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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.

The Atlantic, April 2012

Image of Rebound: Why America Will Emerge Stronger From the Financial Crisis
Author: Stephen J. Rose
Publisher: St. Martin's Press (2010)
Binding: Hardcover, 288 pages

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.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.

The Atlantic, April 2012

Image of Rebound: Why America Will Emerge Stronger From the Financial Crisis
Author: Stephen J. Rose
Publisher: St. Martin's Press (2010)
Binding: Hardcover, 288 pages
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I'm a bit tired of hearing this old saw. I just experienced a recession where I saw my income cut twice in 3 years, and I barely missed being laid-off, yet prices continue to rise. I have had to cut cable-tv, buying clothes, buying new electronics, buying music and movies and going out for entertainment. In other words: things continue to cost more and I can afford them less. Where ever Stephen J. Rose is getting his data, it isn't from talking to me and most of the people I know. Life in the USA is more expensive, and it's not an illusion from my memories of the 1960s. Pay is not keeping up with costs. Listening to this story on your show made me angry. I felt I was being talked down to, as if I was too dumb to see for myself the correlation between how much I make and how much things cost. I can't believe Rose got paid to write this article, or that NPR would play it to an adult, educated audience.

I'm concerned that the fact that all of this data appears to be "per capita" means that it is missing the fact that income inequality is so huge right now. If our incomes are being measured on average, then the mega-wealthy's incomes are mathematically "shared" with the rest of us. At the very least I would like to see the medians of this data, which gives us the real halfway point.

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