The American Consumer

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Chapter 3: The American Consumer

The Rise of the Consumer Culture
Contemporary Consumer Spending
Historical Trends in Consumer Spending
The Cost of Medical Care
The Cost of Living
Public Opinion on Consumer Issues
Consumer Spending, Job Creation, and Interest Rates

The use of money is all the advantage there is in having money.

Benjamin Franklin, Poor Richard's Almanack (1737)

Americans love to spend money, and their aggressive spending helps fuel both the U.S. and global economies, as imported goods are widely available and popular in the U.S. market. In fact, consumer spending is the single largest contributing factor to the nation's growth in gross domestic production. High consumer spending rates produce a ripple effect that spreads across many other macroeconomic sectors, including employment, wages, corporate profits, and interest rates.

The Rise of the Consumer Culture

World War II

World War II (19391945) is generally credited with lifting the United States out of the Great Depressionthe period of economic disaster that lasted from 1929 through the early 1940s. The urgent need for weapons, tanks, planes, and other war goods led the government to invest heavily in getting the nation's factories running again, especially after the United States joined the fighting in late 1941. At the war's end, many factories were converted into facilities to manufacture civilian products such as appliances and automobiles, for which demand was especially high after the war.

RATIONING AND THE WAR PRODUCTION BOARD. During the war citizens were encouraged to exercise restraint in spending to conserve materials for the war effort. Some items were temporarily banned from public use; for example, platinum was declared a strategic metal to be used only in the manufacture of military goods, so its use in jewelry making was halted. The government also established rationing (tight controls over how much of an item a person can use or consume in a certain amount of time). All citizens were issued coupon books for rationed items every six months; once they used up their coupons for the month, they had to wait until the next month to buy more rationed goods. Coffee, sugar, meat, butter, and canned vegetables were rationed, as were gasoline, rubber, silk (which was used to make parachutes), fuel oil, and other goods put to military purposes. Victory gardens became common as the government encouraged Americans to grow their own vegetables rather than buy them.

In 1942 the War Production Board (WPB) was created to oversee production programs for war-related commodities. The agency's first move was to halt all American automobile production and order car factories to produce only planes, tanks, machine guns, diesel engines, and military trucks. Producers of other consumer goods were also ordered to join the war effort; for example, a domestic housewares company called International Silver converted its manufacturing facilities to the production of military goods such as surgical instruments, machine gun clips, and gasoline bombs. To conserve materials needed to clothe soldiers and make other fabric items for the war effort, the WPB regulated every aspect of U.S. clothing design. Silk stockings were banned, so women drew seams on the backs of their legs to simulate them. The WPB mandated that dresses and skirts be made shorter and that men's suitsmarketed as victory suitshad narrower lapels and pants with no cuffs, to conserve fabric. Women's two-piece bathing suits became popular because they used less fabric than one-piece suits.

The Postwar Boom

When the war came to an end in 1945, Americans were divided about becoming consumers again. Whereas some had felt deprived for so long that they could not wait to start spending, others were reluctant. To help create jobs for the tens of thousands of soldiers returning to the workforce from the war and build on the country's newfound economic prosperity, the government, along with businesses and marketing firms, began a campaign to stir up consumer activity. Spending was promoted as a civic duty and an expression of patriotism rather than as a personal indulgence. A postwar baby boom also changed Americans' perspective on spending.

Growing families purchased bigger houses, many of which were built in the suburbs. The suburban population shift was accompanied by a growth in shopping centers, supermarkets, and car ownership. According to Alonzo L. Hamby of Ohio University, in Outline of U.S. History (November 2005,, the annual production of automobiles quadrupled between 1946 and 1955. Television and air conditioning became widely available following World War II. Air conditioning spurred migration from the Northeast and Midwest to the Southeast and South-west. By the end of the 1950s three-fourths of all American families owned at least one television set. Television advertising reached a large audience and promoted more consumer spending.

