Inflation ate your free lunch, but you’re still better off

Inflation ate your free lunch, but you’re still better off

Inflation ate your free lunch, but you’re still better off

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Believe it or not, we live in the best of times. It’s been crazy decades, with a pandemic, rising inequality, slowing growth and productivity, and major changes in the economy. But in general, most people experienced huge gains in standard of living. We shudder to think of what life was like in the 1980s or 1990s, when air conditioning was a luxury, as were dishwashers; people had to defrost their freezers, we were tethered to landlines, and houses only had one or two televisions — and they weren’t even flat screens. The smartphone may not be the game changer that the indoor plumbing was, but just stop and count all the ways it’s ironed out the kinks in your daily struggle.

Similarly, the first waves of industrialization made consumer goods (clothing, household items) cheaper and more accessible, so the tech boom made services that were once luxuries (car services, delivery drivers, handymen, digital butlers) widely available and contributed to the welfare. There is no question that our standard of living is remarkably higher than it used to be.

Here’s the bad news: We actually had a free lunch and now it’s coming to an end. And that means a drop in our standard of living, at least for the next few years.

Derek Thompson of The Atlantic recently wrote that we have underpaid for many services we now take for granted. That $10 Uber ride never really made sense when you think about the cost of fuel and labor. The same goes for food delivery and other app services that became a way of life for many city dwellers. Many of the technology companies that provided these services lost money to keep prices down, win 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 raise prices once they ousted the competition. Or maybe they believed that with enough volume, even negative gains would turn positive.

In an era of very low interest rates, such concerns were not the top priority. Investors – often venture capital firms – inundated with cheap capital and public sector retirement money (which we are all looking for) were hungry for risky longshots. If a few of those long shots paid out big, everyone would still be making money. So they were willing to tolerate losses if their investments could show a growing market share. But then the pandemic hit and labor was no longer so cheap. Then interest rates started to rise and the tolerance for losing money evaporated. So what was once a $10 car ride is now $50.

Low interest rates allowed investors to sustain not only money-losing tech companies. They also meant that companies could build up corporate debt, subsidizing even more low-cost 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 borrowing costs and subscriptions have declined, so we’ll all have to watch ads (basically a tax on our time) or pay more each month.

Inflation is the other shoe to drop. Alexis Leondis wrote an anger-inducing column about ‘drop prices’ last week. This is when we are charged extra for things that used to be included in the price, from choosing an airplane seat to paying for credit card transactions. With inflation rising, companies are trying new, more opaque ways to pass on their costs to customers. But even if inflation falls again, many of these fees are likely to remain. And if you’re suddenly paying “fuel surcharges” and “kitchen appraisal fees,” you probably won’t indulge yourself as much.

This means that, in addition to the inflation that we are already experiencing, we are going to pay for things that were previously subsidized by low rates and low price growth. Chances are, prices for these services will never be this cheap again. Rates and prices are going up and may remain higher for the foreseeable future. So unless you have unlimited money, things like car service are once again becoming a luxury. This is an unequivocal drop in living standards: instead of getting more, we get less, and that will be painful.

Create courage. It may not last forever. I don’t know what will happen to the interest and whether future consumption can be subsidized. But I’m optimistic that new, even better technology and increasing prosperity in our future are in the long run.

It may feel like small consolation now, but all this new technology has made us better off. Even without the low interest subsidy, we still have more choice and cheaper services than we did 20 or 30 years ago. Maybe people hate loss so much that it’s worse to lose a subsidized Uber than to never have Ubered. But I do not think so.

More from other writers at Bloomberg Opinion:

Why are rental costs going up? Ask the Fed: Lisa Abramowicz

Politics has distorted Americans’ view of the economy: Tyler Cowen

Don’t be fooled by contradictory inflation figures: Jonathan Levin

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist on economics. She is a senior fellow at the Manhattan Institute and the author of “An Economist Walks Into a Borhel: And Other Unexpected Places to Understand Risk.”

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