Michael Eriksson's Blog

A Swede in Germany

Thoughts around social class: Part II (prices etc.)

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As I have often remarked, the best way to create a society with a higher degree of wealth for those* with relatively little wealth and income, is not to redistribute the existing wealth (often at the risk of reducing it)—but to increase the overall wealth (even should it result in larger differences in distribution).

*I am troubled to find a good phrasing, with “poor” often being highly misleading, “disadvantaged” simultaneously a euphemism and (potentially) interpretable as a statement about opportunity (where the intended meaning relates to outcome), “lower class” too fixed in perspective, “less well off” either a euphemism or covering too large a group (depending on interpretation), …

The most obvious sub-topic is economic growth (e.g. in the rough GNP sense); however, for my current purposes, the area of prices and purchasing power is more relevant.* Trivially: If earnings rise faster than inflation** then every major group will (in real terms) earn more.*** This is, in turn, closely connected to factors that, directly or indirectly, relate to economic growth, including government policies, introduction of new or improvements to old technologies, energy prices, wastefulness or efficiency of business planning, …

*However, I have a text planned on some other aspects relating to growth.

**But note that inflation also has an effect on e.g. bank balances, which implies that not everyone will automatically grow wealthier in a stricter sense. These effects, however, will naturally hit people harder the more money they have—and might even be beneficial to those in debt.

***With a number of caveats and reservations when we look at the gritty details, e.g. that the distribution of increases is sufficiently reasonable, that there are no upsetting changes in (un-)employment patterns, and similar. Discussing such complications would lead to a far longer text.

A few observations relating to this sub-topic:

  1. The current “economic power” of e.g. a well-todo (but not outright rich) German is quite great in some areas, e.g. relating to food; however, it is quite poor in others, notably where the government or major businesses tend to be involved. For instance, laying a single meter of Autobahn costs roughly six thousand Euro—under ideal circumstance. In extreme cases, it can be more than twenty times as much. (Cf. [1], in German.) A clear majority of all Germans could not afford to build a single meter of Autobahn out of their monthly income—even taxes and living expenses aside… Looking at “discretionary income”, most would need to work for several months for this single meter—and real low-earners might need years.

    Through such examples, we can see a clear difference between living in a wealthy/well-fare/whatnot state and actually being wealthy. Indeed, as will be argued in a later installment, the vast majority of people are still (and might permanently remain) second- or third-class citizens in a bigger picture. (While, I stress, having far less to complain about than their grand-parents.) This includes very many who typically consider themselves successes in life, e.g. middle managers, most upper managers, professionals in good employment or running small businesses, …

    The Autobahn example also raises some questions on the effective use of tax-payer’s money: Chances are that these costs could be a lot lower with a greater efficiency—but when the politicians pay with someone else’s money, there is little need for efficiency.

  2. A particularly troublesome issue is rent, prices of apartments/houses/land, and building costs: Looking at the vast improvements in most other areas (in terms of better products and lower prices) we might expect even relatively poor earners to affordably live in their own houses or large apartments. The reality, excepting some unattractive areas, is very different. In booming areas, prices can even be preventative for many. Even in non-booming areas, the monthly rent or mortgage payment is often the single largest expense. To further increase the economic well-being of the people, reducing these prices should be a priority.

    To some part, these prices are caused by high localized population growth that is hard to work around in a timely manner—and lack of land can be a long-term issue for the duration. (Someone happy with an apartment can be accommodated e.g. by building higher; someone looking for a large garden either has to be loaded or live somewhere else.) However, there are other issues, including too long delays in building new apartments, building* costs, taxes**, luxury renovations***, “unnecessary”**** and temporary***** rentals, and undue realtor fees (see also several older texts, e.g. [2]).

    *For one thing, these are generally quite high in Germany, for reasons that include great demand, personnel costs (taxes and the employment construct; cf. a later installment), VAT, and a mentality with a disconnect between the value delivered and the price. For another, building methods, materials, “pre-fabrication”, …, have not advanced at the rate that they should have—possibly, because the building industry has little incentive for progress.

    **If a landlord makes a profit, he must pay taxes. Even if he does not make a profit, VAT will often be an issue. (Generally, note that taxes do not just hit an employee when he earns his money—they also hit him when he spends it, although usually in less obvious manners than income tax etc.)

    ***German law allows landlords to make many renovations, with a corresponding rent increase, even against the will of the tenant and in alteration of the terms of the contract. This is often used to artificially increase the rents considerably, and often with the side-effect that old tenants are forced to move out to be replaced by better earners.

    ****A common investment strategy in Germany is to buy a single apartment for the purpose of letting it for rent. This does increase the number of available rentals, but it also decreases the number of apartments available to those purchasing for own living, which (a) drives the prices up unnecessarily, (b) forces some people to rent who otherwise would buy.

