175 in 2007, according to the school's IRS form.) It appears that we are, on average, 62% richer than we used to be. But our wants have risen and overwhelmed our means. The median home price should be $88,417; it is actually $172,600. One reason: the average new single-family home size has more than doubled over the last 50 years, from about 1200 to more than 2400 square feet. We think we need that much space even though the average family size has decreased from 3.33 to 2.56 persons since 1960, more family members work or are cared for outside the home, and we eat more meals in restaurants. Medical care, if it kept pace with inflation, would now cost $1,100 per person per year. It actually costs over $7,000 -- but we routinely expect services that, 50 years ago, were the stuff of science fiction. The cost of higher education has also exploded. In the '60s, about 10% of adults in their mid twenties had college degrees. Today the figure is 30%. In-state students at the University of Minnesota in 1960-61 paid tuition fees of $213; this year they pay, not the inflation-adjusted figure of $1,583, but $10,320. In 2007, the average household did not save. Instead, it spent considerably more than it earned.
So here's our situation. We earn 60% more than our forefathers, but we are in debt; 25% of our houses are worth less than their mortgages; we can't figure out how to finance medical care; and we are almost certain to be unable to provide for the oncoming flood of retirees. Somehow we have come to think that we should (a) have more than our parents did, (b) never be asked to pay more taxes, (c) have guaranteed pensions, whether from our employers or the government, and (d) have state-of-the-art medical care, whether from our employers or the government. This is not a multiple-choice question: we want it all. We seem to believe we will pay for the above through (a) taxing the rich, (b) investing in and selling oversized houses, (c) investing small amounts in the stock market when we are young, and (d) letting market forces work their magic. And magic is the operative word.
The solution is both obvious and impossible. If we as a society adopted 1960 expectations -- small houses, one-car-per-family, no-frills medical care, spartan universities -- we would have a lot of money left over to spend on things like retirement, repairing our crumbling infrastructure, providing health care for more people, or whatever else we truly valued. But just try to buy a 1960s-style house. For the fun of it, I went to www.realtor.com and looked for a modest house in Wheaton, IL. In this city of about 55,000 people with a median household income of $83,272, there are about a dozen houses for sale for less than $200,000 (by 1960s standards, a mortgage should be no greater than two times family income). Most were built 40 or 50 years ago. Most are described as starter homes, great investments, potential tear-downs, or rehabbers' dreams. If I wanted a nice little brand-new house, I was in the wrong place. Wheaton's cheapest new construction was a 4-bedroom, 3.5-bath behemoth with 3800 square feet and a price tag of $425,000, because it was about to be foreclosed. If buying in a foreclosing neighborhood strikes you as unwise, your next-best choice would be a 2140 square-foot, 4-bedroom, 2.5 bath house at $435,000. So, maybe I could move to Winfield or Aurora, where houses are considerably less expensive. But what could I do to bring down my children's college tuition, room, and board -- now $25,654 at the University of Illinois or $49,440 at Wheaton College, which nearly matches Harvard's $50,657? And what could I do about health-care costs, which averaged $16,771 for a family of four in 2009? Obviously it is impossible to turn the financial clock back to 1960. And if somehow all 305 million Americans agreed to do so, the economic repercussions would be devastating. Once we've bought into a Ponzi scheme, the only way to avoid disaster is to keep it going. But it's looking like we can't do that much longer either.
So should we just rush over the edge of the cliff?
No. Before doing anything drastic or swooning in despair, see part 2...
LaVonne Neff is an amateur theologian and cook; lover of language and travel; wife, mother, grandmother, godmother, dogmother; perpetual student, constant reader, and Christian contrarian. She blogs at Lively Dust.