One of the most commonly perpetuated notions nowadays is that people on the West are struggling. The wages are allegedly low (despite being the highest in the world), the inequality is allegedly high (despite even the poorest having access to the same means of transportation, quality of food, etc. as everyone else), the jobs are allegedly scarce (despite unemployment rates typically being far below the 10% mark, and often below 5%)... As someone who immigrated to the US from Russia, I can say that an average McDonalds cashier in New York City enjoys far better quality of life than most middle class people in Moscow - yet nobody here seems to appreciate just how well people have it.
However, this is not what I want to discuss here. I want to discuss a different notion related to it: that the reason people are struggling is the system. Someone will say that the rich rob the poor; someone else will say that the regulations prevent the poor from moving up the ranks; others still will say that some people grow up in a social environment not conductive to success, go into bad schools, have terrible parents. etc.
What I personally have observed is that most people have absolutely awful spending habits, something they could easily change at will. More so, most people make terrible financial decisions in life routinely.(In this particular post I will be using the data and values specific to the US, but all other developed countries I have looked at have the same general patterns as what I describe here.)
Let us take a look at the results of this survey:https://www.cnbc.com/2020/02/11/32-percent-of-workers-run-out-of-cash-before-payday.html
The two figures are of interest:
We see that close to 30% of the population runs out of money before their next paycheck, and close to 40% of the population routinely worries about money. What is especially interesting here is how close the fractions are between different income categories. Naturally you would expect people with higher incomes to be less likely to run out of money and worry about money less - but that is not what we see here, and while the poorest people do have this problems more often than the richest people, the difference in rates is quite minor, and are not observed throughout the whole income spectrum.
As we can see, income is not the issue
. Inequality is not an issue
. Something else is at play here, something far more obvious. The effect that is called lifestyle inflation
The pattern economists have pointed out on numerous occasions is that the ratio of personal spending to personal net income typically stays the same for a given individual and/or household. This means that, for example, if you make $40,000 a year and spend $35,000 a year, then the increase of your net income to $200,000 a year will cause you to spend $175,000 a year - giving you higher surplus, which results in effectively the same spending ability, as, again, you are going to spend that surplus eventually on items with inflated costs.
Now, this would not be a significant problem, if most people spent their money wisely. But that does not seem to be the case. In the US, the median full-time worker income is approximately $48,600:https://www.bls.gov/news.release/pdf/wkyeng.pdf
Now let us look at some of the things that people buy with that income (unfortunately median costs are hard to obtain, so I will use average ones for some of the items):
We see that allegedly struggling people blow dozens thousands on cars (often getting in debt and paying even more in interest as a result), spend fortunes on houses and do not shy away from spending over $250 a month just to eat out.
You can get a very nice reliable used car for $3,000, you do not need to own your own house and, if you do want one, you can get decent ones in many areas for around $60,000, with condos going even cheaper. Finally, you certainly do not need to eat out, and if you do so, you do not have to spend a few hundred bucks on it. Not if you are struggling.
That is not all of it. While it is true that people also spend a lot of money on college (somewhat hard to assess how much is too much, given that college price strongly correlates with the subsequent income, and people, say, spending $400,000 on a medical school get a very high income and can pay back the debt quickly) and healthcare (a lot of which is typically covered by the employer), you would expect them to spend a lot of money on other useful activities, right? But that, again, is not what we see:
The key takeaways here are:
- People severely overspend money on things they do not need.
- People spend orders of magnitude less on things they do need.
- People do not change their spending-to-income ratio and have approximately the same economical situation regardless of their income.
I could list a few more factors, deriving from these, as well as completely separate ones:
- People take far more debt than they need (credit cars, auto loans, mortgages, etc.) and end up paying fortunes in interest.
- People invest money into useless things (countless college degrees that offer few employment opportunities, various beauty salons, startups that flop, etc.), and do not invest enough money into things that have proven to be effective money-wise (index funds, IRA accounts, business ideas, etc.).
- People spend too much time relaxing at home watching Netflix / playing video games, or going to expensive parties, instead of working on their skills or doing more healthy hobbies, such as going to parks, meeting with professional interest groups, doing sports with friends.
I will mention here that the rich people have their own extreme spending habits. I will rely here more on anecdotal evidence which everyone can relate to:
- People are willing to pay for their kids' private tutoring over $1,000 an hour sometimes. While it is possible that there are tutors actually worth this much, I seriously doubt there are many of them - yet they seem to pay this much to almost anyone with any credentials whatsoever.
- People buy old wine bottles for hundreds dollars and blow thousands at restaurants, including thousands given waiters in tips; no meal can possibly cost this much.
- People buy fancy dresses costing dozens thousands dollars, which look very similar to what you can get on Amazon for a few dozen bucks - they pay for the brand which, ultimately, no one, except them, cares about.
Now, all this does not in any way imply that the economy in the US (and in other developed countries) is perfect, nor does it necessarily imply that some groups of people are not put into a somewhat disadvantaged position by the system. However, given how much ridiculous spending people do and how easy it would be to tone it down significantly with no noticeable drop (and sometimes even rise) in quality of life, and given how the described problems exist in all worker classes, we have to conclude that the bulk of the problem is in the people, not in the system.
No matter what the system is, if you blow a fortune on useless things, you are going to struggle. In fact, we see again and again people winning hundreds millions in lottery quickly blowing off their fortune and getting into endless debts, quickly ending up in a worse situation than they were before. Even if everyone was a billionaire, the problem would still exist and people would still struggle.
I know it in myself: I bought a car I could not afford and got into a very precarious situation. Then I seriously reconsidered my spending habits and started saving money every way I could, and just a couple of months later I was out of the rut, despite my income and mandatory expenses not changing a bit. If everyone else did the same, I suspect that the bulk of the problem would be resolved, and we would no longer see scary statistics such as "78% Americans live from paycheck to paycheck" and "the average American household is $130,000 in debt".
Do you agree with this reasoning?