Clarion Masthead

QC Sociologist: Where Our Money Goes

Income inequality in the US gets more discussion today than in the past. Incomes for the vast majority of US wage-earners have been stagnant or in decline for more than a decade, while the greatest gains have gone to a small minority at the top.

Joseph Cohen sits in front of a miniature cityscape, an art installation at Queens College.

Joseph Cohen, an assistant professor of sociology at Queens College, says there’s another reason that most workers feel squeezed: they don’t have much room to cut back. It’s not just how much people earn, it’s where they have to spend it. His findings shed light on the economic distress felt by PSC members after five years without a contractual raise.

Paraphrasing a colleague, Cohen calls the US a country where small luxuries are cheap, but necessities are expensive. “A cell phone is affordable,” Cohen explained to financial journalist Helaine Olen. “What’s killing people is housing and child care and medical expenses.” Or, as Olen put it, the problem in spending is not the lattes – it’s the Lipitor.

Clarion spoke with Cohen about how US wage-earners are squeezed by the cost of key necessities.


Q: What have been the main income trends in the US over the last few decades?

A: In the broadest terms, we’ve seen a move toward stagnation in wages that’s grown progressively worse over the past 40 years. In the 1950s and ’60s, wages were going up by around 3% a year – so most families were effectively getting a 3% raise relative to prices every year. Starting sometime in the ’70s, wage growth slowed and became more cyclical – in other words, wages began to stall when the economy was doing poorly.

Our last good burst of wage growth happened in the 1990s. Since 2000, there have been up years and down years, but for the vast majority incomes have been stagnant.

For people in the middle up to the 90th percentile, it looks like wages dropped in the early and mid-2000s. And they were nearly stagnant for those at the 95th percentile.

At the very, very top of the labor market, such as highly paid executives, salaries have gone up. But only the top 1% of income earners saw their salaries rise during the 2000s. And in this period, the top 1% also saw its wealth grow dramatically through capital gains, because the stock market has been booming.

Q: So with incomes squeezed, how have people been spending their money?

A: There are books and TV programs with titles like Credit Card Nation or Affluenza, you hear discussion about an “epidemic of overconsumption” or how we’re addicted to shopping. But if you look at what we’ve been spending our money on, how it’s changed over the past 20 years, you see a different picture.

Q: In a recent paper, you detail how during the two decades up to the mid-2000s, Americans’ spending declined on buying clothing, cars, alcohol, tobacco and more. The amount spent on restaurant meals went down, even though the percentage of meals eaten outside the home went up. But in those two decades, the amount spent on prescription drugs went up 41%, and the cost of health insurance roughly doubled. Housing costs rose by about 20%, and education was up by 60%.

A: That’s right. Those figures focused on pre-recession spending and incomes. People have tightened their belts even more to some degree. Still, the basic patterns are the same. We spend less on clothes and food. Furniture is cheap, whether you buy it at Ikea, Target or Walmart. Electronics are a bit of a mixed bag – but the market is not exploding, and it doesn’t make up a big share of the average household budget.

There are four major areas where spending has been growing and it’s prevented people from saving: housing, education and child care, health care, and variable transportation costs. Cars are cheaper, but insurance and gas went up. These are not areas of spending that people can just give up.

Q: So you’re saying people are caught in a vise between the high costs of these necessities and stagnant incomes. With the result that medical costs, for instance, become the leading cause of personal bankruptcy.

A: Exactly. Personal bankruptcy is the result of people spending to their limits. Very few people have much in the way of a rainy-day savings fund. Most experts say to keep at least three to six months’ worth of expenditures in a cash reserve account in case you lose your job or you get sick or suddenly need a big home repair. My data suggests that the vast majority of people only have enough to cover two to eight weeks. They don’t have much of a reserve.

If you run into an income disruption, or you get a big spending shock, you’re in trouble. For some people the margin of error is so slim that a $3,000 home repair could put them under. It would completely deplete their reserves. Or getting in an accident with an underinsured driver and having to buy a replacement car so you can continue to get to work. That kind of expense can be devastating for many families’ balance sheets. That’s why you have so many people working second jobs, multiple jobs. They have to, just to balance the books.

