A Brief History of Why The U.S. Consumer Thinks The Way They Do

Okay, imagine this for a second. You fall asleep and say 1945, then you wake up in 2020. - Whoa. - Right. I mean, the shock would be incredible. You'd see this staggering wall in places like New York, San Francisco, but then you know, devastating poverty and Detroit and the prices, homes, college, health care, it would make absolutely no sense. - Yeah. - And maybe the biggest thing, how average folks think about money, saving, spending, totally different from back then. I bet any story you'd try to tell yourself about how we got from A to B to probably be wrong, you just couldn't have predicted it. So yeah, how do we get here? - That really is the essential question, isn't it? If you wanna understand the modern consumers mindset, even get a handle on where the economy might go next, you really have to trace that journey back. So that's what this deep dive is about. We're gonna explore the story, the narrative of the American consumer, really starting right after World War II, we'll link the big events, try to show why we think about money the way we do today. - And why those ideas are so sticky maybe. - Exactly, why they're so hard to shake off, even when things change. - All right, let's do it. So we start August, 1945, Japan surrenders. New York Times calls it the happiest day in American history. Just pure joy everywhere. - Absolutely, parades, celebrations. - But then you know, once the cheering stops, this big question mark starts hanging in the air, what happens now? - And that wasn't just a casual question. It was loaded with anxiety. For policymakers, for regular Americans, everyone. - Because the scale was just enormous. - Think about it, 16 million Americans served. That's like 11% of the whole population then. - Wow. - Eight million, we're still overseas when the war ended. And almost all of them, barring maybe 1.5 million, we're gonna be home at a uniform within 18 months. - So the immediate fear was. - Three huge things, where are they gonna live? - Right. - And what jobs are gonna do? A lot of people, smart people, economists, genuinely thought, here we go again, back to the Great Depression. Which, remember, had only really ended five years before. That fear was palpable. - And you can imagine, with that depression shadow looming, policymakers must have felt immense pressure. What were the specific things staring them in the face, like the concrete problems? - Well, for starters, housing. Construction basically stopped during the war. Everything went to the military effort. - Sure. In 1943, they were building fewer than 12,000 homes a month. That's nothing. So GI's coming home, massive housing shortage. - Okay, so that shelter, what about work? - Millions of jobs have been created just for the war. Building ships, tanks, planes, highly specialized stuff. - Right. - And those industries, they shut down almost overnight, boom. Gone, not like a normal business cycle downturn. - So policymakers were genuinely worried? - Deeply. The Council of Economic Advisors wrote a report for President Truman in '46 warning of, quote, a full-scale depression. - Wow. - There's another memo from '47 summarizing a meeting with Truman, talking about the danger of a downward spiral. - And they couldn't just like export their way out of it? - Not easily. Europe's economy was wrecked. Japan's too. So export markets weren't there. In America itself, record levels of debt from the war. So massive government stimulus wasn't really an option either. - Okay, so faced with this, I mean this potentially catastrophic situation, what did they do? What levers did they pull? - This is where it gets really interesting. You see this very deliberate policy choice emerge. Keep interest rates incredibly low. - Hello. - Well, the Fed had announced back in '42 during the war that they'd keep short-term rates pegged at 0.38%. Tell finance the war, right? - 0.38, that's basically zero. - Pretty much. And here's the kicker, those rates didn't move for seven years. - Seven years. - Yep, three month treasury yield stayed under 2% all the way until the mid-1950s. - So was that just inertia from the war financing or did they realize, hey, this cheap money could be useful? - That's the key point. It started as war finance, but it quickly became clear that these rock bottom rates made borrowing super cheap for houses, for cars, for all the new gadgets people wanted. - So it became a strategy. - An explicit economic strategy, yeah. The historian Sheldon Garren talks about this shift. We went from this wartime culture of save, save, save by war bonds, to actively encouraging people to spend. Cheap borrowing was the engine. - And there are two huge things that really poured fuel on that fire, right? - Absolutely. First, the GI bill, just transformative. - How so? - It gave those 16 million veterans access to mortgages like never before. Often, zero money down, no interest for the first year, fixed rates so low your mortgage payment could actually be less than rent. - Unbelievable. - And the second thing. - An explosion in consumer credit. They started loosening the regulations that have been put in place during the depression. - Ah, okay. - You get the first real credit card diners club in 1950, then store credit, installment plans, personal loans, payday loans, it all just took off. - And you mentioned a crucial detail before, about taxes. - Right, until 1986, the interest on all debt, including your credit card debt, was tax deductible. - They're out, seriously. - Seriously, think about the incentive that creates to borrow and spend. It's baked right into the tax code for decades. - Okay, so that really sets the stage. You've got cheap money, easy credit, and after the war, all this pent up demand. People hadn't been able to buy stuff for years. - Exactly, factories were making tanks, not toasters. So