THE COLD WAR: BEATING COMMUNISM BY SHOPPING. By the late 1940s the cold wara decades-long period of political tension between the United States and the former Soviet Union that began just after World War II and ended in the early 1990swas well under way. To contrast the U.S. open market system with Soviet socialismunder which private ownership was generally disallowedU.S. politicians argued that widespread ownership of more possessions would create greater social equality, thereby proving the superiority of the market system. Therefore, consumer spending acted as a function of the drive to defeat communism.

HOMEOWNERSHIP. Foremost on the list of items that many American citizens wanted was new housing, and the ideal housing, according to the standards of the time, was a mass-produced single-family home in the suburbs. Lizabeth Cohen explains in The Landscape of Mass Consumption (February 2003, that residential housing construction after the war occurred at rates never before seen in the United States, with the federal government helping veterans buy homes with guaranteed loans and connecting the new suburbs to cities with an immense system of federally built highways. Between 1947 and 1953 the number of people living in the suburbs increased by 43%, and by 1960, 62% of Americans owned their own homes.

AUTOMOBILES. Homeownership generated the need for many items, but few had more far-reaching effects than automobiles. With such a large proportion of Americans living in the suburbs, the ability to commute to work and shopping centers became essential, so a family car went from being a luxury to being a necessity in the 1950s. This was the birth of the American car culture.

Car ownership led to more travel, which spawned more business opportunities. Fast-food restaurants allowed people to eat in their cars. Motels (motor hotels) provided inexpensive places to stay (and park cars) overnight. Convenience stores sprang up along the new highways, encouraging drivers to stop and shop while they were on the road. Even the camping and outdoor industry saw a rush to its products, as Americans purchased campers and other outdoor equipment and took to the road for family vacations. In What We Work for Now: Changing Household Consumption Patterns in the Twentieth Century (December 2001,, Jerome Segal, Cynthia Pansing, and Brian Parkinson state that by 1950, 60% of U.S. households had a car and that transportation-related expenses accounted for one out of every seven dollars spent by the typical U.S. household.

TELEVISION. Along with the widespread ownership of automobiles, the introduction of television into daily U.S. life represented one of the most important social, economic, and technological changes of the twentieth century. Television was promoted as a social equalizer that would, again, prove the superiority of U.S. capitalism over Soviet communism. With such unprecedented access to information, U.S. citizens were predicted to achieve equality across all classes and social groups. Lyn Spigel explains in Television (Encyclopedia of American Cultural and Intellectual History, 2001) that in 1948 about 2% of U.S. households had a television. By 1960 approximately 90% of U.S. households were equipped with at least one television.

Contemporary Consumer Spending

The U.S. Bureau of Labor Statistics (BLS) tracks consumer spending and publishes the results in two different formats. Personal Consumer Expenditure (PCE) data are used on a quarterly basis to calculate the nation's gross domestic product (GDP; the total market value of final goods and services produced within an economy in a given year). The PCE is based on aggregate data (data summed to represent the entire population). The BLS also publishes an annual Consumer Expenditure Survey that estimates the consumer spending of an average U.S. household during a given year.

One economic indicator extremely relevant to consumer spending is the inflation rate based on the Consumer Price Index (CPI). The BLS indicates in Consumer Price Index (March 14, 2008, that the average annual inflation rate based on the CPI for all urban consumers (CPI-U) was 2.8% in 2007. However, the annual rate calculated from December 2006 to December 2007 was much higher at 4.1%. This means that consumer prices rose at an uncomfortably high rate during 2007. Table 3.1 shows the annual percent change in the CPI-U for all items and specific categories of items for 2007 on a

TABLE 3.1. Annual percent change in the urban Consumer Price Index (CPI-U) for selected expenditure categories, December 2006December 2007
SOURCE: Adapted from Malik Crawford, ed., Table Q1. Annual Percent Changes in the CPI for All Urban Consumers, 20012008, in CPI Detailed Report: Data for March 2008, U.S. Department of Labor, Bureau of Labor Statistics, April 2008, (accessed May 6, 2008)
Expenditure categoryPercentage change 12 months ended in December
All items2.54.1
Food and beverages2.24.8
Medical care3.65.2
Education and communication2.33
Other goods and services33.3
Special indexes:2.917.4
Energy commodities6.129.4
Energy services-0.63.4
All items less energy2.52.8
All items less food and energy2.62.4

December 2006 to December 2007 basis. These numbers represent annual inflation rates. The overall inflation rate of 4.1% in 2007 for all items was exceeded by the rates for food and beverages (4.8% increase), medical care (5.2% increase), transportation (8.3% increase), and energy (17.4% increase).

