Can the Middle Class Afford Cars?

Via The Taupe Avenger, The Truth About Cars wonders if middle-class families can’t afford new cars anymore. (Warning: the author of that piece strongly insinuates the problems are Obamacare and immigrants. Which, no.)

The math is pretty simple. Median household income in the US is about $53,700; thanks to wage stagnation and the Great Recession, this is barely above where it was in 1989. The article uses a new Toyota Camry LE, which costs $23,905. According to Autotrader, in 1989 the basic 4-door automatic model Toyota Camry had a list of price of $12,158… which, in 2016 dollars, is $23,248. The basic 2016 Honda Civic starts at $18,640, while the 1989 model was $10,090 or $19,290 in 2016 dollars.

Note that the 2016 Camry and Civic are better cars the 1989 models. They are safer and more fuel efficient. So even if it feels like the middle class can’t afford new cars, it seems like that’s not actually the case. Incomes haven’t gone up very much, but the real price of a basic new car hasn’t gone up very much either.

Leave aside that this rough analysis is based on median incomes, which ignores changes in income distribution that would make new cars affordable to a smaller number of people. (If the middle class shrinks while the high-income and low-income classes grow, the median will stay the same but a larger number of people will be unable to afford a new car.) What’s going on here?

My guess is that people feel poorer because of the Big 3 items whose real costs really have increased greatly since the 1980s – housing, health care, and education. And in fact, the article unwittingly suggests this is true.

First, the mortgage payment that the hypothetical family is making is given as $2,100/month. With 10% down at current interest rates, that’s nearly a $400,000 house. As of February 2016, the median new home price in the US is just over $300,000. In 1989 it was about $120,000, or $230,000 in 2016 dollars. So while new car prices and real wages have more or less stayed the same, new home prices have gone up by about 30%. Suffice to say that if you live in some of the most populous parts of the country, it’s considerably worse than that.

We could say the same for health care – the article complains about Obamacare but of course the real problem is that health care costs in the US have grown faster than wages and inflation, and faster than the rest of the world, for decades. Likewise for education.

The increase in cost of housing, health care, and education probably explains most of the squeeze put on ordinary Americans over the last 25 years. Sometimes people realize this; sometimes they focus on the cost of something else like cars or gas. Unfortunately, even when people realize the costs of the Big 3 are the issue, they often blame the wrong thing – Hispanic immigrants, Obamacare, Chinese property buyers, Chinese factory workers, Chinese college students.

It’s easy to scapegoat, and convenient for the people who do not want to do anything to solve the problems of housing, health care, and education costs. The real sources of the problems are more complex. But they are of our making, and that means we can solve them, if we want to.

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5 thoughts on “Can the Middle Class Afford Cars?

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  4. keaswaran

    But isn’t it also the case that the average car on the road is increasing?

    http://www.usatoday.com/story/money/2015/07/29/new-car-sales-soaring-but-cars-getting-older-too/30821191/

    The average car is 11.5 years old. We can ignore who exactly is buying new cars and who is buying used cars, if we assume that most of the money for buying used cars is just transferred from families buying used cars to families buying new cars. So if the real price of a car is staying fairly similar, and the average age is increasing, then the average cost per year per car should be going down. If the average number of cars per person isn’t rising, then car spending per person should be going down.

    Reply
  5. NewsView

    Your post backs up another very useful blog post on inflation, albeit it’s a bit of an older post but still illustrative:

    http://www.mybudget360.com/cost-of-living-2014-inflation-1950-vs-2014-data-housing-cars-college/

    During the Great Recession and the “occupy” movement, I think we began to see the broader society begin to get a handle on the growing divide between executive pay levels in this country — 400 times what average workers make, if memory serves — and the pressure that exerts on prices downwind. Demands for non-stop stock returns on the part of shareholders and Wall Street has also “inverted” the economy somewhat, which is why more and more keeps being siphoned out of the pockets of workers, who by all estimates today are more productive — and spend more time working in a lifetime — than did their single-income, middle class grandparents (or parents) of the 1950s-’70s. The latch-key generation really took hold in earnest in the 1980s and during that time, when housing was still relatively cheap, demand for all kinds of consumer goods skyrocketed (the “me” or “material” years).