Q: One of the four areas you mention is transportation costs.

A: Variable transportation costs, right. Cars have gotten cheaper but people have been spending more on auto insurance and gas, though the latter’s been changing lately. But I think part of what’s driving up transportation expenses is that people have been suburbanizing: they’re trapped in a dynamic that is part of what’s driving up housing costs.

The United States is a highly unequal society and it’s residentially segregated. The US has this weird system where a lot of essential services are financed and dispersed at the local level. So, the rich pay for their stuff and the poor pay for their stuff – it’s a messed-up system. There’s not much redistribution. If you live in a rich neighborhood, the schools, the services are outstanding. In a poor area, it’s usually the opposite.

This means that your quality of life, the quality of your kid’s school, and a lot of other things depend on you getting into as wealthy a neighborhood as you can afford. As a result, people sacrifice commuting distance or their financial security to get a foothold in the “best” neighborhood they can.

The logically sensible thing, from a financial standpoint, would be to live below your means. If you’re middle-class, but move into a lower-middle-class home, you could save more for your kids’ college education or for your retirement. But at the end of the day, does your family come out better if you decide to spend less for your home? When you look at all the factors, it’s not certain that you do.

Interestingly, rent has also gone up for a lot of people, so it’s not like renting is necessarily a cheaper option.

Q: What about spending on health care or education?

A: As a proportion, they look more moderate than they are. Not everyone has a big doctors’ bill, not everyone is a student or has kids in college. But these costs can be very big when they hit. And when people don’t spend on these necessities, because they simply can’t, it looks like they’re saving money when in fact the cost is steep.

Everybody does this juggling act to get by, right? But a low-income household may have no fat to trim from the budget, and must start cutting into muscle and bone. For example, there has been a sizable portion of the population that ends up saying, “You know what? I’m just going to roll the dice and go without health insurance.” That will diminish the appearance of how much health insurance has been straining their personal budget, but they’ll pay for it in another way. It can be disastrous.

When people are forced to cut bone, it’s hurting them and hurting all of us. If you have to stop going to college, you’ll face worse odds in the job market. And you’ll pay less taxes, be less economically productive and so on. Many doors that education can open, culturally and politically, will be closed to you. Your personal budget will show lower education costs, but we’ll all pay a price.

It’s worth stepping back a moment to ask whether people should have to make these trade-offs. In a lot of societies they fully or partly socialize the cost of these basic essentials, so they’re not something you have to cut if you can’t balance the books.

Q: You’re a Canadian working in the US – does that shape your perspective on these questions?

A: Oh, yeah. First of all, the idea that people would be denied health care is just – I mean, it’s shocking. If you look at polls of what Canadians think about the American health care system, it strikes fear into their hearts. It is not admired or anything that other countries want to emulate.

Countries like the Netherlands or Germany have socialized tuition. I expect they’d be just as shocked by the idea of people having to give up a university education because they can’t afford to pay for it.

Americans are deeply skeptical about anything that is public. Public institutions have been demonized for years and not much defended.

CUNY, for instance, has been underfunded. But we do an excellent job, for students with a lot of needs, with the resources we have. It’s completely backwards, to me, that an institution that does such vital work doesn’t get more budgetary support. When I go abroad, my affiliation is a real plus; people know the school and respect it.

So it’s strange to me to see that a lot of US public universities try their best to look like a private institution. Rutgers, for instance, is like that. Rutgers may be public, but there’s nothing public about the image it projects.

In the US, we force people to roll the dice in ways that they wouldn’t have to if we decided that certain things weren’t optional, shouldn’t just be left up to the market. They should be guaranteed, just like elementary school or policing services. If they were conceived of as basic rights, then people wouldn’t be forced into these dilemmas.

Q: What would it take to make this change?

A: I think we have to shift our view of how to maintain good living standards for everybody. We can do it if we pool our resources, with expanded public programs for necessities like education, housing and health. This would be a big change from the status quo, but today’s financial pressures may make people more open-minded.

With more public support for life’s necessities, middle-class voters could have a good basic living standard even if they lost a job or a family member got sick. Then the market becomes more about the non-necessities, the extras. That would do a lot to increase our well-being – and it would probably save the country a lot of money in the end.