The money illusion
Professor Stephen Rose says we shouldn't be focusing on the price of things as much as the prices relative to how much we make.
Remember what a gallon of milk cost 20 years ago? Isn’t it crazy how much more everything costs nowadays? Not really, says Georgetown University Research Professor Stephen J. Rose whose article “How We Spend” appears in the April 2012 issue of The Atlantic magazine. Economists have created the term “the money illusion” to describe the concept that the amounts things cost may change over time, but what really matters, he says, “relative to how much you get paid.”
Rose gives us this example: “When we say food has gone down tremendously as a share of our budget, that’s in real terms. We don’t see it that way, because we think about it back when it was cheaper, and now it’s more expensive because of inflation. I have a mother-in-law who’s telling me all the time that she remembers what it cost in the 1950s to buy food. ‘And it’s just so much more now, so how can you say it’s less?’ Well, we make that much more now.”
According to Rose, in 1947 we spent 42 percent of our budget on food and clothing. Today we spend just 16 percent. Similarly, we’re spending only half as much on national defense as we did in 1967 in terms of percentage of the gross domestic prodect. Four percent of GDP today as opposed to 8 percent 45 years ago. But not all relative costs are going down. The cost of health care has skyrocketed in the past half century. In 1960 we spent 5 percent of GDP on health care, in 1980 we hit 10 percent, and by 2000 we were at 15 percent. Today we spend 18 or 19 percent of GDP on medical services, and Rose sees that percentage going as high as 25 percent in the next 15 years.