Believe it or not, we live in the best of times. It’s been a crazy few decades, with a pandemic, rising inequality, slowing growth and productivity, and major changes in the economy. But generally, most people experienced huge gains in living standards. We shudder to think what life was like in the 1980s or 90s, when air-conditioning was still a luxury, as were dishwashers; people had to defrost their freezers, we were tied to landlines, and homes had only one or two televisions — and they weren’t even flatscreens. The smartphone may not be the game changer that indoor plumbing was, but just stop and count all the ways it’s smoothed out the kinks in your daily struggle.
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In the same way the first waves of industrialization made consumer goods (clothing, housewares) cheaper and more accessible, the tech boom made services that were once luxuries (car services, delivery, handymen, digital butlers) widely available and contributed to rising prosperity. It’s indisputable that our standards of living are remarkably higher than they used to be.
Here’s the bad news: We’ve basically been living a free lunch and now it’s about to end. And that means a drop in our living standards, at least for the next few years.
The Atlantic’s Derek Thompson recently wrote that we have been under-paying for many services we now take for granted. That $10 Uber ride never really made sense when you thought about the cost of fuel and labor. The same is true for food delivery and other app-services that became a way of life for many urban dwellers. Many of the tech firms that supplied these services lost money to keep prices down, gain customers and dominate their markets.
In the tech world, network effects are valuable, but it’s not clear what the long-term business model was for many app-based services. Perhaps they planned to increase prices once they drove off competition. Or maybe they believed that with enough volume, even negative profits would turn positive.
Such concerns were not top of mind in an era of very low interest rates. Investors — often venture capital firms — flush with cheap capital and public-sector pension money (which we are all on the hook for), were hungry for risky long-shots. If a few of those long-shots paid off big, everyone would still make money. So they were willing to tolerate losses if their investments could demonstrate a growing market share. Except then the pandemic hit and labor wasn’t so cheap anymore. Then interest rates started to increase and tolerance for losing money evaporated. So now what was once a $10 car ride is $50.
Low rates didn’t just allow investors to sustain money-losing tech ventures. They also meant companies could bulk up on corporate debt, which subsidized even more cheap services. Before the pandemic, Netflix earned a junk bond rating because it took on so much debt to offer endless content. Now higher rates have increased the cost in borrowing and subscriptions have declined, so we’ll all have to watch ads (effectively a tax on our time) or pay more every month.
Read the full article here by Allison Schrager, Advisor Perspectives.
