Economy entries
Even before I’d finished Ellen Ruppel Shell’s new book Cheap: The High Cost of Discount Culture, I decided I should review it on Pocketmint. I then spent two weeks artfully procrastinating on doing so.
Apparently I have a block on writing formal ‘book reviews’. I have no trouble discussing books, verbally and informally, but the moment I start trying to write about them I seize up over doing it properly.
So this is not a book review, it’s a brief casual monologue about a book I thought was worthwhile. Right? Okay then. (Er, maybe not so brief. Oops.)
• • •
The general premise of Cheap is neatly encapsulated in the title: the ‘discount culture’ that pervades America today has a number of costs, borne by both the naive consumer (in the form of shoddy goods and false bargains) and the world at large (in the form of environmental destruction and human rights violations).
Cheap is not a polemic; rather it is a measured, deeply researched examination of a cultural phenomenon — one I suspect most Americans today take for granted.
The first quarter or so of the book is devoted primarily to tracing the roots of the ‘discount store’ and related phenomena, all the way back to the first example of mass production two hundred years ago. (No, not cars — guns.)
If I have one criticism, it’s that I felt that the biographical details of discount-store pioneers occasionally dipped into tedium. Nevertheless, the broader historical perspective was illuminating. Have you ever imagined shopping in a store with no price tags? Yeah, neither have I. But before John Wanamaker came along, that’s just how things were done. Here’s another, more recent example of cultural shift:
President George W. Bush’s stirring call to spend after the fall of the Twin Towers in New York City on 9/11 seemed surreal to those Americans who recalled President Carter’s 1979 “sweater speech,” in which he donned a cardigan and asked Americans to turn down their thermostats to conserve energy for the sake of national prosperity and security.
(This sentence alone sent me scurrying off to learn more about Jimmy Carter, a president I barely remember. The man put solar panels on the White House! In 1979! And then Ronald Reagan came along and took them down again. /facepalm)
• • •
Having covered the history of America’s adoption of the discount mindset, Shell turns to the source of that mindset — the psychology of price.
Sadly, even when we know we’re being tricked, the tricks still work: people respond differently to a $9.99 price tag than to a $10 one. We’ll pay more for a sale sweater with a ‘regular’ price of $249 than one with a ‘regular’ price of $89, even if we are absolutely certain that the $249 is inflated.
And sometimes we’re oblivious to the stratagem in play. I always assumed outlet malls were rurally situated because of lower real estate costs. But no! It’s a ploy: once you’ve driven an hour or two you’re invested in the trip and therefore will buy more to justify the time and effort you’ve already spent.
In many cases, we’ve been conditioned to think something is a bargain when it really is nothing of the sort. You think Wal-Mart has ‘always low prices’, right? Chalk one up to the marketing team if so: Wal-Mart has higher than average prices on a third of its merchandise. And on those items for which prices are lower? A third of them offer savings of two cents or less.
Meanwhile, the rise of discount stores has lowered American wages; where department store staff salaries and benefits once totaled 18% of sales, today’s discounters spend a mere 6 or 7% of sales on their staff.
• • •
Later chapters move beyond the cost to the individual consumer and into the realm of the cost to people in foreign nations (who are intrinsic to the supply chain) and the cost to the health of the planet.
IKEA had begun to lose its luster for me even before I read this book, but the chapter in which Shell tours IKEA headquarters in Sweden was enough to finish the job. Artfully interspersed with the marketing-approved statements from the CEO and various employees is solid research that debunks IKEA’s claims of environmentalism and spotlights the devil’s bargain we’ve made by embracing mass-produced cheap furniture over careful craftsmanship.
And then there’s the chapter on the dangers of cheap food. I gave up meat twenty years ago, so the description of what the pork industry calls “PSE” (for “pale soft exudative”) left me shuddering but secure in my moral stance. Unfortunately for me, however, most of the chapter is devoted to the environmental deterioration and human degradation resulting from the explosion of Asian shrimp farms. Shrimp is a significant component of my diet, in part precisely because it’s become so cheap. This presents a dilemma I have yet to resolve.