    *****In times of project work, temporary assignments, and whatnot, increasing numbers work in cities for so short times that it does not pay to rent or buy a regular apartment, but still long enough that living in a hotel is unnecessarily expensive. This has led to a market of furnished apartments that are rented for weeks or months at a considerably higher than ordinary rent—and each of these apartments is removed from the regular market, increasing the deficit.

  3. A drop in prices is increasingly countered by product alternatives, product improvements, and product “improvements”, that partially or wholly move inexpensive products of the market in favor of more expensive ones. Consider e.g. the boom around various coffee machines, like Nespresso, Dolce Gusto, Senseo, which allows the sale of coffee grounds with an immense increase in markup.* Another good example is the continual replacement of computer models with more powerful and pricey versions. This is to some degree good, however, the simple truth is that, for most people, a modern computer already is more powerful than it needs to be, and that the average customer would be better off if technological advancements were directed at lowering costs. A particularly perfidious** example is toilet paper, which becomes more and more expensive the more plies it has, even at the same overall quantity***—and where even two-ply paper has been artificially removed from the B2C market.

    *This is an example where the customer still has the option to use the older and cheaper versions—and often are better off doing so. For instance, I have repeatedly had a Nespresso in temporary (furnished) apartments, but actually grew tired of the taste and tended to prefer drip brews. In my own apartment, I have a Dolce Gusto, which I used on a daily basis for a while, enjoying the greater variety, but I ultimately returned to drinking drip brews almost exclusively—I have not used the Dolce Gusto in months, despite having a dozen capsules still lying around. A Senseo that I owned some ten or fifteen years ago produced outright poor coffee, having a shorter preparation time as the sole benefit compared to a drip brew.

    **In the other discussed cases, I pass no moral judgment: That businesses try to gear customers towards more profitable products is only natural, while the customer does gets something in return and often still has a choice. The result might or not might not be unfortunate for the customer, but at least there is only rarely an ethical wrong-doing. With examples like toilet paper, the customer is left with no improvement and no choice—and is forced to pay the additional and unnecessary cost.

    ***One segment of four-ply is more expensive than two segments of two-ply, etc., even though the overall weight and volume is virtually the same, and even though the customer could just fold the two two-ply segments over another for what amounts to four-ply.

    Without such artificial market alterations, life could be a whole lot cheaper.

  4. A partially overlapping area is convenience products that reduce the work-load for the customer at an increase in monetary costs. This is most notable when it comes to food, where e.g. very few people bake their own breads and whatnots today, because the convenience of store-bought alternatives almost always outweighs the additional* costs—and despite own baking once being almost a given.** Indeed, most bread loaves appear to be sold even pre-sliced today—unlike just a few decades ago.*** Coffee was regularly ground by hand in earlier days; today, it is mostly**** bought pre-ground. “TV dinners” can reduce effort considerably, but are a lot more expensive than own cooking. Etc.

    *In this specific area, we might have reached a point where even the monetary cost of own baking exceeds the price of ready-made products; however, if so, this is not generally true and it was not originally true in this area either.

    **Indeed, further back, even more elementary steps (e.g. grinding flour) might have taken place at home; while subsistence farmers might even have provided most of the ingredients.

    ***Here the additional cost in the process is likely to be very small; however, the customers are potentially hit from another angle: Pre-slicing reduces the expected “best before” date.

    ****And the exceptions are likely almost exclusively for use in coffee machines that automatically grind beans.

    As an aside, these convenience products do not only bring a money–effort trade-off, but often result in less choice and/or suboptimal products. Consider e.g. the German pre-sliced cheese vs. the block cheese for manual slicing that is common in Sweden—to me, the former slices are too thick, simultaneously reducing how long a given quantity of cheese lasts and making sandwiches less healthy. Or consider the often quite poor nutritional profiles of TV dinners compared to own cooking.

  5. Luxury and brand products is an area bordering on the perfidious: Often these come with a value added; often they do not; and only very rarely is the value added comparable to the price hike. For the rich, this is not much of an issue; however, even the “middle class” is often well-advised to stay away from brand products without a plausible real* value added. Unfortunately, a liking for brand, or even luxury, products is quite common even among those who earn little—and here the effects can be outright dire, e.g. when a low-earner spends most off a small yearly surplus on shoes** instead of putting it in the bank for a rainy day.

    *As opposed to e.g. one that is explicitly or implicitly claimed in advertising, or one that only applies to other groups than the actual buyer: If, hypothetically, Nike brings a value-added to an Olympic runner, it is not a given that a junior-high student taking physical education also benefits.

    **To take an extreme fictional example, the infamous Carrie Bradshaw once discovered that she (a) could not afford her apartment, (b) had spent forty-or-so thousand USD on shoes over the years. Generally, she might be a good example in that she likely was not that low-earning, instead creating her recurring economic problems through wasteful living.

    In particular, it is a very great fallacy to assume that “more expensive” also implies “better”.

