The Problem of Scarcity

 

September 13, 2009

 

We have too much of everything. And not enough.

Here, in early 21st century America, we are in a funny situation. After hundreds of years of industrial evolution, and many astonishing advances in production technique, we have too much of just about everything. Look at your closet. Do you have a shortage of clothes? Are our houses too small? Do you have a storage unit to contain the overflow of material possessions that don't fit in your garage, basement and attic? Are we hungry or cold? In absolute terms, food today is the cheapest in human history -- if sometimes the most degraded in human history. Clean water is so plentiful that we use it mostly for toilet-flushing.

And yet, at the same time, we feel the press of scarcity incessantly. Let's take a look at a household making $250,000 a year. This is the top 1.8% of households in the United States, which is still one of the wealthiest countries on earth. It is five times (!!!) the median household income of about $50,000.

You would think that 5x the median income in the wealthiest country that the world has ever seen (more or less) would be plenty. Or, at least, enough.

First of all, this is household income. Often, this comes from two earners, making an average of $125,000 each. Which is nice, but not exactly big money. Also, this includes people who declare big one-time sources of income. People who sell a company, or cash in a big block of stock, or inherit money. Not all of the people who make $250,000 in a year make that amount every year. Sometimes they are one-time members of the club.

The funny thing is, $250,000 a year is not really that much money. It is upper middle class, and not even upper-upper middle class.

For one thing, most people making upper-level incomes live in places with upper-level expenses. If you use the 3x-income rule of thumb for buying a house, a $250,000 income buys you a $750,000 house. How much house does that buy you in San Francisco or New York City? It's a nice house ... but not a spectacular one. Not even a noteworthy one. Just a nice one.

If you're making $250,000 and spend $750,000 on a house, you're no better off than someone making $50,000 who spends $150,000 on a house.

The 3x-income rule does not exactly mean you are living free and easy either. It represents the most you can spend on a house, and be reasonably certain of paying off the mortgage. After thirty years of debt slavery. At a 6% interest rate and 2% of amortization (not bad for a 30-year jumbo loan), that's $60,000 a year in mortgage payments alone. Plus $10,000 for property taxes, and another $5,000+ for maintenance, and maybe $3,000 for insurance. If you really wanted to be financially unencumbered, you might spend 1x income on a house. That's $250,000. Not bad -- in most places. Might be a 2-bedroom condo in New York or San Francisco (if they were properly priced, not overpriced as has been the case for the last ten years). So, you're making the top 1.8% of income and living in a two-bed condo.

Then -- the schools! Most government schools are crap. Some districts are pretty good. They tend to be the expensive ones. Not to mention that a lot of neighborhoods are just plain inappropriate for kids (and young women, and moms, and old people, which is to say anyone that is not a male age 20-32). So, even if you would be perfectly happy to live in a two-bed condo, or a not-so-fashionable part of town, you decide it is best to live in the best suburban neighborhood, rather than spend another $20,000 a year for private school ($40,000 for two kids). It is not so easy to avoid the big suburban house as it might seem. (And the accompanying mega-commute.)

OK, now we're out $75,000 a year for housing alone. That leaves $175,000. Still not too shabby. But the taxes! Ever seen the taxes in New York City or San Francisco? We could easily pay $70,000 in income and payroll taxes, both federal and state (and city). That leaves us with $105,000 for the rest of living.

Then, there's a pair of cars. No junkers either -- we need to keep up appearances. A basic "entry-level" BMW 328i sedan, at $34,000, has an estimated 5-year cost-to-own of $55,000, or $11,000 per year. (If you go with a two-year lease, it's more like $14,000 per year.) For a BMW 650, the total 5-year cost-to-own is $99,445, or $20,000 per year. So, that's $22,000 total, for the cheapie option. Down to $83,000.

Better save a little. $20,000 a year in savings is not exactly miserly. It's probably too low. At that rate, it would take you five years to save up the "six months of living expenses" that everyone recommends. Down to $63,000.

Kids? Better start saving more for college. Call it $15,000 a year.

Even with corporate healthcare, we're going to have a few health-related expenses, deductibles, copays, alternative medicine, etc. Let's say $3,000. Utilities and upkeep of course: $500 a month, including heat, is probably on the low side for most people. ($100 cellphone, $100 electric, $150 cable/phone/internet, $150 heat. Possibly more for water, garbage pickup, air conditioning, pool heating, etc. etc. and more etc.) That's $6,000 a year. More if you have a gardener.

And so it goes. We're down to $39,000, and we haven't even spent any money on groceries ($12,000+) yet. Or clothes ($6,000), or home furnishings, or vacations or restaurants, trips to the spa, golf/country club dues, or a shrink. Not to mention any big toys, like a vacation house, kitchen upgrade, a couple motorcycles or a boat. (Or a mistress or a coke habit.)

