In this post I want to address an idea that has been bouncing around my head, that is almost certainly already addressed in the economic literature, and that I would rather think through myself than actually study.

The basic idea is that average incomes have largely risen – with notable dips along the way – over the last century, and yet people subjectively don’t feel that much richer. I believe that this is in large part due to a small number of inelastic Sponge Goods including housing, education, health care and child care, which have seen their prices skyrocket over the same period and have effectively sponged up all of this excess income.

Someone in the 1970s who saw how average incomes would grow might naively think that we all feel like millionaires today, when in reality there are these small number of highly important goods that are scarce enough and an important enough share of wallet that the net effect has been little change in disposable income.

This model may be wrong, but I find it a useful way to remember that even if AI or other innovations make us substantially richer, a small number of Sponge Goods can completely mitigate the actual benefits.