Personal Consumer Expenditures

In 2007 the nation's personal consumption expenditures (PCE) totaled $9.7 trillion. (See Table 3.2.) Major PCE categories include durable goods (items expected to last at least one year, such as cars and refrigerators), nondurable goods (items expected to last less than one year, such as food and gasoline), and services. Note that housing is listed under services. This category includes rent paid by renters and the estimated equivalent of rent for owner-occupied houses (in other words, the amount of money the owner occupants would have paid if they had been renting the space from someone else).

Services accounted for the largest portion (60%) of the PCE in 2007, totaling more than $5.8 trillion. (See Table 3.2.) Medical care ($1.7 trillion) and housing ($1.5 trillion) were the two largest components of service spending. Americans spent more than $2.8 trillion on nondurable goods in 2007. Nearly half of this amount ($1.3 trillion) was devoted to food. Another $1.1 trillion was spent on durable goods, such as motor vehicles and furniture. Note that PCE data are based on industry information. In other words, the BLS estimates consumer

spending by calculating the final value of goods and services sold by businesses.

TABLE 3.2. Personal consumption expenditures (PCE), 2007
SOURCE: Adapted from Table 3. Gross Domestic Product and Related Measures: Level and Change from Preceding Period, in Gross Domestic
Product: Fourth Quarter 2007 (Final); Corporate Profits: Fourth Quarter 2007
, U.S. Department of Commerce, Bureau of Economic Analysis, March 27, 2008, (accessed April 4, 2008)
[Billions of current dollars, seasonally adjusted at annual rates, 2007r]
ComponentPercent of PCE
Personal consumption expenditures$9,734.20
Durable goods$1,078.2011%
Motor vehicles and parts$441.205%
Furniture and household equipment$416.104%
Nondurable goods$2,833.2029%
Clothing and shoes$370.504%
Gasoline, fuel oil, and other energy goods$364.204%
Household operation$531.105%
Electricity and gas$226.902%
Other household operation$304.203%
Medical care$1,689.3017%
r = Revised.

Consumer Expenditure Survey

According to the BLS, in the Consumer Expenditure Survey (October 26, 2007,, the average U.S. household spent $48,398 during 2006. Nearly two-thirds of this amount was devoted to three expenses: housing ($16,366, or 33%), transportation ($8,508, or 17%), and food ($6,111, or 13%). (See Figure 3.1.) However, the Consumer Expenditure (CE) housing component does not include mortgage principal payments, because they are considered repayment of a loan, rather than a consumer expense. Thus, CE data underreport the true cost of housing for Americans with mortgages.

CE data are compiled based on consumer-supplied information. Purchase diaries are sent to sample households around the country. Participants record their everyday purchases and expenses in the diaries. Periodic interviews are conducted to collect diary information and quiz participants about their finances and spending habits. CE data are collected from households (called consumer units) that are representative of the civilian noninstitutional population of the United States (i.e., people not in

the military and not in institutions, such as prisons or long-term-care facilities).

According to the BLS, the average consumer unit in 2006 included 2.5 people and had pretax annual income of $60,533. Most of the consumer units owned their homes (67%), and a large majority (88%) owned or leased at least one motor vehicle.

The Consumer Expenditure Survey results provide detailed data on American spending habits. For example, participants break down food purchases as to meal location (at home or away from home). The 2006 survey indicates that the average household spent $2,694 eating out, representing 44% of total food expenses. Each household averaged $117 per year for reading materials and $888 per year for educational expenses. Another $497 per year was spent on alcohol and $327 per year on tobacco products. The average U.S. household reported donating $1,869 in cash to charitable causes.