We can see that we aren't really experiencing abundance with this lifestyle. We are just getting by, in a comfortable but not particularly blingy fashion. If either of the two earners lose their job -- forget it. Or if you want to transition to a one-earner household? If you aren't careful with spending (most aren't), you could easily spend more than this rather conservative scenario.

Isn't that weird? How is it that Chinese or Malaysian households can have an average savings rate of 30%+, and our family is just getting by, in the top 1.8% of the wealthiest country in the history of the world?

Thus, the Problem of Scarcity. There is never enough. At some point, there is enough -- when you accumulate about $20m. Obviously, that can never be a solution for everyone, or even 1% of everyone (or 1% of 1% of everyone). Even $20m is not very much if you start to get silly about it. Observe, for example, the strange story of photographer Annie Liebowitz. She's been earning an estimated $2 million a year from Vanity Fair, plus additional income from advertising campaigns and the like. Call it $3 million. Plus, her collection of past photos is worth an estimated $40 million. Certainly that -- another 12x the income of our $250,000/year example -- must be enough? She apparently has $15 million in mortgage debt alone on her several residences!

Har!

Let me give you a little hint people: rich people don't have mortgages. They own their homes free and clear. If you have a mortgage -- even a $15 million mortgage -- you are not rich, you are just another blinged-out debt slave.

* * *

We can see that we don't solve the problem by not buying a zippy handbag. These consumer trifles don't really change the basic algebra. The problem is the biggies: housing (including utilities), medical, education, transportation.

If we look a little closer, we see that the issues here are not really a shortage of goods and services, or even "keeping up with the Joneses," but dysfunctional systems, especially dysfunctional cities. In many big U.S. cities, only about 20% of the public school systems are even barely adequate. Right off the bat, that means that 80% of the people are going to have crappy schools, and are thus going to feel Scarcity because they obviously don't have the means to buy their way into the top 20% (or they would have already done so.) Even many of those in the 20% of neighborhoods (always the most expensive) that have good schools are going to feel Scarcity because they can't really afford to live there comfortably, but are pushing their financial limits. Money is spent as a means to solve a problem which is not really monetary in the first place. You could give everyone twice as much money, but if 80% of the schools and neighborhoods still stink, they will feel the same scarcity.

Some of the nice suburbs of New York or San Francisco can be reasonably pleasant and comfortable, but I've always had the feeling that they were being buoyed up on a fountain of cash. If the river of expenditure faltered for even a bit, the facade would crack and we would be left with Suburban Hell in all its trashy monstrosity without the cushy accoutrements.

This is a sure sign of an inherently dysfunctional system. Most (80%) of the neighborhoods in the U.S. are just like the schools -- crap. Not just unfashionable, but genuinely unpleasant, in an absolute sense. This creates the desire to buy your way into the nicer bits, not because you have a bling addiction, but because you know crap when you see it. (Of course the nicer bits get bid way up in price.)

Why don't more people live in Queens? It's sitting right there next to Manhattan. Well, the reasons why not are obvious: Queens is a dump. The schools are mostly crap, it's a terrible place for kids, the transportation (buses, subway) is icky, and a dozen other things you could list. (Plus, there are tax issues.)

Abundance comes when you have plenty -- more than enough -- to live comfortably. When you are spending much less than your income. Or, heck, you can spend all your income, but spend it on fripperies that you could give up on a moment's notice, rather than necessities. Don't spend $75,000 a year on a house. Spend $15,000 a year on a house, and $60,000 on restaurants, heli-skiing, designer clothes, and big parties. We should solve this problem not only for the top 1.8% of society, but for 80% (at least). How could that work?

Housing is a biggie. It is possible to make a usable residence, with all the modern conveniences, for not much money. Tata, the Indian automaker that is putting into production the $2,000 Nano car, is also building a "Nano Apartment" These are in Mumbai, and they plan to sell them for $7,800-$13,400 each. They range from 218-373 square feet. Not real big -- but I lived quite happily in a 250 sf apartment, so I know where they're coming from. I would happily live in a place like that again today (one-third of all Tokyo apartments are one-room studios). I think minimalist living is sort of fascinating, while typical suburban living is more like an endless slog with too many chores and too much stuff. The Tumbleweed Homes guy makes houses of 65-140 square feet, so I'm talking about twice as much space as that. But, I think people (including my wife) wouldn't want to talk to me if I did that so I would probably go with a one- or two-bedroom place instead.

Click here for a photo tour of the 102 sf. WeeBee design by Tumbleweed Homes

The WeeBee costs about $46,000 in turn-key format, which is really rather high. $450 a square foot! I bet they could cut it to $25,000 with volume production.

Here's another teeny home on wheels -- made from a garbage truck!

German Garbage Truck house

People's reactions are funny when they look at the Tumbleweed Homes houses. You'd think they'd go: "No fucking way." But that doesn't happen. No, they look around, and say: "Hmmmm, looks nice. And no mortgage. Maybe I could do that." A hundred square feet! And it's a damn trailer. Show them another trailer -- a real minimum-wage trailer-park trailer -- which might be twice as big, and costs half as much (or as little as $3000 used for a decent one): there is no interest at all. (Me either.) So you see, it's the doesn't-suck-ness that's important.