• • •
Shell is not advocating that we all spend profligately in service of craftsmanship and social or environmental responsibility. On the contrary, she admonishes Whole Foods for contributing to the false dichotomy of value vs. quality. “What is missing here,” she says, “is what we used to take for granted — the happy medium. Consumers are left to choose between discount retailers whose practices they find questionable and high-end stores whose prices they cannot afford.”
Who gets it right? According to Shell’s book: Wegmans, a small chain of grocery stores in the Northeastern U.S. I’ve never been to one, but I read the description hungrily. (If any Wegmans shoppers read this blog, I’d love to know what you think of it.)
The cost of change, in fact, may not be nearly as prohibitive as we think. A University of Massachusetts economist calculates that, for example, increasing the wages of Mexican apparel workers by 30% would raise the price of a shirt in the United States by just 1.2%. Would you pay an extra quarter on your $20 shirt to make that kind of difference in the life of a Mexican sweatshop workers? I would, if I could trust that my quarter was actually going to Mexican workers and not to some corporate CEO.
• • •
Cheap is hot off the presses with a publication date of July 2009 and statistics as recent as 2008. Shell talks frankly about the recession we’re experiencing right now, and shows some of the ways in which America’s fascination with ‘cheap’ has contributed to our current problems. Hard though it may be in a time of rising prices and falling wages, I believe it’s good to be mindful of hidden costs, and this book is a great way to start.
(Photos by Kenneth Hynek, Stef Noble, and marissaorton.)
In the last month I’ve had to come to terms with the fact that purchasing this house when we did was a huge financial error. It’s been hard, and I’ve engaged in a lot of self-flagellation over the subject.
We closed on this house December 1, 2006. Two and a half years later, we’ve paid down our mortgage principal by $31K. We’ve also put about $19K into major home improvements — like new windows and hardwood floors — which should have increased the value.
Zillow lists our house as worth $26K less than we still owe. My own best estimate, using more intelligently-selected comps, puts us upside-down by about $10K. Which means that we’ve lost at least sixty thousand dollars on this house so far.
By contrast, we could have moved into a comparably-sized rental house for probably a thousand dollars less per month than we’re paying in mortgage. Just sticking that money in the bank would have given us another thirty thousand dollars by now, not counting interest. And we would likely have been in a nicer house and a more convenient neighborhood, as well.
We were urged to buy — sooner than we’d planned, and with less money down — by our real estate agents and mortgage broker. I don’t blame them, though, or think they intentionally misled us. As far as I know, our agents and broker believed that they, and we, were doing the right thing.
The catch-22 has always been that when real estate is climbing steeply — as it frequently tends to do in coastal cities, and had been in Seattle since I moved back here in early 1998 — it’s almost impossible to break in and buy that first house. 20% savings for a down payment becomes an ever-receding goal; by the time you have $60K saved up, that $300K house is now worth $450K and you need $30K more. Incomes don’t rise nearly fast enough to keep up.
In 2006 we saw a rare chance to get our foot in the door, and we took it. To do so we had to compromise in location and quality from what we could have had as renters; the plan was always that this would be temporary — five to seven years, and we would be able to sell this one and buy a nicer one in a more convenient neighborhood.
Hindsight is 20/20, of course, and today the collapse of the housing market is such a foregone conclusion that buying a house in 2006 seems like obvious idiocy. The housing crisis had already begun; why in the world did I jump on that patently rickety bandwagon?
But when I actually went back and looked up what I was reading in the fall of 2006 about Seattle real estate, I began to feel like less of a bonehead. Even as home prices in many areas of the country were starting to nosedive, the prevailing wisdom at the time was still that Seattle would dodge that bullet:
- March 2006, Bankrate, Top 30 Markets to Watch: Seattle ranked high on the ‘housing will continue to appreciate’ list.
- September 2006, Forbes, How Low Will Real Estate Go?: In contrast to most cities, Seattle’s projection shows about three years of very minor appreciation, but values up almost 60% at the end of ten years.
- September 2006, Seattle Times, Home prices’ long rise: Is the end near?: “If history is any indication, King County may escape” the national housing bust. A local economist estimated that “appreciation will slow to 2 to 3 percent a year”, while the chief risk officer for PMI Mortgage Insurance explained why Seattle was relatively unlikely to see prices dip.