Historical Trends in Consumer Spending

Expenditures for some components making up the PCE have changed dramatically over time. Figure 3.2 shows spending on medical care, housing, durable goods, nondurable goods, and other services as a percentage of the total

PCE for 1970, 1980, 1990, 2000, and 2005. These categories have historically been the five largest components of the PCE.

The data show that the percentage of the PCE dedicated to housing and durable goods remained steady between 1970 and 2007. Housing hovered between 14% and 16%, and durable goods stayed between 11% and 13%. (See Figure 3.2.) A slight downward trend is evident in the percent spent on durable goods over time. A much more dramatic decrease is seen in the percentage of the PCE devoted to nondurable goodsfrom 42% in 1970 to around 29% in 2000 and 2007. A percentage decrease in one component making up the PCE means a percentage increase in one or more of the other components.

The percentage of the PCE devoted to other services increased slightly, from around 10% in 1970 and 1980 to around 14% in 2000 and 2007. (See Figure 3.2.) Medical care increased from only 8% of the PCE in 1970 to 17% in 2007. In other words, the percentage of the PCE devoted to medical care more than doubled between 1970 and 2007.

Food and Energy Price Volatility

Over the short term, food and energy prices can vary tremendously. Food prices are dependent on a variety of factors, including weather conditions (which affect growing costs), transportation and processing costs, and subsidies paid to farmers by the government that influence supply and demand ratios. Energy prices, particularly for oil, are affected by political and economic factors in the Middle East. Energy prices in the United States can also be affected by weather, as evidenced by the rise in gasoline prices following Hurricanes Katrina and Rita in 2005. Because of the volatile nature of food and energy prices, these costs are not included in the economic indicator called the core inflation.

FOOD PRICES. One component of the PCE that has historically become more affordable over time is food. Figure 3.3 shows data from the U.S. Department of Agriculture (USDA) on food prices as a percentage of personal disposable income between 1929 and 2006. Personal disposable income is also known as after-tax income or take-home pay. During the early 1930s the average U.S. household spent nearly a quarter of its disposable income on food. By the 1960s the percentage had fallen to around 15% and continued to decrease. In 2006 U.S. consumers spent just under 10% of their disposable income on food. Enormous gains in agricultural productivity and crop yields were responsible for keeping food prices relatively low.

This downward trend began to change in 2007 with dramatic increases in some food prices. The Economic Research Service (ERS) uses a food price index to track U.S. food prices. The price index for all food increased by 4% in 2007. (See Figure 3.3.) This increase exceeded the increase in the overall average U.S. inflation rate for the year of 2.8% based on the CPI-U.

According to the ERS, in Food CPI, Prices, and Expenditures: Analysis and Forecasts of the CPI for Food (June 20, 2008,, the 4% increase in 2007 was the largest annual increase

TABLE 3.3. Changes in food price indexes, 200408
SOURCE: Changes in Food Price Indexes, 2004 through 2008, in Briefing Rooms: Food CPI, Prices, and Expenditures: CPI for Food Forecasts, U.S. Department of Agriculture, Economic Research Service, April 25, 2008, (accessed May 6, 2008)
ItemRelative importanceaFinal 2004Final 2005Final 2006Final 2007April 25, 2008
Forecast 2008b
Consumer price indexesPercentPercent change
All food1003.42.42.444.0 to 5.0
Food away from home44.633. to 4.5
Food at home55. to 5.0
Meats, poultry, and fish12. to 3.0
Meats7. to 2.5
Beef and veal3.811. to 3.0
Pork2.45.62-0.221.5 to 2.5
Other meats1. to 1.0
Poultry2.37.52- to 3.5
Fish and seafood22.334.74.63.0 to 4.0
Eggs0.96.2-13.74.929.23.0 to 4.0
Dairy products6.47.31.2- to 4.0
Fats and oils1.56.6- to 9.0
Fruits and vegetables8.433. to 4.0
Fresh fruits and vegetables63. to 4.0
Fresh fruits3.42.83.764.53.5 to 4.5
Fresh vegetables3.24.344.63.22.5 to 3.5
Processed fruits and vegetables1. to 4.5
Sugar and sweets20. to 4.0
Cereals and bakery products7. to 8.5
Nonalcoholic beverages6.70.42.924.13.5 to 4.5
Other foods9. to 3.5
aBureau of Labor Statistics (BLS) estimated expenditure shares, December 2007.
bForecasts updated by the 25th of each month.

