​Why Americans are feeling poorer even though they're not | FT #shorts

Key Concepts

• Disposable Income: Income remaining after taxes and other mandatory deductions.
• Tradable Goods: Goods that can be easily imported and exported, typically mass-produced items.
• Non-Tradable Services: Services that are difficult to import or export, often labor-intensive (healthcare, education).
• Baumol's Cost Disease: The observation that prices of goods in labor-intensive sectors increase disproportionately to those in sectors experiencing productivity growth.
• Middle Class Squeeze: The perception that the middle class is facing increasing financial pressure.

The Debate Over the Cost of a Comfortable Life

The video addresses a recent debate in the United States concerning the income required for a household to live comfortably. This discussion was initially sparked by asset manager Michael Green’s claim that a family needs $140,000 annually to “function,” a figure almost 70% higher than the median household income. While Green’s calculation contained errors, the argument resonated with many who feel financially strained. The core question is whether Americans are genuinely more financially squeezed than in the past, or if they are, in fact, more prosperous.

The Squeeze on Essentials: Rising Costs

The video argues that the middle class is experiencing a squeeze, specifically due to the increasing cost of essential services. A breakdown of disposable income reveals that spending on education, healthcare, childcare, and housing has risen from 27% to 37%. This represents a significant 10 percentage point increase in the portion of income dedicated to these unavoidable expenses.

Offsetting Factors: Declining Costs of Goods

However, the video presents a counterintuitive argument: total spending as a share of income has not increased overall. It remains in line with historical averages, and is even slightly lower. This is attributed to dramatic price declines in mass-produced goods like clothing, electronics, and appliances. For example, housing costs have increased from 17% to 21% of income, but spending on clothing and household goods has decreased from 15% to 10% – a net decrease of 5 percentage points. This demonstrates that while essentials are more expensive, other categories of spending have become more affordable.

A Global Phenomenon & Baumol’s Cost Disease

This phenomenon isn’t limited to the United States; it’s observed across high-income countries. The video explains this through the lens of economist William Baumol’s work from 1967. Baumol’s Cost Disease posits that as economies develop, productivity growth primarily occurs in the production of tradable goods. This drives down their prices. Simultaneously, rising prosperity leads to wage increases, making labor-intensive, face-to-face services (like healthcare and education) relatively more expensive.

As societies become wealthier, a larger share of spending naturally shifts towards these non-tradable services. “As societies get richer and wages rise, the share of spending on essential services will grow ever larger,” as stated in the video, directly referencing the implications of Baumol’s theory.

The Paradox of Prosperity

The video concludes that the feeling of being financially squeezed by the middle class is, at least partially, a consequence of increased overall wealth. While essential services consume a larger portion of the budget, this is not necessarily indicative of declining living standards. Instead, it reflects a broader economic trend where rising wages and productivity gains in certain sectors lead to relative price increases in others. The increased cost of essentials is, therefore, a symptom of prosperity, not a sign of economic hardship.