Seattle Metropolitan Area*
(Forbes, September 2006)
I thought I was being conservative in my projections; I was prepared for a couple of completely flat years, with a mere two percent annual appreciation otherwise — worse than what anyone was imagining at the time. Instead we’ve had two roughly flat years followed by at least a 10% drop in the third.
It pains me terribly every time I think about how much better off we’d be if we’d continued as renters, but wallowing in regret doesn’t really help anything. So I am trying to focus on the positive: we aren’t in danger of foreclosure; we still have a positive net worth; and we can wait years before selling this house if we need to.
Meanwhile, I have very viscerally learned the investing adage that ‘past performance is no indication of future results’, and it’s left me a much more cautious person.
(Photo by Seven_Null7.)
If tough economic times are causing you stress, you can bet your kids are picking up on the tension as well. Knowing how much to tell them about financial matters can be tricky; you don’t want to overburden and worry them, but neither do you want to leave them surprised and unprepared.
I thought the movie Kit Kittredge: An American Girl made a terrific springboard for discussion with our kids, especially the younger one. Set in the middle of the Great Depression, the movie touches on economic issues — like unemployment, foreclosure, and homelessness — in a way that kids can relate to. The point-of-view character is a spunky ten-year-old girl who learns to cope with various changes that result from financial hardship.
It’s a fun movie, and so doesn’t come off as preachy or boring; the second half is basically a caper mystery, where intrepid children discover the truth that adults can’t see and chase down the bad guys, who are more comical than actually scary. Before the silliness, though, there is a lot of grounding in the Great Depression setting. Despite some grim events — her friend’s family loses their house to foreclosure; her own father loses his business and winds up eating in the soup kitchen — the overall tone of the movie is one of stubborn cheerfulness.
I’d guess ages six to twelve will get the most out of this movie. Our younger daughter was nine, and watching it sparked discussions about things from soup kitchens to the basics of mortgages and foreclosures. Here are a few more ideas for conversations with your kids based on scenarios in Kit Kittredge:
- Kit’s family begins to keep chickens and sell the eggs for extra income. What things might we do to generate extra cash?
- Kit’s mother sews dresses out of feedsack calico to save money. What storebought things can we try making at home more cheaply?
- Some of Kit’s classmates make fun of other kids for egg-selling and homemade dresses. Have you ever been teased or embarrassed about not having much money? What’s a good way to react?
- Kit’s father has to go to another city in search of a job, while her mother rents out rooms in their large house to make ends meet. What lifestyle changes might be in store for our family? How will we adapt to these changes?
Yesterday I promised to give an update on our personal financial situation and how it’s changed over the last half-year.
In November I wrote that we were down to a quarter of our prior income, as Jak’s employer had cut his hours by half just as I’d been summarily dismissed from my full-time job.
I am happy to report that this situation didn’t last long. After just a few weeks Jak was able to ramp back up to 30 hours, and eventually took over a project for a coworker on maternity leave that brought him back to 40 per week. On the down side, Microsoft cut their vendors’ rates by 10% across the board, so Jak got an anti-raise. (What is that, a ‘fall’?)
For my part, I put together a portfolio and spent several months applying for jobs. After the first few weeks, during which I covered the existing backlog, it became apparent that there were hardly any full-time salaried positions available in my field, for people of my skill level. I kept seeing the same dozen or so postings over and over again, and couldn’t break through on any of them.
I had a little more luck on the freelance side. The first big project I got was both exciting and potentially lucrative. Sadly it fizzled very early due to an unexpected change in the client’s circumstance — but at least they did pay me for the work I’d done so far. Then in February I answered a craigslist ad and landed another gig. The down side is a lower hourly rate than I’m accustomed to for freelance, but on the other hand it’s been steady at around 20 hours a week for four months now, and the client pays promptly.
The end of 2008 was cushioned by vacation payout from my ex-job, which carried us through November. December was bleak. But since the first of the year I’d estimate we’re pulling perhaps 60-65% of mid-2008 net income, which is a lot better than the 25% we feared. (Part of this is because I’ve dropped an entire tax bracket, so that even though my gross is much lower and I owe self-employment tax, my net income has fallen less than you might expect.)
On the spending side, we made some large changes. All major house-improvement projects came to a sudden standstill. Vacation plans for 2009 were abandoned. We slashed our Christmas and birthday gift spending to the bone.
