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The Miraculous Cell Phone

Phones

As the economy emerges from the Great Recession, it is hard to deny that times are still tough for many Americans. Some advocates have attributed difficulties to rising basic costs such as health care and, puzzlingly, cell phones, that limit discretionary spending power. The Wall Street Journal, in an article about rising costs for the middle class, reports that spending on cell phones by the average American middle class family has increased by 49 percent from 2007 to 2013 according to data from the Bureau of Labor Statistics (BLS).  Some have interpreted this as showing that price inflation for these services is growing faster than the overall consumer price index (CPI).

But what it in fact shows is that while Americans are spending more on these telecom services they are getting more.  Americans are spending more on cell phones in part because more Americans have cell phones- the number of cell phones in the United States grew by 17 percent from 2007 to 2013. At the same time, spending on landline telephones declined by 31 percent over the same period. So spending on all phones, the more accurate measure of consumer expenditures, increased by only 15 percent during this period, not the 49 percent the Journal would have us believe.

Moreover, this figure is not adjusted for inflation.  The BLS Chained Consumer Price Index estimates that the price of communications shrank by 8 percent.   (This BLS category incorporates phones, Internet, and television subscriptions which are combined by the BLS to better account for the common practice of bundling these services together).

Chained CPI figures reflect the incredible technological advancements that make today’s cell phones unrecognizable to consumers just a decade ago, as well as a reflection of the goods that cell phones can serve as a substitute for. Today’s phone not only replaces the traditional phone. Walking out the door, the phone in your pocket can replace maps, portable music player, camera, flashlight, newspaper, games, pencil and paper, and address book. This is why, for example, digital camera production fell by over 25 percent over this period.  In fact, smart phones are so powerful that for about 10 percent of American adults, smartphone data plans are their only access to the Internet. So while Americans may be spending slightly more on cell phones, they are spending less on many other things that the cell phone now can do for them.  Indeed, though we still use the world “phone,” a more apt descriptor might be “pocket computer,” “electronic multi-tool” or even “command center.”

Despite this incredible technological growth, analysis which decries modest rises consumer spending on cell phones ignores the vast changes in what we are consuming. If a worker in 1990 and a worker in 2014 are both able to afford to purchase a telephone with a set percentage of their wages, today’s worker is clearly getting more for his money. From 1990 to 2013, total consumer spending on phones rose 115 percent, not accounting for inflation and rising income levels.  Over the same period, spending on all consumer goods grew 65 percent. However, today’s phones are not just smart; they are faster than the world’s most powerful supercomputer in 1990, making such a comparison meaningless.

It is telling that the Wall Street Journal now refers to the price of a cell phone as “basic costs” in the same category as health care and clothing.  For many people, the cell phone is now a necessity.  Even in India, a nation with a per-capita income level around 1/10th of U.S. levels, 85 percent of unmarried Indians aged 23 to 35 said “life was impossible” without their cell phones.  So the claim that consumers are put upon by the oppressive costs of cell phones is not only false, it is ridiculously so. For consumers, cell phones and cell phone service are one of the best deals ever.

 

Photo credit to Adrian Clark

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About the author

Adams Nager is an economic policy analyst at ITIF. He researches and writes on innovation economics, manufacturing policy, and the importance of STEM education and high-skilled immigration. Nager holds an M.A. in political economy and public policy and a B.A. in economics, both from Washington University in St. Louis.
  • 4Gbill

    The amazing thing about the cell phone is that it was not forecasted to be a significant market by AT&T who invented the cell phone and hired McKinsey to do a forecast in 1985. The forecast said only about 1 million cell phones would be in operation by 2000. That forecast was off by a factor of about 100 and the failure reveals what’s wrong with the current, commonly practiced third generation (3G) of innovation management to emerged as best practice since 1900. Bob Gordon has identified that innovation has stalled and says we need the equivalent of another industrial revolution filled with many radical innovations to fix the poor situation with high increasing costs and low productivity improvements that can be seen in many industries including healthcare, education and construction. The root cause of the problem is that businesses, governments and universities haven’t upgraded their management of innovation to a new fourth generation (4G) which is now required to competitively create and manage radical innovation. With 12 principles and practices, 4G upgrades almost all business disciplines such as financial accounting to measure intangible capital and measure the capability to create and manage innovation. The Department of Energy has adopted a key 4G principle which is innovation hubs to facilitate the large scale of collaboration needed for radical innovation. The 4G innovation process was practiced by Motorola in the 1970’s and early 1980’s and the process correctly identified the large market for the cell phone. The 4G process is nonlinear, iterative and replaces the linear stage gate process practiced in 3G that is acceptable only for incremental innovation within existing markets. 4G has new executive jobs such as a Chief Innovation Officer who is responsible for radical innovation that creates new markets and transforms the business to be sustainable with growth while the COO remains responsible for incremental innovation within existing markets. The need for 4G as a capability to competitively innovate is similar to once was the need for lean manufacturing to be competitive.