recorded in the food price index since 1990. The agency blames higher food prices on five factors:

  • Higher commodity and energy costs for retailers
  • Growing global demand for food
  • An increase in U.S. food exports due to strong global demand and the relative weakness of the U.S. dollar
  • Weather-related food production problems in some parts of the world
  • Increasing use of some food commodities, such as corn, for bioenergy purposes

The ERS projects particularly large price increases in 2008 for fats and oils (up 8% to 9%) and cereals and bakery products (up 7.5% to 8.5%). (See Table 3.3.) The latter products are expected to be more expensive due to increasing prices for wheat and corn and rising energy costs associated with the production of cereals and baked goods.

ENERGY EXPENDITURES AND PRICES. Nondurable energy goods accounted for only a small amount (4%) of the PCE during 2007. (See Table 3.2.) This category does not include electricity and gas for household operation, which fall under services. Nondurable energy goods include products such as gasoline, other motor fuels, and lubricants. In 2007 U.S. consumers spent $364.2 billion on nondurable energy goods; gasoline accounted for the vast majority of this total.

December-to-December inflation rates based on the CPI-U for energy goods and services are shown from 2002 through 2007 in Table 3.4. In 2007 the inflation rate for gasoline was 29.6%, and for fuel oil it was 32.5%. Inflation rates for electricity and natural gas for home heating and/or cooling were much lower at 5.2% and 0.4%, respectively.

GASOLINE PRICES. According to the U.S. Department of Energy, the average retail price for a gallon of regular-grade gasoline was $3.61 per gallon as of May 5, 2008. This value was up from $3.05 per gallon on May 5, 2007. Gasoline prices have risen dramatically since the mid-1990s, when the average retail price for a gallon of regular-grade gasoline was between $1 and $1.50 per gallon. (See Figure 3.4.)

Figure 3.5 illustrates that the retail price for a gallon of gasoline in the United States in March 2008 had four contributing components:

  • Crude oil price72%
  • Federal and state taxes12%
TABLE 3.4. Annual percent change in the urban Consumer Price Index (CPI-U) for energy expenditure categories, December to December, 200207
SOURCE: Adapted from Malik Crawford, ed., Table Q1. Annual Percent Changes in the CPI for All Urban Consumers, 20012008, in CPI Detailed Report : Data for March 2008, U.S. Department of Labor, Bureau of Labor Statistics, April 2008, (accessed May 6, 2008)
Expenditure category200220032004200520062007
Energy commodities23.76.926.716.76.129.4
Motor fuel24.66.826.116.26.429.5
Fuel oil14.77.839.527.22.332.5
Energy services (electricity and natural gas)
Natural gas6.717.416.430.214.20.4
Note: Figures are percent changes for 12 months ended December.
  • Distribution and marketing costs8%
  • Refining costs8%

Thus, the cost of crude oil accounts for nearly three-fourths of the retail price of gasoline. Crude oil is sold by the barrel, with each barrel containing forty-two U.S. gallons. In 1997 the average worldwide price for crude oil was around $20 per barrel. (See Figure 3.6.) After a brief decrease over the following year the price of crude oil began to rise in 1999. In April 2008 the price of crude oil rose to an all-time high of $111 per barrel.

All Items Less Food and Energy

Table 3.5 shows annual inflation rates (changes in the CPI-U) on a December-to-December basis for items other than food and energy from 2002 through 2007. The inflation rate for this category in 2007 was 2.4%, well below the overall rate of 4.1%, according to Malik Crawford of

the BLS, in CPI Detailed Report: Data for March 2008 (April 2008, This indicates that inflation was largely driven by rising food and energy costs that year.

