Helaine’s Blog

Giving up coffee to balance the books: how many lattes to financial freedom?

August 13th, 2013 | via The Guardian

Cutting back on minor expenses won’t save you much in a country where luxuries are cheap and necessities expensive

It’s not our daily latte that is driving us to the poorhouse. It’s our Lipitor … and our houses, our families and other necessities of life.

Yet we still don’t want to believe it. A decade after Elizabeth Warren first revealed that the leading cause of bankruptcies was medical spending, Americans continue to discuss our financial woes as though we only have to give up a few habits to solve our checkbook woes.

It’s a nice fairy tale. It’s also not true.

The latest to take on the challenge of convincing Americans of the reality of their financial lives is Joseph N Cohen, an assistant professor of sociology at Queens College. In a paper released this past weekend at the American Sociological Association‘s annual meeting in New York City, Cohen used figures from the Bureau of Labor Statistics to bust the myth of the latte factor: the idea that we’re wasting our precious funds on pointless luxuries.

Cohen found that we’re not spending more on things we don’t need to get through the day. On the contrary, we’re spending less. Between the mid-1980s and the mid-00s, Americans’ spending on clothes fell by 28%; alcohol 12%; tobacco 25%; vehicle purchases 15% and vehicle maintenance 24%. Overall expenditures on food also declined, with spending on in-home meals falling by 8% and restaurant dining by a more modest 3%.

Where did the money go? Consider your own circumstances, and you’re likely to see the most common increases in spending. During the same period of time, we spent almost 20% more on housing and 32% more on healthcare, which includes a more than 100% rise in the cost of health insurance and 41% of pharmaceuticals. Education? An astonishing 60% increase. Gas went up by 23% and auto insurance by 29%.

Cohen summed it up aptly:

“A colleague of mine once told me that America is a place where the luxuries are cheap but the necessities expensive. A cell phone is affordable. What’s killing people is housing and childcare and medical expenses.”

Think of it this way. An iced tea I purchased Saturday at Abbot’s Habit in Venice Beach, California, cost $2.50. I pay just under $1,300 a month for a health insurance policy that … well, let’s just say it’s less than generous.

Doing the math shows that I would have to give up 520 iced caffeine drinks a month to pay my health insurance bill, and I still would not cover all my family’s medical expenses. As University of California-Irvine law school professor Katherine Porter told me in my book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry: “You can’t latte yourself to bankruptcy. The bladder won’t stand for it.”

Oh, and one other thing: our salaries are plunging. Median household income in 2011 equaled that in 1996.

Moreover, Cohen argues that telling people to cut back can lead them into worse financial trouble in the long-run. Take housing, for instance: people stretch not to buy the latest in McMansions, but to make sure their children are in a decent school district. In a country where education spending is determined on a hyper-local level, Cohen explains:

“It’s not irrational to spend to your financial limits to buy in the best neighborhood you can.

“People are making a trade-off. I can have personal financial security or send my children to a school with art and physical education. Or I can worry about retirement or worry about crime and a long commute.”

Other major expenses also offer similar, “damned if you do, damned if you don’t” choices. Give up health insurance and you’ll save money – till the day you need more than basic care. Skip college and your lifetime earnings are almost certainly impacted. As a result, Cohen says our financial lives are increasingly a lose-lose situation, where if we lose a job or get into a car accident, we almost immediately slip over the financial edge.

Yet the situation feels so normal to us that we don’t question it. Believing we’re a nation of latte-swilling wastrels stops us from addressing the real causes of our personal financial woes: ever-increasing income inequality, falling salaries, and a lack of adequate government funding for everything from healthcare to education.

So why does the latte meme, though a fallacy, persist? Cohen told me he believes the myth of the fiscally promiscuous American appeals on both sides of the political spectrum. On the right, it lands squarely in the camp of personal responsibility – the idea that we are fully masters (or mistresses) of our fate. At the same time, fictions about our supposed free-spending ways also fits into a long-running leftist critique of the consumerist society – the idea that somehow our spending on luxuries is morally wrong.

The idea that our friends and neighbors waste their money also makes us feel better about our own decisions, if we embrace it. “It’s wonderful for our self-esteem to look down at everyone else,” Cohen told me.

But what’s good for our day-to-day mental health does not make for good public policy.

• Editor’s note: a previous version of this article misstated the years during which American luxury spending fell, and has been corrected accordingly

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