households were starved for goods. - Were there other factors boosting this spending wave? - Yeah, there was this sort of hidden productivity gain that came out of the depression. - How does that work? Hard times making more productive. - In a way, yeah. The 1930s, tough as they were, forced incredible resourcefulness, efficiency, innovation, just to survive. - Ah, I see. - So you had all these advancements bubbling into the surface, better appliances, cars, phones, air conditioning, wider electricity access. It wasn't obvious during the depression or the war, but by the '50s, America realized, hey, we're actually really good at making stuff now. We've got all these cool new things to make. - And people just went on a massive shopping spree. - Colossal. Use some numbers, commercial car and truck production. Basically zero from 42 to 45. - Right. - Then between 45 and 49, 21 million sold. Another 37 million by 1955. - Whoa, and houses. - Same story. Fewer than two million built between 40 and 45. Then, seven million from 45 to 50. Another eight million by 1955. - That's, it's hard to even picture that scale of building and buying. It's not just economics. It's like the physical landscape of the country changing. - Completely. - And think about the jobs. All those returning GI's needed work. What do they do? They got jobs making all this new stuff. - Right. - And they earned good money doing it. The Fed told Truman in '51 that by 1950, consumers spending in home building hit $203 billion. That's about 40% higher than the peak of the war effort in '44. - So the answer to what will the GI's do was basically they'll build the suburbs, fill them with stuff and buy cars to drive between them. - Pretty much. They were buying stuff with money earned, making new stuff often helped by cheap loans to buy even more stuff. It was a powerful cycle. - So this post-war boom takes off. What was the kind of social vibe was everyone getting rich or was it uneven? - You know what's really remarkable about that period, roughly 1950 to 1980, is how much the country got richer together? - Shared prosperity. You hear that term a lot. - And it was real then. The gap between the rich and the poor actually narrowed significantly. - How so? - We'll look at the top 1% share of national income. After taxes, it fell from about 13% down to 7% by 1945. And get this, from 1950 to 1980, the real income growth for the bottom 20% of earners was almost identical to the growth for the top 5%. - That's incredible. So people really felt like they were moving up together. - Exactly, and it wasn't just income. It was social leveling too. Women entered the workforce in much greater numbers. Participation went from 31% after the war to 40% by 1965. Minority saw gains too. Eleanor Roosevelt wrote about seeing an African-American reporter to White House reception in 1945. Mixing easily, something she said would have been unthinkable just 12 years earlier. - And lifestyles became more similar. - Yeah, Harper's Magazine wrote in '57 something like, the rich man smokes the same cigarettes as the poor man uses the same razor. There was a sense of shared experience, but Paul Graham made a great point years later about TV. Back then, there were basically three networks. So every night, tens of millions of families neighbors were watching the same shows, laughing at the same jokes. What we see now only with the Super Bowl that used to happen every night. We were literally as he put it in sync. - That's a powerful image, and it matters, right? Because we judge our own well-being by looking at the people around us. - Absolutely crucial. For most of that 45 to 80 period, most people saw their neighbors, their coworkers, living lives that felt similar or at least understandable, relatable, not wildly different. - So with all the shared growth, how did debt fit in? Were people still scared of it after the depression? - You'd think so, but no. Household debt actually surged. It increased fivefold between 1947 and 1957. - Wow, why? - Well, that new consumer culture we talked about, all the new things buy, plus all those new ways to borrow money, credit cards, installment plans, and crucially, those super low interest rates often subsidized. - But didn't cause problems? - Largely. - No, not then. Because incomes were rising so strongly across the board, people could handle the payments. And remember, people started from a very low base of debt. The depression wiped a lot out, and wartime rashing and saving had kept borrowing down. - So debt was rising, but income was rising too. - Exactly. Even with that fivefold increase, the overall household debt to income ratio stayed below 60% right up until the late 1970s. - Which is way lower than today. - Oh, much lower, today it's over 100%. And a lot of that debt was going into homes. The home ownership rate just took off. It was 53% by 45, hit 62% by 1970. Millions became homeowners who couldn't have before. - So this generation just had a different attitude towards debt. - Completely different from their parents. - Yeah. - David Halberstam wrote about this in his book, The 50s. He said they were confident, optimistic. They didn't fear debt like the generation that lived through the depression. They felt like, you know, the good times were here to stay. The future had already arrived as he put it. - Sounds like a golden age in a way. America booming, doing it together, debt manageable, but obviously it didn't last forever. - No, the story definitely takes a turn. Around 1973, you start seeing the cracks appear. - What happened in '73? - Well, a recession hit and it was nasty. Unemployment shot up to levels not seen since the depression. Inflation, which had been around, suddenly surged and just stuck around to became persistent. - Stagflation. - Exactly. And interest rates started climbing too. Short-term rates hit 8% in '73. Remember, they were down