Between 2002 and 2007 inflation rates were generally moderate for some items. (See Table 3.5.) Shelter prices increased by 2.2% to 4.2% annually. The prices of alcoholic beverages increased by 1.3% to 3.8% annually. Apparel prices actually decreased in most years; the exception being in 2006, when they increased by 0.9%. Other items with largely negative price trends included televisions, personal computers and peripheral equipment (such as printers), and new vehicles. Mixed positive and negative rates were reported for used cars and trucks (11.8% to 4.8%), airline fares (2.4% to 10.6%), and tobacco and smoking products (0.4% to 9.5%). Items with relatively large inflation rates included college tuition (6.1% to 9.8%) and medical care (3.6% to 5.2%).

The Cost of Medical Care

In 2007 medical care expenditures approached $1.7 trillion and accounted for 12% of positive GDP. (See Table 2.3 in Chapter 2.) This made medical care a more expensive component than housing, food, or durable goods. David M. Walker of the U.S. Government Accountability Office notes in Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future (January 29, 2008, that

TABLE 3.5. Annual percent change in the urban Consumer Price Index (CPI-U) for expenditure categories other than food and energy, December to December, 200207
SOURCE: Adapted from Malik Crawford, ed., Table Q1. Annual Percent Changes in the CPI for All Urban Consumers, 20012008, in CPI Detailed Report: Data for March 2008, U.S. Department of Labor, Bureau of Labor Statistics, April 2008, (accessed May 6, 2008)
Expenditure category200220032004200520062007
All items less food and energy1.
Rent of primary residence3.
Owners' equivalent rent of primary residence3.322.
Hotels and motels03.
Medical care53.
Medical care commodities3.
Prescription drugs4.
Medical care services5.
Personal computers and peripheral equipment-22.1-17.8-14.2-15.8-12-13.2
New vehicles-2-1.80.6-0.4-0.9-0.3
Used cars and trucks-5.5-
Airline fares-2.40.1-1.56.4-110.6
College tuition79.88.66.676.1
Tobacco and smoking products9.5-
Alcoholic beverages2.
Note: Figures are percent changes for 12 months ended December.

the percentage of GDP comprised by medical care spending was 8.4% in 1976, 10.6% in 1986, 13.7% in 1996, and 16% in 2006, and projected it to be 19.6% in 2016. (See Figure 3.7.) On a national basis, health-care expenditures are expected to comprise an ever-increasing percentage of GDP through 2016.

Figure 3.8 compares the CPI-U between all items and medical care only on an annual average basis between 1998 and 2007 using the time period of 198284 as the reference period (CPI = 100). Medical inflation has outpaced overall inflation in each of these years. In other words, medical care prices are increasing at a faster pace than overall prices in the economy. Medical inflation is blamed, in part, on technological advances in medicine that have increased expenses associated with the diagnosis and treatment of patients.

Recipients and Costs

The Agency for Healthcare Research and Quality (AHRQ) is a division of the U.S. Department of Health and Human Services. The AHRQ conducts large-scale surveys of medical care recipients and providers as part of its Medical Expenditure Panel Survey (MEPS;, which provides detailed data and reports on medical utilization and expenditures. As of July 2008, comprehensive MEPS data were available for calendar year 2005.

According to the AHRQ, 84.7% of the U.S. civilian noninstitutional population had some kind of medical expense during 2005. (See Table 3.6.) The rate was much higher among the elderly (people aged sixty-five and

TABLE 3.6. Health care expenses and sources of payment, by age of patient, 2005
SOURCE: Adapted from Table 1. Total Health Services-Median and Mean Expenses per Person with Expense and Distribution of Expenses by Source of Payment: United States, 2005, in Medical Expenditure Panel Survey, U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, 2008, (accessed May 6, 2008)
Per person with an expensePercent distribution of total expenses by source of payment
Population characteristicPopulation (in thousands)Percent with expensesMedianMeanTotal expense (in millions)Out of pocketPrivate insuranceaMedicareMedicaidOtherb
Age in years
Under 65258,70882.99123,239695,04819.6535.914.27.3
Under 519,79388.94441,63828,82210.245.37.329.67.6
65 and over37,47796.74,0859,074328,71517.117.653.456.8
aPrivate insurance includes Tricare (Armed-Forces-related coverage).
bOther includes other public programs such as Department of Veterans Affairs (except Tricare); other federal sources (Indian Health Service, military treatment facilities, and other care provided by the federal government); other state and local sources (community and neighborhood clinics, state and local health departments, and state programs other than Medicaid); and other public (Medicaid payments reported for persons who were not enrolled in the Medicaid program at any time during the year). Other also includes worker's compensation; other unclassified sources (e.g., automobile, homeowner's, liability, and other miscellaneous or unknown sources); and other private insurance (any type of private insurance payments reported for persons without private health insurance coverage during the year, as defined in the medical expenditure plan survey).