1986 Fleetwood Mallard: $4,990. (This is 30' long, and probably about 250sf.)

The next thing you think is: OK, I've got a 100sf house on wheels. Where am I going to put it? In a trailer park? On the street? In a friend's backyard? On ten acres deep in the country? Not a lot of good solutions there.

The problem isn't really just "housing" but our living arrangements.

In the U.S., typical construction costs range from about $100/sf for a cookie-cutter house to $150-$200/sf for a custom job. So, a perfectly respectable 500sf one-bedroom apartment could be 500*$100 or $50,000, and an 800sf two-bedroomer could be 800*$100 or $80,000. (I bet recent condo construction prices, ex-land, have been lower than this.) These sizes are somewhat smaller than typical U.S. one- and two-bedroom apartments, but they are common elsewhere in the world and entirely functional. For example, this two-story one-bedroom apartment is in the ritzy Azabu-Juban neighborhood of Tokyo. This is a typical upper-end, professional one-bedroom apartment. It is 52.08 square meters, or about 567 square feet.

Azabu-Juban apartment for sale

Look at it! Take the photo tour. It's quite lovely. Doesn't suck, right? Let's add a little for land, which brings us to $100,000 for our two-bedroom apartment. I bet that, with some creativity, you could put together a perfectly nice $40,000 apartment, which is still 3x the price of the deluxe Nano Apartment. But, let's go with the $100,000 number.

(Rent on the Azabu-Juban place would probably be around 250,000 yen or $2,000 a month, implying a "normalized" purchase price of about $200,000 -- assuming $666 a month of expenses and an 8% cap rate. That is for one of the tippy-top best locations in Tokyo. Yes, I know it is listed for 60 million, which is a reflection of 3.0% mortgage rates and expenses that are apparently -- listed at 26,000 yen per month -- much lower than typical U.S. levels. Plus some hope and froth. You could easily rent a similar size place, in a very nice but not so fashionable neighborhood, for 120,000-180,000 yen per month, with corresponding effects on purchase values. In less expensive places, such as Niigata City for example, you might find a place like this for about 80,000 yen a month, which would translate into a "normalized" purchase price of about 8 million yen sor $64,000.)

OK, $100,000 is 3x $33,000, which is a pretty low household income (could be two earners). It's an easy hurdle to clear for our median household of $50,000, as it is only 2x earnings. Our $250,000/year household could pay for it out of one year's earnings. Chump change. Then, they wouldn't be debt slaves. That might be nice. Heck, even if you are making $15,000 a year, you could swing a $40,000 200sf micro-studio, which would still be twice as big as one of those Tumbleweed Homes. (Henry David Thoreau's cabin at Walden Pond was 150sf.)

If you were making $250,000, or $50,000, or even $30,000, but you could live comfortably in a $50,000-$100,000 house/apartment, then you would start to feel wealth and abundance -- which is what you should feel as a member of the wealthiest society the world has ever seen.

I'm not saying that you can't live in a $10 million palace. Go right ahead. Knock yourself out. What fun! But, you should have the option of living -- comfortably -- in a modest place too.

By "comfortably," I don't mean that you have a nice sofa. (The sofa in that Fleetwood Mallard actually looks OK.) I mean that your needs and aspirations are fulfilled. Practically, this has almost nothing to do with square footage. This means a nice neighborhood with good schools. Location, location, location, as they say. The kind of place you could grow up, mature, raise kids and grow old, and feel lucky that you spent your life in such a wonderful spot -- but without the financial anxiety that accompanies living in most "nice neighborhoods" today. These upscale "nice neighborhoods" today are too much like Survivor. Everyone is afraid of being kicked off the island. (For good reason too.)

So, maybe it's not really about housing. It's about nice neighborhoods. A nice place for your 100sf house, or your 10,000sf townhouse. They could be side-by-side. Why not.

I know all this talk about cheap housing is causing you anxiety. Because, we all know that it is not particularly difficult to find a cheap place to live. It is virtually impossible to find a modest place to live that doesn't suck. It is so unusual that most Americans assume that it is basically impossible, like travelling faster than light. Whenever I mention a $50,000, 500sf house or apartment, people immediately think: "Don't tell me to live in some ghetto or trailer park!"

This is exactly what you would expect from people who have spent their whole adult lives beating their brains out trying to get into the 20%-10%-5%-1% (depending on your standards and aspirations) of places that don't suck, and out of the 80%-90%-95%-99% of places that do. And who are often in debt up to and over their eyeballs as a result.

I feel your anxiety. Relax.

We are going to talk about comfortable, even fabulous lifestyles that are also attainable by the majority of Americans. Before making it a reality, we have to begin by imagining that it is possible, and what form it could take.

It's like heavier-than-air flight. It was impossible until people decided that it wasn't.