It's an often-heard story. You've just loaded a pen of steers into a lineup of trucks. As they head out the gate, you pencil out what they're worth. Scratching your head, you remember the day when the money from only part of a truckload would buy a new pickup truck — with change leftover. Today, an entire load won't even buy the wife that new Suburban she's been wanting.
You get to thinking about what you're doing — and what you're getting for it. The money you get no longer covers the expenses it used to cover.
But that's what you get when you use money as a constant measure of value, and money as a measure of value remains imperfect, says Bob McTeer Jr., president and CEO of the Federal Reserve Bank of Dallas. Time rather than money is another way to keep score — and measure our economic progress.
To compare the “value” of our time spent working, we need to turn producers into “workers” and workers into consumers. Then we can demonstrate how our increasing productivity drives down the prices of goods and services.
In doing so, McTeer, a true champion of free enterprise, credits our nation's “great productivity machine” for the declining real cost of living in America.
“Our progress is best gauged by the shrinking work time it takes to pay for the necessities and luxuries of life,” he says. “Work time enables us to compare our productivity and standard of living over the long haul.”
The Real Cost Of Living
The best way to measure the cost of goods and services is in terms of a standard that doesn't change — time at work.
For example, Michael Cox, chief economist for the Dallas Fed, says a pair of men's cowboy boots cost $3.50 in the 1897 Sears catalog. That sounds good until you consider that the average wage was 15¢/hour.
It took nearly two, 12-hour workdays to buy those boots in 1897, Cox says. Today's equivalent “work price” — at a wage of around $15/hour — for a pair of average cowboy boots would be $360.
In terms of time on the job, the cost of a half-gallon of milk fell from 39 minutes in 1919 to 16 minutes in 1950, 10 minutes in 1975 and just under seven minutes today, says Cox. A pound of ground beef declined from 30 minutes of work-time in 1919 to seven minutes in 2001.
Work-time cost for housing, when expressed in cost/square foot, fell from 7.8 hours in 1920 to 5.6 hours in 1999. And the type and quality of our houses, and the amenities in them, are way beyond those of 70 years ago.
The Cost Of Living High
Getting back to Mom's new Suburban, a typical factory worker in 1908 had to put in more than two years' labor to buy a new Model “T” — the country's basic affordable car. Today's equivalent — a Ford Taurus — costs a worker about eight months of labor.
“And, we can see an enormous improvement in the quality of cars and trucks,” adds Cox. “Today's vehicles are more reliable and last longer. They're more comfortable and safer. Although buyers are shelling out more money than they once did, cars have never been such good values.”
|Item||1897 Sears catalog price - $||2001 work-equivalent price - $ *|
|1-lb. box of baking soda||0.06||5.87|
|100-lb. 16d nails||1.70||166.52|
|Aluminum bread pan||0.37||36.24|
|Pair of ladies' hose||0.25||24.48|
|Men's cowboy boots||3.50||360.00|
|1-carat diamond ring||74.00||7,249.00|
| *1997 Annual Report Federal Reserve Bank of Dallas (adjusted to 2001 prices) |
Prices are in terms of how much a worker would earn today working the same number of minutes or hours required to afford the product in 1897. For example, at an hourly wage of 14.8¢/hour in 1897, the worker would have had to labor 24 minutes to earn enough to buy the box of baking soda. Today, 24 minutes earns that worker $5.87.
And when people talk about the high cost of living, Cox says they often confuse it with the cost of living high. After all, much of today's consumption centers around leisure, but our productivity is even making leisure activities less expensive.
“The price of a movie declined from 28 work minutes in 1970 to 23 minutes in 2001,” adds Cox. “A seven-day Caribbean cruise slipped from 51 hours in 1972 to 45 hours today.”
On The Other Hand
Some things, however, Americans must work longer for today. Higher education is one. Tuition and fees at public colleges and universities, Cox says, have doubled in terms of work time since the mid-1970s, even more at private institutions.
Cox reminds us though, that a worker with a bachelor's degree can earn an average of about $16,500/year over a high school graduate — up from $10,488 in 1979.
Harder to grasp is the increasing cost of medical services, including health insurance. Still, it's undeniable that the past 25 years have brought vastly improved medical care — for everything from cancer to depression to braces for our teeth.
A full set of the then-brutal metal devices cost the average person $900 in 1950, the equivalent of 625 hours of work at the $1.44/hour average wage. Today, at $3,800, braces seem more expensive, but the real cost is just 263 hours of work — to say nothing of the gains in comfort and appearance.
Then there's the inevitable fact that virtually every new product requires an up-front investment. The first consumers usually bear much of that cost.
Critics of capitalism sometimes fret about the rich having too much in terms of material wealth — and not sharing it with the masses. Cox makes the case that it's the wealthy who make everyday consumer goods affordable to common people.
“Uneven income distribution plays a role in market development,” he explains. “The wealthy are the first to acquire hot, new products.” In effect, the wealthy nurture new industries and product lines by paying most of the costs associated with research and development.
“Without society's wealthy, fewer new goods and services would find their way to the rest of us,” he says. “Unequal income distribution is instrumental in driving society forward.”
This concept of spending time as opposed to spending money might help transform that down-in-the-dumps feeling of never getting ahead into resigned satisfaction that we all reap the fruits of America's collective productivity.
These lessons demonstrate that while we might think a truckload of steers or a paycheck don't go as far as they once did, it's important to look from a different perspective at what's behind the money, measure what we produce and what we get from it. But McTeer even takes it to another level.
“Inflation makes money elastic over time, like a rubber yardstick,” he says. “The value of our time, and what we can acquire for its exchange, is our most important and valuable asset.”
McTeer also believes that Americans should strive to better understand the system that has provided them with the highest standard of living of any nation in the world.
Says McTeer, “That will be our contribution to individual liberty.”
This article was inspired by “Time Well Spent — The Declining Real Cost of Living in America,” the 1997 annual report of the Federal Reserve Bank of Dallas. Author W. Michael Cox believes today's economy is transitioning to a new era. He battles economic doomsayers by championing capitalism in his book, Myths of Rich and Poor, which was recently nominated for a Pulitzer Prize.
Productivity And Growth Today
General economic productivity and growth declined in the early 1970s and averaged barely above 1%/year for two decades, says Bob McTeer. That changed in the 1990s, especially the second half of the decade.
“Productivity growth has doubled or tripled since 1995, depending on the measure,” he explains.
Technology is the main reason — mainly information technology and the Internet and, increasingly in the future, biotechnology, says McTeer. Globalization, in its many aspects, is another reason for growth in our nation's productivity.
“So is the collapse of communism and hard-core socialism, the collapse of the Soviet Union and the Eastern bloc, freer trade and investment, deregulation, privatization and so on,” adds McTeer.
But, as we have all seen for ourselves — the world changed Sept. 11. Even before that, however, the economies of most of the trading world had either slowed significantly or went into actual economic decline. This made it difficult for the U.S. to rely on other countries as engines of growth.
McTeer says history, monetary policy, fiscal policy, lower energy prices and reduced inventories and better information offer hope for recovery.
“I'm not saying recovery is at hand or imminent,” he says. “I see no hard evidence of that. Meanwhile, we have a higher priority — to prosecute the war on terrorism.”
That said, consumer spending has to hold up until investment spending can get back on track.
“While this bout of terrorism lowers our standard of living immediately and on an ongoing basis, that doesn't mean growth won't resume,” McTeer adds. “It will — and we will again surpass old living standards.”