older); 96.7% of them reported having a medical expense during the year.

Overall, expenses for medical services (excluding insurance premiums) exceeded $1 trillion. (See Table 3.6.) The average (mean) expense during the year for each treated person was $4,082. According to the AHRQ, the average was lower ($3,239 per treated person) for people aged sixty-four and younger and much higher ($9,074 per treated person) for people aged sixty-five and older.

Who Pays the Bill?

During 2005 private health insurance paid the largest portion (41.6%) of medical service expenditures. (See Table 3.6.) Another 18.8% was paid out of pocket, that is, directly by consumers. Medicare and Medicaid are government-operated health-care programs. Medicare covers the elderly and includes some younger people with certain disabilities and illnesses. Medicaid provides insurance coverage for needy people. During 2005 Medicare and Medicaid paid 21.1% and 11.2%, respectively, of the nation's health-care expenditures. An additional 7.2% was paid by other sources, such as workers' compensation programs or automobile insurance companies.

The Cost of Living

The nontechnical term cost of living refers to the cost of basic necessities to U.S. households, such as food, clothing, and shelter. Even though many factors affect the prices of these commodities, one economic factor has played a major role in recent decades: inflation. Because of inflation, the cost of living increases each year as the prices of necessities become more expensive. The CPI is the economic indicator commonly used to gauge changes in inflation and the cost of living.

A cost of living adjustment (COLA) is an adjustment made to wages or benefits to compensate consumers for the effects of inflation. The government applies annual COLAs to increase the amounts paid out to recipients of certain benefits, such as Social Security and food stamps. This is designed to help people keep up with the rising cost of living due to inflation.

The COLA for Social Security recipients is calculated on the CPI for urban wage earners and clerical workers (CPI-W) from the third quarter of one year to the third quarter of the next year. For example, in 2008 Social Security Changes (October 2007,, the U.S. Social Security Administration notes that in December 2007 the government calculated a 2.3% increase in the CPI-W between the third quarter in 2006 and the third quarter in 2007. As a result, monthly Social Security benefits payable during 2008 were increased by 2.3%.

Public Opinion on Consumer Issues

The Gallup Organization conducts many polls questioning Americans about their consumer habits and concerns. In April 2008 pollsters asked Americans to rate their level of concern about their ability to pay certain costs based on their current financial situation. Nearly half (44%) of respondents were moderately or very worried about having enough money to pay their normal monthly bills. (See Table 3.6.) A quarter of those asked said they were not too worried. Another 29% of respondents expressed no worry about this issue.

Poll participants were also asked about specific costs for housing and medical care. Thirty-six percent of respondents were very or moderately worried about being able to pay their rent, mortgage, or other housing costs. (See Figure 3.9.) Less than a quarter (24%) were not too worried about these costs. A larger percentage (35%) were not worried at all about these costs.

Gallup found that medical costs posed a greater concern for Americans. Forty-four percent of poll participants were very or moderately worried about being able to pay medical costs for normal health care. (See Figure 3.9.) Twenty-four percent said they were not too worried, and 28% were not worried at all about these expenses. Respondents were slightly more concerned about medical costs they could incur in the event of a serious illness or accident. More than half (56%) of those asked were very or moderately worried about being able to afford such costs. Twenty percent were not too worried, and 21% expressed no worry about this issue.