Then we pared back the smaller, frequent things. As luxuries go, my biggest weakness has always been restaurant food (and drinks), which typically cost $80-100 per dinner for the pair of us. We cut that indulgence to 1-2 times per month, down from around twice a week while we were both working. I also severely reduced our alcohol purchase and consumption at home. We agreed not to buy any books, music, or movies, making do with the public library and Netflix. Clothes purchases are limited to absolute essentials (mainly replacement underwear).
We’ve had some windfall income from non-work sources. Between the two of us, we received $4800 in federal tax refunds — possibly the only perk to having a lower-than-expected income for 2008. I also sold some reprint rights to my “How to Toilet Train Your Cat” article for an extra $1700. And finally, we’ve gotten a few hundred dollars from online advertising and interest on our savings.
I’ve been able to sock away all of those windfalls, and a bit more besides. Altogether, over seven months, I’ve managed to grow our savings from $30K to $40K, despite our slashed income. In addition, I put an extra $2K this month toward the principal on our second mortgage.
The two mortgages are our only debt, but they’re still crushingly huge. I’ll talk more about that in another post. Otherwise we’re doing quite well, considering. I’m proud of our restraint — I think we’ve done a great job of ‘tightening our belts’ without overreacting and denying ourselves absolutely everything. Swing that pendulum too far and you grow bitter and depressed.
I have no idea how much longer this economic trough will last, but if this is as bad as it gets for us personally I will be ecstatic. Onward!
(Photo by alancleaver_2000.)
I’ve been quiet for a while, going through a number of struggles that have left me without the — in the vernacular of my childhood, the ‘gumption’ — to keep writing frequently. I’m trying really hard to get the spark back now, because I know in the long run the Pocketmint project is important to me.
Here’s a little of what we’ve been dealing with: about three weeks ago, the big corporate monster suddenly chewed me up and unceremoniously spat me out. By innocently mentioning what I thought was a widely obvious event, I apparently violated some unknown policy of the parent company (the details of which remain vague to this day) and in under 24 hours received my walking papers — no mercy, no appeal.
This abruptly cut our income by half. Then, last week, Jak learned that due to staffing cutbacks at Microsoft his hours will be cut to half-time. This means one-quarter income, and total loss of health insurance.
The bad news is that the mortgage alone on our house come to slightly more than Jak’s remaining half-salary, so we’re behind before we even start. The good news is that the mortgage is the only debt we’re carrying — we paid off the last of our massive credit-card debt a couple years ago — and we have a pretty decent cash emergency fund. I’ve been putting aside at least 40% of our take-home for the last two years; some of that we’ve pulled out again for major house improvements and additional (Roth) retirement funding, but we’ve got almost $30k in cash savings.
We can put off all the remaining house projects and hunker down to the bare essentials, and make it for maybe 6-8 months like this. Hopefully it won’t come to that; salaried jobs may be rare right now but I should be able to pick up some freelance or contract work. And Jak’s employer will be working on his behalf to try and increase his hours again. Right now he’s burning PTO to keep the insurance going through December. We’re trying to make this work, and hopefully something will get better before it all gets a lot worse, but we’re definitely in a new era now.
We had a talk with the kids last night, resetting their expectations about our way of life — we won’t be going out for sushi anytime soon, or ordering pizza; we won’t be funding any more weekend out-of-town trips for Michaela to watch her school athletic teams. They took it pretty well; Claire immediately wanted to know how we could cut our costs. Someone else must have previously explained to her about the connection between lighting and your electricity bill, because Claire instantly morphed into Lightswitch Nazi, turning off every light in the house that wasn’t immediately necessary, scolding all the while. We were amused.
I also made the point, which I hope Michaela at least will remember, that this is exactly why it’s important to save a lot of what you earn for a real emergency. She tends to spend money as fast as she gets it, which concerns me in someone about to turn sixteen. But only the difference between us and all those people with ‘foreclosed’ signs on their houses is going to be our empty credit cards and our emergency savings account.
If you have a job now and aren’t saving most of your money for emergencies, please start. You may think this is an isolated incident, but I fear it’s not; if the collapsing economy hasn’t touched you yet, it will. Be prepared.
(Photo by sunchild_dd.)
