26 November 2015

What to think about during Thanksgiving?


Thanksgiving is, once again, upon us. No doubt, some people feel that this year they have less to be thankful for than in the years gone by. The Thanksgiving meal, to give just one example, will supposedly cost “more than ever.” The cost of living is not a trivial matter. It is also a fiendishly complicated one. In many ways, we are more prosperous than ever. Yet, the picture is not uniformly positive. What accounts for the difference?

Consider the cost of food. The headline-grabbing data about the cost of this Thursday’s feast comes from the American Farm Bureau Federation, which has been faithfully recording the cost of the items that go into a preparation of a Thanksgiving dinner since 1986.

On the face of it, the nominal cost of a Thanksgiving meal for 10 people rose by $0.70 from $49.41 in 2014 to $50.11 in 2015. Adjusted for inflation, the real price increase amounts to a mere $0.47. Still, Thanksgiving dinner in 2015 will be more expensive than last year.

thanksgiving chart

The calculation changes dramatically, however, once we account for the rise in nominal earnings. According to the Federal Reserve Bank of St. Louis, the average hourly earnings of production and nonsupervisory employees in the private sector (i.e., blue collar workers) amounted to $20.72 in October 2014. In October 2015, it amounted to $21.18.

In 2014, an average worker had to work 2 hours 23 minutes and 5 seconds to procure all the items needed to buy a Thanksgiving dinner for 10 people. This year, to buy the same basket of goods, a worker had to work 2 hours 21 minutes and 57 seconds. So, in terms of actual work, the price of a Thanksgiving dinner has decreased by 1 minute and 8 seconds.

Now consider what happened to the price of a Thanksgiving meal since 1986 (i.e., the first year for which we have data). Back then, a turkey dinner with all the trimmings for 10 people cost $28.74. The average hourly earnings, however, stood at $8.96. A Thanksgiving meal, in other words, required 3 hours 12 minutes and 27 seconds of work. That’s 50 minutes and 30 seconds longer than today.

The question of the cost of living in the United States is connected to the issue of the so-called “wage stagnation,” which supposedly started in the late 1970s. Prior to the economic liberalization of the 1980s, it is sometimes argued, workers’ earnings grew at a faster pace than over the last 35 years. In fact, hourly earnings of production and nonsupervisory employees in the private sector barely changed between 1979 and 2015. In October 1979, hourly earnings stood at $6.47 or $21.20 in 2015 dollars. In October 2015, it stood at 21.18.

Looking at the average hourly earnings, however, ignores at least two very important factors. First, in recent decades, non-wage benefits expanded. Today they include relocation assistance, medical and prescription coverage, vision and dental coverage, health and dependent care flexible spending accounts, retirement benefit plans, group-term life and long term care insurance plans, legal and adoption assistance plans, child care and transportation benefits, vacation and sick paid time-off, and employee discount programs from a variety of vendors, etc.

It is not easy to put an exact figure on the value of those non-wage benefits, but they could amount to as much as 30 or even 40 percent of the workers’ earnings. The lion share of the non-wage benefits, as my Cato colleague Peter Van Doren wrote in 2011, is consumed by “the dramatic increase in health insurance costs.” “The fixed costs of health insurance,” Van Doren shows, “are a much larger percentage of the total compensation of lower-earnings workers.”

Second, many, perhaps most, big-ticket items used by a typical American family on a daily basis have decreased in price. Over at Human Progress, we compare prices of common household items as advertised in the 1979 Sears catalogue and prices of common household items as sold by Walmart in 2015. We divide the 1979 nominal prices by 1979 nominal hourly wages and 2015 nominal prices by 2015 nominal hourly wages. A price of a 13 cu. ft. refrigerator, for example, fell by 52 percent in terms of hours of work. The price of a 1.3 cu. ft. microwave decreased by 95 percent. Gas range by 65 percent and so on.

Needless to say, the above price reductions greatly underestimate the totality of welfare gains by an average American, by ignoring qualitative, aesthetic and environmental improvements on commonly used items.

From the above discussion it might be reasonable to conclude that Americans are much better off today than they were in the late 1970s, but that would be too simplistic. In at least three important areas – education, healthcare and housing – life has become much more expensive. It is true that today’s houses are larger, healthcare better and education more high-tech than in the past. Yet, it is curious that in the areas where U.S. government is most committed to increasing access and affordability, the prices have risen, and in the areas that our politicians have ignored, such as the production of microwaves and refrigerators, the prices have declined. Is that not something worth pondering over the Thanksgiving holidays?

Marian L. Tupy is a senior policy analyst at the Cato Institute’s Center for Liberty and Prosperity. He is also the editor of www.humanprogress.org