Consumer Spending, Job Creation, and Interest Rates

Consumer spending is essential to economic growth in the United States and is greatly affected by two things: employment and interest rates, which are interdependent factors in the economy. Historically, when interest rates have been lower, people have spent more money, which has in turn stimulated the job market. When people have steady and dependable work, they are more likely to spend money, which also adds jobs to the economy.

Consumer buying choices can also stimulateand even shiftjob growth among industries. The higher the demand is for certain products and services, the more growth those industries will experience. The goods and services that are purchased by the consumer are called final goods; those that are used in the production of final goods are called intermediate goods. Demand for both final and intermediate goods leads to expansion in their respective industries, which in turn adds jobs to the economy.

Interest Rates and Spending

Interest rates are determined by the Federal Reserve Board, which is the central bank of the United States. The

Federal Reserve sets the federal funds rate (the interest rate banks charge for overnight loans to each other), which then influences the prime rate (the rate that banks charge their best customers; the prime rate is usually set at about three percentage points above the federal funds rate). From there, creditors set competitive rates for lending money to consumers. When interest rates are high, consumer spending, particularly for high-priced items such as cars and houses, tends to slow down because the cost of borrowing money is higher. Lower interest rates stimulate the economy because consumers can afford to borrow more at lower rates.

For example, the historically low interest rates of the early 2000s led to a high number of mortgage refinancings, which gave homeowners more money to spend monthly as their mortgage payments were lowered. Because of lower interest rates, many homeowners also had access to a source of disposable income unrelated to their wages: their homes. In 2003 U.S. homeowners took advantage of rising property values and low interest rates by withdrawing $200 billion in equity from their homes. (Equity is the proportion of a house's mortgage value that a homeowner has paid off and actually owns; when people get a home equity loan, they have access to that part of their home's value in the form of credit, which they must then pay back.) In this sense, low interest rates are not always good for individual finances or the economy, because they lead to more debt in the form of home equity loans, car loans, and credit cards.


Some critics say that American consumer habits are a sign of chronic overspending. In The Overspent American: Why We Want What We Don't Need (1998), Juliet B. Schor examines the tendency of Americans to overspend. Noting that competitive acquisition has been a hallmark of American life since the founding of the country, Schor explains that people used to compare themselves and their belongings to those who lived near them in circumstances similar to their own. More recently, however, as exposure to different economic classes has become commonplaceespecially via television, movies, magazines, and the Internet, but also with coworkers and acquaintancesAmericans began to compare themselves to people outside of their own economic group, usually looking to the upper classes for direction on what and how much to buy. This seemingly unrealistic comparison eventually became the norm, causing average Americans to expect their material status to equal that of those outside of what Schor calls their reference groupsthe group of people each of us chooses to identify with most closely. The material possessions of one's reference group quickly come to be considered necessities rather than indulgences; Schor writes of the trend of overspending to keep up with others:

Oddly, it doesn't seem as if we're spending wastefully, or even lavishly. Rather, many of us feel we're just making it, barely able to stay even. But what's remarkable is that this feeling is not restricted to families of limited income. It's a generalized feeling, one that exists at all levels. Twenty-seven percent of all households making more than $100,000 a year say they cannot afford to buy everything they really need. Nearly twenty percent say they spend nearly all their income on the basic necessities of life. In the $50,000100,000 range, 39 percent and one-third feel this way, respectively. Overall, half the population in the richest country in the world say they cannot afford everything they really need. And it's not just the poorest half.

Elizabeth Warren and Amelia Warren Tyagi find in The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (2003) that many Americans overspend for practical reasons, citing education as an example. Even though public schools were once considered more or less reliably similar in different communities, the perception in the 1990s and 2000s has been that families who plan to send their children to public schools must buy houses in more affluent neighborhoods, whether or not they can afford them because those areas have better school districts. Many parents consider this to be a fair trade-off, but it often strains a family's finances. Additionally, Warren and Tyagi note that, unlike earlier generations that typically had one parent working full time and the other at home and available to take on a job to supplement the family's income if necessary, families in the late twentieth and early twenty-first centuries already tended to have both parents working full time and putting about 75% of their pay toward household essentials.

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The American Consumer

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