  6. Attempts to gain through large scale salary/wage increases, as attempted by unions, will not be overly successful without a simultaneous and independent trend towards lower prices (relative earnings). Not only will people with more money have a tendency to spend more,* which drives prices upwards, but the additional cost of work will also have an effect on product prices. Notably, there are often chain effects, e.g. that a wage hike in the mining industry increases metal prices, which increases costs in e.g. the machine industry, both metal prices and machine prices affect the tin-can industry, etc. If we, hypothetically, were to increase wages and salaries with a blanket ten percent, the individual businesses would not just see a ten-percent increase of cost of work—they would also see an increase of almost all other costs. While these other increases might fall well short of the full ten percent, they can still be sizable—and they will lead to a greater price increase on a business’ products than would a similar cost-of-work increase limited to only that business. (Also note e.g. that a three percent wage increase at two percent inflation is slightly better than a ten percent increase at nine percent inflation.)

    *Or e.g. work less to keep income roughly constant with an increase in spare time. Similarly, an employer who must pay his workers more might opt to employ fewer of them, e.g. through use of more automation. Such aspects will be largely left out, for the sake of simplicity.

    To some part, such increases can even amount to a competition between different unions and their members, in that any increase drives prices upwards, and that those with smaller increases will see a larger part killed by the resulting increase in prices. At least in theory, there could even be a net decrease in purchasing power for one union/member connected to the net increase seen by another.

  7. For similar reasons, naive sometime suggestions from the radical Left that everyone should earn the same, that the fortunes of Billy Gates et al. should be confiscated and divided among the people, and similar, will work poorly (even questions like ethics aside): Give people more money and they will (a) buy more, which drives prices up, and/or (b) work less, which forces businesses to page higher wages/salaries, which drives prices up. After a period of fluctuation, the lower earning/less wealthy would be back at roughly* the same purchasing power as before, and little would be gained. At the same time, the incentives to start businesses, come up with inventions, earn money, whatnot would be reduced, which would harm economic growth…

    *It would probably be a bit higher, but by nowhere near as much as expected in a naive calculation. Indeed, in some scenarios, the prices of lower-priced goods are likely to see unusually large increases, which would be particularly harmful. Consider e.g. a simplistic world of poor peasants and rich noblemen, of which the former live on bread and the latter on cake. Turn the noblemen into peasants and divide their money in equal shares among the population—and watch cake prices drop while bread prices increase. Either cake has to grow cheaper, or no-one will now be able to afford it. Bread, meanwhile, will be eaten by more people than before (unless the price decline for cake is very sharp) and the increased competition for this traditionally scarce resource will drive prices up.

As an aside, some of these items allow the customers a degree of own choice and prioritization, and quite a lot of money can be saved by making the more frugal choice.

Excursion on myself and brand products, etc.:
While I do not take frugality to an extreme, I have almost always tried to avoid expenses without a corresponding practical value to me. This includes avoiding brands that are “famous for being famous”, buying lamps* at hardware stores instead of department and pure lamp stores, having no qualms** about going into a “one euro” store, usually preferring the cheaper hotel to the hotel with more stars, and having never owned a car***. Outright luxury items have been quite rare and restricted to times of high income.

*For instance, when new in Wuppertal, I wanted to buy an uplight (?). Asking around, I was directed to a lamp store where prices started around three hundred Euro. I spent the extra time to find a hardware store and bought a perfectly satisfactory specimen at (possibly) sixty Euro. To boot, I found the visual design of the latter to be superior…

**These days, I suspect, few people are hesitant, but in earlier days I have heard strong negative opinions expressed towards these and similar stores, both in terms of perceived product quality and the risk of being seen as a pauper for visiting them. (Quality can be a legitimate concern for some products, but mostly the products are fine enough.)

***I have mostly lived in major cities with decent public transportation, and I prefer to walk when it is reasonably possible. Having a car would rarely have been worth the cost.

This, however, does not mean that I am skimpy when I see a benefit. Most notably, I have repeatedly taken sabbaticals to spend time on studies/writing and to enjoy life—while a year-or-so off work is very expensive, it really brings me something. (I strongly recommend it to those fortunate enough to have the opportunity.) However, I have also had no qualms about living in hotels or temporary apartments when working in other cities, even at distances where most others commute. If I can afford to cut out that extra one-to-two hours a day, with all that extra stress, having to go up earlier in the morning, having to wait longer before I can relax in the evening, etc., then I have a very real benefit. At the same time, I have always adapted to my income, e.g. in that I spend considerably less money on food, eating out, clothes, whatnot today (on a sabbatical) than I did a year ago (working full-time).

Written by michaeleriksson

November 12, 2018 at 1:15 am

3 Responses

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  1. […] e.g. the last installment published at the time of […]

  2. […] of points-to-be-expanded have been removed. The previous installments include at least [1], [2], [3]. Further texts might or might not be added (“Hornblower”, probably; the removed […]


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