    What’s rarely discussed, however, is perhaps best captured in the book the “The Two-Income Trap”. The rise in two-income households was at first a matter of preference — liberating women from their roles as homemakers — yet has now become a matter of modern economic necessity for many families. With a dual-income household requirement in the best of times, American families are ill-prepared to whether the worst of times and so we are seeing rates of personal debt,default and bankruptcy increase with every prolonged recession or personal misfortune (accident, disability, divorce, job loss). This has placed more pressure on entitlements, despite cutbacks in food stamps and the welfare reform instituted under the Clinton administration in the 1990s.

    It’s not politically correct to point this out, but women today are just as trapped trying to “be it all” — both a parent and a full-time career professional — as their parents/grandparents were as housewives. More than being a social trend, it’s an economic trend. As more women entered the labor force, conceivably we would see the levels of disposable income, not to mention personal savings, rise accordingly (not to mention, a healthy consumer spending segment, which has instead been on the downswing in recent years). However, I would postulate that what happened is that consumer pricing trends followed suit, and so for a time the cost of entering the middle class remained relatively low whereas over the long run the cost of continuing to be middle class has increased. Why? Because employers gained the option to suppress wages because such salaries are presumed, even by working professionals, to comprise just one half of a typical household income.

    It used to be that if you worked a minimum wage job, it was understood that you probably had to take on roommates or have a working spouse to afford to live. Increasingly, however, that requirement has entered the professional class thanks to the prevalence of the two-income household. Employers can and do compensate employees less even as they incur less pushback on the part of workers — who are less inclined to protest or support unions thanks to the fact that few workers are the sole breadwinner in a household. Through the end of the 20th Century, workers with employed partners/spouses have been able to make up the wage-growth shortfall with the help of a second income in the household. In the 21st Century, however, that assumption can no longer be counted upon to hold. As employers pay any one particular employee less for the job they perform they can simultaneously afford to funnel more and more into executive pay and perks, accounting for how incredibly divergent executive pay has become over the past 40-some years compared to the considerably narrower differential that existed when single-income “breadwinner households” were the norm. Now add in Ross Perot’s “giant sucking sound” of American jobs succumbing to free trade agreements that served to erode employment diversity in the United States from the late 1980s into the mid 1990s, and the stage is set for the perfect economic storm. As predicted by the late financier and billionaire Sir James Goldsmith in “The Trap”, the outflow of middle-skill jobs in manufacturing and other sectors, beginning with NAFTA/GATT, has generated a bifurcated — unsustainable — workforce, comprised of low-wage service workers on the one hand, and high-skill professionals on the other. In tandem with the demise of the middle class — given that 70% of the American economy has traditionally relied upon consumer spending, which is no longer the sure bet it once was — Wall Street has been forced to come up with ever-more creative ways to maximize returns to shareholders/investors. This is precisely why, as the “real” or “fundamental” economy wanes, we have witnessed the rise of the so-called Wall Street casino — a derivatives-based economy alongside Wall Street returns driven by stock buybacks. THIS helps explain why, despite the hard lessons of the financial crisis, little has changed: derivatives and too-big-to-fail banking institutions WORSE now than they were prior to the Great Recession.

    The trend for the past 20-some years has been to do to the white-collar worker what was done to the blue-collar worker in the 1980s and 1990s. Insourcing and outsourcing have begun to reach into high-skill, high-education sector — such as IT jobs and skilled nursing jobs — to tap foreign H1B visa workers to compete for the “living wage occupations” that American students continue to pay dearly for at their over-priced higher education institutions. When these grads come out of college with their in-demand STEM (science, technology, engineering, math) jobs, they will face much of the same career instability that was formerly reserved for low-wage workers in the service sectors. Notably, there are no “scapegoats” necessary, here. We have collectively allowed our economy (and political leadership) to shift its emphasis from self-replicating a viable middle class to self-cannibalizing the very engine upon which economic stability and growth rely.

    We are on a wholly unsustainable path in which WE Americans, the ones who vote and the ones who can’t be bothered alike, are largely responsible, politically and otherwise, for our own middle class losses. Too often, we vote against our own interests without regard for the long-term economic consequences. All the while, we have a government of, by and for the special interests — with global Business interests financing Democrat and Republican administrations alike. Until we reform campaign finance, the interests of the American family, middle class or otherwise, will continue to receive lip service while being dismissed as “populist” nonsense. And yet the mathematics of stagnating income levels, declining buying power, inadequate personal savings rates and record indebtedness don’t lie.

    Reply

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