Are our bigger lives truly a revealed preference?
Or have we been pushed into a particular manner of spending our wealth?
A fundamental theory of liberal markets is that it wasn’t particularly important to set priorities for consumption on a societal level because people would freely choose those things that they truly wanted. In The Wealth of Nations, Adam Smith wrote that
“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.”
In other words, individuals would make the right investments for society, because they would be rewarded (presumably by consumers in a market) for making the right investments and penalized for making investments whose products people did not appreciate.
There are serious questions raised by this. Some are psychological - sure, an alcoholic may choose to spend all his money on liquor, but does that mean it is truly in society’s best interest to invest in another distillery to meet that revealed preference? However, even if we take as a given the theory that individuals generally know what they want and choose to buy that when allowed, there are myriad ways in which already existing restrictions, both top-down and bottom-up, may push consumers towards making consumption choices that they would not, in a freer market, actually make.
This is particularly evident in the way the US has, as a society, spent its increased wealth in the past 40 years. It’s often remarked that people don’t really feel richer, even as real incomes have grown. There are of course more pieces to such a puzzle than can be approached at one time, but I’d like to look at two - the growing size of American vehicles and American homes.
Bigger vehicles cancel out better engines
First, vehicles. The growth in American vehicles is obvious - there are today almost no vehicles weighing less than 2750 pounds, whereas such vehicles were nearly a quarter of the fleet in the 1980s. It’s true that some of the weight comes from increased features, as Forbes points out - and it’s also true that improvements in technology have managed to move a great deal more weight with less gas than before.
However, shifts in the classes of vehicles purchased have blunted these potential gains. Cars and sedans have seen a doubling or tripling in fuel economy within each class. However, the most efficient classes of vehicles have plummeted in overall production share, while the least efficient, pickups and truck SUVs, have soared to more than half the overall market.
Let’s look at specifics. In 1980, the bestselling car on the market was the Oldsmobile Cutlass.
Fuel technology was obviously less advanced than it is today, so the Cutlass didn’t get great mileage - roughly 17 in town, 23 on the highway. 43 years later, the F-150 is the best selling vehicle on the market. Despite four decades of improved technology, the much larger vehicle gets…basically the same. So if you switched from driving a Cutlass to driving an F-150 - as statistically many drivers must have - you saw no improvement in your overall fuel economy. And with a factory price of roughly $21,000 in todays dollars, a Cutlass would leave its driver with a great deal more money in their pocket for gas compared to the F-150, with an invoice price over $40,000.
So, did customers just choose to sink more money into vehicles? If so, then they truly are richer for having purchased the F-150, even if they rarely use most of its features. But the reality is not that simple.
As Derek Kreindler explains in great depth here, the way the US government calculates corporate fuel economy (CAFE) standards means that the move towards trucks, and larger ones at that, is given an immense (if unintentional) boost. CAFE standards are looser for trucks than for cars, and also are looser for vehicles that have a larger footprint. In theory this is reasonable - expecting a pickup truck to meet standards like a coupe isn’t very realistic. But, as it turns out, it’s simpler to just sell bigger trucks that have lower expectations for meeting fuel economy standards that convince Americans to buy very fuel-efficient cars with less powerful engines. It’s true that, theoretically, Americans could just buy cars. But specific policies have nudged the market in the direction it has taken, rewarding the production and consumption of larger, more expensive vehicles.
Housing - buying more than we need, or even want?
Probably the only place Americans spend more time than their cars is their homes. Here, too, sizes have ballooned - growing by about 50% since 1980 despite have smaller families. As with cars, this may be to some extent be simply a consumer choice that reflects greater prosperity. However, the regulations that push consumer choice are more in evidence here, as well.
For one thing, the designation of huge swaths of cities - three quarters of US urban residential land - for single family homes limits options for households that, presented options in an open market, might choose differently. Indeed, since in most cases zoning presents a maximum, not minimum, density, it is almost guaranteed that this is the outcome. Living with larger homes also increases maintenance costs, heating and cooling expenses, and the like, in addition to adding to the initial purchase price.
Moreover, even those who might choose a single family home could be stuck with an abode larger than they had hoped. Minimum lot sizes serve to restrict available housing around most metro areas. This not only decreases density and thus drives automobile reliance, but mean that families both end up paying for and maintaining acreage whether they choose it or not. Within one’s own property, covenants and deed restrictions may further restrict what kind of houses may be built (and thus lived in) - and again, the trend is frequently for minimum house footprints. Sometimes these restrictions actually reduce the price of housing impacted - indicating that in an open market consumers choose less regulated housing even when it means their neighbors gain more options as well. And the process for approving new subdivisions and other projects is also more likely to lead to larger homes built on less dense lots when areas are moved from agricultural to residential uses.
Is it a problem?
None of this is to say that these outcomes are definitively wrong, or that the only valid economic outcome derives from perfectly free markets. Certainly, there are good reasons for standards on fuel economy or on housing sizes.
However, not only are our regulations nudging consumers towards these bigger choices, in many cases they are actively exacerbating known externalities, most obviously those related to emissions, air pollution, and climate change. Government actions that put bigger cars on the road or houses on lots also bring with them more pollutions for moving, constructing, heating, and maintaining those products.
It is worth considering, then, ways in which the unrivaled wealth of the United States can be better directed towards uses more likely to give people the experiences they proactively choose and less likely to incur environmental and economic costs down the line. Understanding ways in which government regulation necessarily channels our immense wealth away from where it would necessarily have the greatest returns in a free market can hopefully break through doctrinaire ‘market’ arguments against investing in public goods like social housing or public transportation.