Thoughtful commentators on the economy are noticing big changes afoot: less dining out; more 'value' shopping; and so forth. So far, they are being rather conservative in their estimations of how far the citizenry is going to be cutting their spending on consumer items. For example, people speak of dining out in the USA being reduced from 50% of the food budget to 40%, returning to the level of 2000.
We believe this is ridiculously over-optimistic. In 1955, dining out was 25% of the food budget. Remember, 1955 was a time of prosperity. Since the world is sinking into a Depression that will last for ten years or more, it would be more realistic to see the luxury of dining out returning to a very low proportion of food spending - say 10%.
In a nutshell, we expect to see this collapse in restaurant and other luxury spending because making it through the next ten years is going to be increasingly a matter of economic survival. More and more of the population will be feeding themselves primarily by way of government food assistance (which does not allow for prepared meals) - as long as such assistance lasts, and most of the rest will sensibly economise by eliminating dining out.
For households not to commence draconian economisations at this point is an invitation to poverty and potential destitution. Such economisations will become more and more evident on a survivor basis. Functioning households will be economical, non-economical households will be dissolved or become economical.
In spite of increasing awareness of deterioration, there is an almost ubiquitous fantasy that recovery is nigh, and when it arrives the population will return to its consumeristic ways. Such a recovery is simply never going to materialise. When, and more importantly if, something akin to economic progress resumes at some point in the increasingly distant future, the economic landscape of the world will be utterly and permanently changed.
We intend to survive this transition and, more than that, experience as much as we can of our idea of the good life. We hope, Reader, the same for you. The severity of the Depression and its consequences must not be underestimated if you wish to be a survivor.
Consider the lessons of the survivors of the Great Depression (1929-1939): pay for everything with cash; make do, mend, use it up, do without; throw away nothing that could be put to use. Our progenitors were altered (often traumatically considering most survivors became compulsive hoarders at least to some extent) by the experience. And remember these are the survivors! Think how much worse it was for the non-survivors!
Showing posts with label economise. Show all posts
Showing posts with label economise. Show all posts
Friday, April 10, 2009
Sunday, January 4, 2009
The Problem of Economising and Sunk Costs
Today's post may seem a bit technical, but it has everything to do with day-to-day decisions for ordinary people.
This subject came up for us when we were trying to think about ways to save on our phone bill. We pay a fixed charge for our phone service. It is the cheapest plan we can get. We never use all the minutes we are allotted, and if we talk evenings and weekends we can jabber on endlessly if we choose to.
Why is the economic system set up to provide an incentive to consume as much as possible? It is because the cost of much of what we consume is largely in the physical plant and not in the material processed or delivered. For telephone, most of the cost is in sending up all those satellites,laying all that cable, setting up the switching networks, and building those towers. Once the infrastructure is built, servicing and maintaining it all is not as costly. Utility companies recover their fixed, or sunk costs by charging customer fees to be hooked into the network, not so much for their usage of photons, water molecules or whatever. Another way this plays out is in property taxes for municipal services. People do not pay for fire, police, or streets on a per use basis.
A problem arises when one is trying to economise, and one hits the floor cost of a service. With telephone service, we can go to a pay-per-call plan. That option is not available for water, electricity, natural gas. If all you want is a little bit of light or heat, it may well be cheaper to burn kerosene for light and for heat, because it does not require an expensive, special distribution pipeline right to your door. What happens if a lot of people, on account of poverty, drop out of the utility system? That forces up the the connection fees to the remaining users and prompts more drop outs. An adverse positive feedback loop (vicious cycle) is engendered, threatening the very existence of the service.
We suspect such a dynamic will soon be at work in many areas. Highways in particular come to mind. The USA has 4 million miles (6.4 million kilometres) of roads and streets. Even at a conservative estimate of the average cost at $3,000,000 per mile, this assigns a value of $12 trillion to the country's public pavement - on par with the value of all publicly traded companies, or an entire year of GDP. As people begin to abandon their automobiles en masse, who will pay for the hefty annual maintenance of this vast piece of capital? Will mileage rates replace gasoline taxes as the State of Oregon is contemplating? Can property taxes on depreciating property cover street costs? Will general taxes be dubiously and destructively allocated to an obsolescing technology? (Answer: yes - see car maker bailout and Obama infrastructure plan).
Streets are arguably necessary, and will continue to be funded in some form or another as long as humans are civilised. Roads on the other hand, are almost certain to gradually fade away as people relearn to transport themselves and their stuff mostly on navigable waterways. Water transportation, though slow, is and always has been the cheapest, so we may as well plan for it.
This subject came up for us when we were trying to think about ways to save on our phone bill. We pay a fixed charge for our phone service. It is the cheapest plan we can get. We never use all the minutes we are allotted, and if we talk evenings and weekends we can jabber on endlessly if we choose to.
Why is the economic system set up to provide an incentive to consume as much as possible? It is because the cost of much of what we consume is largely in the physical plant and not in the material processed or delivered. For telephone, most of the cost is in sending up all those satellites,laying all that cable, setting up the switching networks, and building those towers. Once the infrastructure is built, servicing and maintaining it all is not as costly. Utility companies recover their fixed, or sunk costs by charging customer fees to be hooked into the network, not so much for their usage of photons, water molecules or whatever. Another way this plays out is in property taxes for municipal services. People do not pay for fire, police, or streets on a per use basis.
A problem arises when one is trying to economise, and one hits the floor cost of a service. With telephone service, we can go to a pay-per-call plan. That option is not available for water, electricity, natural gas. If all you want is a little bit of light or heat, it may well be cheaper to burn kerosene for light and for heat, because it does not require an expensive, special distribution pipeline right to your door. What happens if a lot of people, on account of poverty, drop out of the utility system? That forces up the the connection fees to the remaining users and prompts more drop outs. An adverse positive feedback loop (vicious cycle) is engendered, threatening the very existence of the service.
We suspect such a dynamic will soon be at work in many areas. Highways in particular come to mind. The USA has 4 million miles (6.4 million kilometres) of roads and streets. Even at a conservative estimate of the average cost at $3,000,000 per mile, this assigns a value of $12 trillion to the country's public pavement - on par with the value of all publicly traded companies, or an entire year of GDP. As people begin to abandon their automobiles en masse, who will pay for the hefty annual maintenance of this vast piece of capital? Will mileage rates replace gasoline taxes as the State of Oregon is contemplating? Can property taxes on depreciating property cover street costs? Will general taxes be dubiously and destructively allocated to an obsolescing technology? (Answer: yes - see car maker bailout and Obama infrastructure plan).
Streets are arguably necessary, and will continue to be funded in some form or another as long as humans are civilised. Roads on the other hand, are almost certain to gradually fade away as people relearn to transport themselves and their stuff mostly on navigable waterways. Water transportation, though slow, is and always has been the cheapest, so we may as well plan for it.
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