Why Everyone Younger Than You is Spoiled: the Foibles of Amateur Accounting

Jeff Lundy:

Sociologist Katherine Newman is working on a fascinating study of a new phenomenon called “delayed adulthood.” According to Newman, parents are bemoaning the extended amount of time their kids are taking to “grow up” in First World countries (e.g. U.S., Japan, Norway, Spain, etc.). Along with this phenomenon of “delayed adulthood,” Newman similarly finds media articles dotting the globe that discuss how parents regard their children as increasingly “spoiled.”

I can’t wait to read Newman’s book on this phenomenon when it comes out. However, from a personal standpoint, I think younger generations are already well aware that older generations (particularly boomers) think we’re a bunch of slackers. In fact, I’ve gotten so tired of hearing this from my elders that I’ve spent some time contemplating why older generations think us younger generations are so spoiled.

While there are many things that must feed into this complex phenomenon, I think that a major culprit here is our elders’ amateur financial accounting. In fact, I’ve isolated four main issues with the economic accounting of older generations that I believe leads them to think of us youth as spoiled (and which us youngins’ should remember for when we get older). To spare your attention span, I’m spreading the four issues over two posts. So if you want the exciting conclusion to this week’s post, you’ll have to come back next week.

Inflation

Inflation is a pretty familiar concept. We all know that things cost “more” now than they used to. Even in my short life I’ve seen the nominal price of using a payphone move from 25 cents to 50 cents. Dispensed sodas once were 50 cents, and now they are damn near $1.25. Still, despite everyone’s vague sense of increasing prices, few people (in any generation) actually have a strong grasp on what inflation is, or a specific idea on exactly how much things have changed over time.

As Dan has pointed out in previous posts, the exact way to measure inflation is questionable, primarily because it’s a diffuse phenomenon with a number of different causes. Still, the Bureau of Labor Statistics does the best it can to track it. And using the BLS inflation calculator as a reference point, we can see the first factor that leads older generations to go wrong: discounting inflation.

Why is Inflation Accounting a Problem for Older Generations?

Take a classic example. My soon-to-be mother-in-law has offered to fund part of my upcoming wedding. I am very grateful for her contribution. However, like any good boomer she cannot help but point out how “exorbitantly” priced our wedding is, and just how “spoiled” we are. She loves to point out, on many occasions, that “all her parents ever gave her was $900 for her wedding.”

$900 does sound pretty reasonable compared to the nearly $3,000 we’re asking her to give us. But, of course, there’s inflation.

My mother-in-law was married in 1974. When you put that into the BLS’ inflation calculator, you find out that $900 in 1974 dollars turns out to be $3,892 in 2009 dollars. And, if you want to be nitpicky about it, I’m certain that the percentile rank of her current household income is certainly higher than her parents’ percentile rank, and also that her inflation-adjusted expenses are much lower (she has only one child – not four, like her parents – as well as various other factors that reduce her costs).

This case is a perfect showcase for the problems of discounting inflation. In it we see how a boomer thinks she’s suffering to give us more than we deserve, when in fact she is giving us less than her parents did, even though she is “better off” than they ever were.

My future mother-in-law is just one example of not adjusting for inflation; but as you will see, it isn’t just your “average boomer” who is making this kind of error. Take my Dad, for example.

My father is an auditor for the Department of Defense. He’s also a Certified Public Accountant. My dad knows how to keep track of money, like few others. But strangely, he is no more immune to the problem of miscalculating inflation than your average lay citizen.

One of my Dad’s favorite stories is about how, when he just got out of college, he bought himself a brand new dark-green Mustang. He says he could only afford enough gas to take him to the grocery store, but he stilled loved that car. Frequently at the end of this story he does his diligence (as a good boomer) to chide his children for their frivolous lifestyles. You probably see what’s coming – further investigation into the inflation-adjusted value of a 1972 Mustang casts doubt on which generation of Lundy has self-indulged more.

The cheapest Mustang my father could have purchased in the year 1972 cost $2,679 . Plug that into the inflation calculator and we find out that in today’s dollars that equals $13,666.

Now, it’s been about 5 years since I left college. To equal my father’s Mustang purchase during my post-college years, I would have to spend around $2,733 per year in big-time-fun expenditures (not counting things like going to the movies, which I know my father did as well, and probably just as frequently). Seeing that my annual income has never been higher than $18,000 a year since leaving college (and very frequently much lower), it seems hard to believe that I would spend, at a minimum 15% of my yearly income on some fun trip or other big-time leisure expenditure. But of course, I don’t have to guess about this matter. I didn’t spend this amount. And for the few “big fun” expenditures I did make (e.g. hiking the John Muir Trail two summers ago), most of this was paid for out of my own (meager) resources, and the rest was helped out by the usual money given to me by my family for Christmas, birthday, etc.

Let me make it clear: I don’t mean to whine. I do recognize the privileged life I lead (and have led). However, as we see from these examples, taking account of inflation would probably help older generations to fully account for the privileges they also enjoyed in their childhoods, and in their current lives.

Substitution

It’s easy to see how inflation might trick someone who is looking retrospectively at the past. Without memorizing a list of inflation factors for every year since your birth, it’s hard to have a realistic sense of how much you need to adjust for changes in the nominal prices of goods. However, one of the more mystifying errors older generations commit is their lack of accounting for substitution.

Substitution is not a hard concept to grasp. When life circumstances change, people tend to buy a different “basket of goods.” So, for instance, when a couple goes from living alone to having children; their basket of goods sees a drop in movie-going expenditures, and a precipitous rise in diaper and bottle purchases.

The same principle of substitution can be loosely applied to generational changes. Kids today just aren’t into pet rocks as much as they were in the 1970’s. Conversely, the interest of today’s youth in constantly texting one another would certainly stump the kids on That 70’s Show.

Why is Substitution Accounting a Problem for Older Generations?

Discounting substitution is caused by a sampling error: older generations only see the “inexplicable” things that younger generations do buy, but not any of the things that younger generations are no longer buying.

To put it in practical terms, my parents look at my desire to buy clothes from Banana Republic with horror. All they ever wore were “cheap, worn-out Levi jeans.”

But what my parents don’t see are all the 75-RPM records and 8-track tapes I’m not buying. In fact, I don’t ever buy music. I download it from a bittorrent site. Or I hear it free from a streaming Pandora radio station. Or I hear it free from videos posted on YouTube (you get the idea).

So with all those record purchases of my parent’s youth that I’m not buying, I’m taking that money and buying what’s fashionable now. But again, it’s much harder to see something I’m not buying, than something I am buying. So my generation looks spoiled to elders, both because older people don’t like the kinds of things I buy, but also because they don’t see all the “essential costs” my generation no longer makes.

 

Posted via email from Jim Nichols