around 2.5% just 10 years earlier. - And this wasn't happening in a vacuum, right? There was other stuff going on. - A lot of other stuff. The hangover from Vietnam, riots and cities, the assassinations of the king, the Kennedys. There was a sense of unease instability. - Plus, America wasn't the only economic game in town anymore. - Right, Japan's economy was booming, becoming a real competitor. China was starting to open up. The Middle East realized the power it had with oil. The oil embargo hit in '73 too. America's unquestioned economic dominance started to fade. - So those post-wartellans were dying down. The economic ride got bumpier. - It got uneven. That's the key word. - But. And this seems crucial. People's expectations didn't change overnight, did they? That idea of shared prosperity, of living like your neighbors. - That's the critical disconnect. The economic reality started to shift, become less equal, less certain. But the cultural expectation, forged in those post-war decades, the expectation that your life shouldn't be dramatically different from the people of the income ladder that persisted. - That idea of the 50th percentile and the 90th percentile shouldn't live in totally different worlds. - Precisely. That expectation lingered. Even as the economic foundations for it, we're starting to erode. - And this is where that lag you mentioned comes in. Expectations moving slower than reality. - Because the economy did bounce back in the 80s, right? Morning in America. - Oh yeah, the 80s saw strong growth. Reagan's 84 ad wasn't just spin, GDP growth was high. And the 90s too. Bill Clinton, in his 2000s state of the union, bragged about 20 million new jobs, fastest growth in 30 years. - And the overall growth numbers were actually pretty similar to the 50s. - Roughly, yeah. Total real GDP growth in the 90s was about 40% compared to 42% in the 50s, pretty close. - So if the amount of growth was similar, what was the big difference? - The big difference was who got that growth. It flowed into, as one writer put it, totally different pockets. - Ah, in a quarter. - In a quarter. The Atlantic had a piece showing that between 93 and 2012, the top 1%'s incomes grew over 86%. The bottom 99%, just 6.6% growth. - Wow, that's a huge divergence. - Huge, just as cigarettes pointed out in 2011, the top 1% saw incomes rise 18% in the prior decade. Meanwhile, middle income folks actually saw their incomes fall, especially men with just a high school degree down 12%. - Okay, so you've got this sharp rise and inequality happening right when people still hold onto those two big post-war ideas. One, you should live kind of like everyone else. And two, it's okay to use debt to get there. That sounds like a recipe for trouble. - It's the recipe for what some people call the big stretch. - The big stretch. - Yeah, as the incomes of that top group soared, their lifestyles pulled away. Bigger houses, fancier cars, private schools, elaborate vacations. - Did everyone else is watching this? - Everyone else is watching. First through glossy magazines and TV ads in the 80s and 90s, later amplified massively by the internet and social media that old, keeping up with the Joneses impulse, which, well, he kind of innocent when everyone's income was rising together. - Become something much more stressful when the gap widens. - Exactly. It becomes almost impossible to keep up without stretching financially, usually with debt. - Can you give us an example, make it concrete? - Sure, think of like Joe. He's an investment banker, making, say, $900,000 a year. He buys a 4,000 square foot house, leases two numerous eighties, sends his kids to Pepperdine. He can afford it, okay. Then there's Peter. He's a bank branch manager, makes $80,000. Decent income, but nowhere near Joe's. But Peter sees Joe, sees that lifestyle, feels that pressure. The pressure to keep up appearances. - Right, so what does Peter do? He takes out the biggest mortgage the bank will give him for a house it's maybe too big. He racks up $45,000 on credit cards, leases two cars he can't really afford. His kids end up graduating with a mountain of student loan debt. - Stretching. - He's stretching, trying to maintain the semblance of that upper middle class lifestyle that's drifting further away from his income level. - And the data shows this wasn't just anecdotal. - All the numbers are clear. The median size of a new American home grew by 50% between the early eighties and the 2000s, even while median wages were basically flat. - 50% bigger. - Yeah, and nearly half of new homes had four or more bedrooms by the 2000s, up from just 18% in 1983. - People were buying way more house than they used to. - Way more house and cars too. The average inflation adjusted car loan. It more than doubled between 1975 and 2003, went from about $12,300 to nearly $28,000. - Wow. - Plus the explosion in college costs and student debt we all know about. - So all the stretching meant more debt. - A lot more debt, that household debt to income ratio. It climbed from that sub 60% level in the seventies, past 100%, hitting over 130% by 2007. - Even while interest rates were coming down in the nineties and 2000s. - Even then, because people were borrowing so much more. And critically, the burden wasn't shared equally. Lower income households ended up spending a much larger chunk of their income servicing debt. Like 14% for the lowest income groups, versus 8% for the highest. - That just feels unsustainable. - It was. It brings to mind the economist Hyman Minsky. He talked about how debt crises start. It's that moment when people or systems have taken on more debt than they can actually handle. - The wildly coyote moment. - Exactly, you're running long. Everything seems fine that you look down, realize there's nothing under you, and gravity takes over. - Which is pretty much what happened in 2008. - Precisely, the great financial crisis. - Okay, so 2008 happens, huge crash. Afterwards, people did pay down some debt, deliveraged a bit, and interest rates went to near zero again. Household debt payments are actually lower now relative to income than they've been in decades. - That's true, on average. - But did the policies put in place after the crash fix the underlying problem? Or did they maybe even reinforce some of those inequality trends? - Well, that's a really important and kind of controversial point. - Yeah. The policies were arguably necessary to stop a complete meltdown, a second great depression. - Right, things like quantitative easing, bailouts. - Exactly. But those policies, while maybe necessary, did tend to benefit asset owners more than wage earners. QE boosted stock prices in real estate helps people who own those things. - Which tend to be wealthier people. - Generally, yes. The fed stepping in to backstop corporate debt. Again, helps bondholders corporations. Tax cuts over the last couple of decades have also tended to favor higher earners. - So it's not that the policies were necessarily wrong, but they maybe didn't address or even worsen that underlying divergence. - You could argue that. There are symptoms of a system where maybe the economy just works better for some people than others. Where success isn't as broadly distributed as it felt like it was in that post-war era. - And why do those old expectations persist? Why do people still cling to that idea of a broad middle class where everyone lives similar lives? - Because it felt good. I mean, really good for a lot of people, for a long time when it was largely true, that sense of shared prosperity, of common experience. It's a powerful, attractive ideal. It's really hard to let go of something that felt that good, even when the facts on the ground have changed. - And that gap that disconnect between the expectation and the reality, that fuels a lot of the frustration we see, doesn't it? - Absolutely. Think about the political movements we've seen bubble up. The P party on the right, occupy Wall Street on the left, Brexit, Donald Trump's election. - Different groups, different proposed solutions. - Totally different groups, often with opposing views, but you could argue they're all shouting in their own way because they feel like stuff isn't working for them. - Within that old framework? - Within the context of that post-war expectation that stuff should work out roughly the same for roughly everyone. When it doesn't, the feeling becomes this is broken. This isn't the world I was promised or the one I expect. - And that leads to-- - That feeling of, I don't live in the world I expected, it makes people angry. You make some think, okay, screw this, screw the status quo. I'm gonna support something totally different. Maybe something radical because this isn't working. - And technology pours gasoline on that fire. - Oh, massively. Social media, Facebook, Instagram constantly shows you curated versions of how other people live, often making the gap seen even larger. - Cable news can create echo chambers that reinforce crevances. Benedict Evans made the point that economic outcomes used to be more localized, less visible now. Everything's global, instant and right in your face. It just intensifies the comparisons and the discontent. - So looking forward, are we just stuck in this loop? Expectations from the past, clashing with the reality of today, is there a way out? - Well, I try not to be too pessimistic. Economics runs in cycles, things change. - And there are some positive signs now? - There are, unemployment is low. We've seen periods recently where wages for lower income workers have actually grown faster than for high income workers, which is a reversal of a long-term trend. College costs, which you factor in grants and aid, seem to be stabilizing somewhat. - And maybe we forget the progress in other areas. - I think so. If you really step back and think about the massive improvements since the 1950s in healthcare, technology, communication, travel, civil rights, opportunities for women and minorities, most people wouldn't actually want to trade today for the 1950s, even with a shared prosperity aspect. - But that core problem remains. Expectations change slowly. - Much slower than reality. That's the central theme, really. Even if we started a new boom tomorrow, a new era of broadly shared growth, that feeling that deeply ingrained belief that the odds are stacked against everyone but those at the top, that could linger for a generation or more. - So that feeling of this isn't working, the demand for something radically new right now that might be with us for a while? - It very well could be. It just shows how the decisions made, the culture created way back after World War II, are still echoing today. History isn't just dusty dates. It's, as the saying goes, just one damn thing after another, all connected. So pulling it all together, this whole journey from that postwar moment of fear and uncertainty to deliberately building a consumer society on cheap credit, finding that amazing shared prosperity and then watching that fray into inequality and unsustainable debt, it's really baked into how Americans think and feel about money today. Those expectations set back then, they're powerful. They shape our reactions to the economy now, even when the underlying reality is very different. - It leaves you wondering then, what does it really mean when our collective hopes or expectations are out of sync with the economic facts on the ground? How do you, listening right now, navigate that gap yourself? The gap between the life you aspire to, maybe based on those older ideals and the actual economic situation today, what could help align those things better? And maybe more importantly, what happens personally and for society if they don't align, something to think about.