True Price: Calm Down and Do the Math, Things Are Not That Bad

The value of goods and services has been a matter of discourse since there have been goods and services. People value certain goods and services and are willing to pay others to build and/or perform those same aforementioned goods and services. How much? That is the key question to a majority of discussions in our lives.

How much should we charge others for our own services? That is the question that we each must ask ourselves when seeking employment.

How much should one pay for housing? That has been a key question in the American economy for the last few years.

How much should one pay for a cup of coffee? That is a question I wish more people would ask themselves on a daily basis.

You might be saying to youself: Well, sure we need to consider prices, how else would we know if we are being overcharged.

The flaw with that line of thinking is that for a normal human mind, if the price of a certain item changes over time, they consider that price in a vacuum without considering all other variables that make up the insane chaos experiment that we refer to as “The Economy”.

Let’s consider the prices of something common: Gasoline for motor vehicles. The general consensus from people I know is that gasoline is getting more expensive. And on some level that is true, even accounting for inflation. However, gasoline today is not 4 times as expensive as it was 20 years ago as the numbers would seem to indicate. But how could that be? Gas today is about $4 a gallon and 20 years ago, it was about $1 a gallon. That would from a purely mathematical thinking mean a 4X increase in price.

The truth is that over those same 20 years, the average income has gone up drastically. Depending on your field of work and technological trends, that increase will vary. However, at the lowest level, wages have gone up almost 100% over that same period of time (if you’re making less than 200% of your wages 20 years ago, it might be time to take a long hard look at your employment situation).

Another completely related but hard to spot variable is that the amouont of gasoline that a person needs to use in a given period of time has gone down over the last 20 years. It is an undeniable fact that when comparing similar vehicles (in terms of size and comfort), cars and light trucks have become far more efficient than they were 20 years ago. With the exception of the very smallest and most efficient cars, which were frankly just unsafe 20 years ago, most cars have become at least 150% as efficient as they were 20 years ago. There are also a number of very common cars that have doubled in efficiency over the last 20 years (see midsize Ford cars as an example).

Thus, let’s put all of this together. We have a price increase factor of 4. We have a wage increase factor of 2. We need to divide the first number by the second in over to arrive at how the hit to a person pocket will be felt. So, we end up with a net increase of 2 for the price of gasoline. However, we can’t simply stop there since that same person (who we are assuming has purchased a car or two in the last 20 years) does not use the same amount of gas. If the person has an average car, perhaps a pickup truck, then their current car is at least 150% as efficient as their old car. In this situation, the effective cost to the person for a gallon of gas is 1 and 1/3rd what it was 20 years ago.

If that same person had one of the more common cars (for example going from an older Honda Civic to a new Honda Civic Hybrid or going from a Ford Tempo to a Ford Fusion Hybrid), then their current car would be at least 200% as efficient as their car 20 years ago. In this case, the cost of gasoline would be exactly the same as it was 20 years ago.

This same approach can be followed for a number of items. Some items don’t gain from the efficiency variable, but the average wage increases must be factored when considering the actual price of an item. For some items, the net cost is drastically lower than it was over a similar time period.

As a quick example, let’s consider a commonplace household item: the laptop computer. Twenty years ago, a decent computer that enabled a person to perform most common activities was about $3000. I am typing this article from a Samsung Chromebook 2, for which I paid $400. This laptop allows me to do all of the common stuff that I would want to do on a portable machine (documents, internet, videos, music, etc). There are many decent machines at this price point, so I’m going to use the $400 price as a baseline here. When we run the numbers through the same kind of math as we did for gasoline we end up with 0.133 / 2, so about 0.065. So that means that to get a laptop today you would effectively pay 6.5% of what you would have had to pay 20 years ago (and this laptop is much nicer that what you would have purchased 20 years ago).

In fact most goods and services have in fact become much cheaper in the last two or three decades. The only exception to this rule appears to be housing, which has in fact gotten much more expensive over the same time period. The only explanation that I can think of in this case is supply and demand. However, I don’t think this is really accurate at all. I believe that unlike most goods and services, housing is this insane product that is purely subjective in terms of price. One person might find a certain home to be wonderful and perfect for their needs, while another will look at the same home and see nothing but dollar signs popping up where “necessary” remodeling must be performed. Combine this with people’s appetite for space and we end up with old product that is simply harder to move paired with ultra desirable new product that is easy to move due to demand.

It is extremely difficult for any reasonable person to look at two well maintained homes (both clean and without horrible structural problems) and justify why the 3500 sqft home is four times the price of the 1750 sqft home. The mantra I need to keep repeating to myself is simply: Homes are like german cars, they lose half their value as soon as the new one with the larger chrome pieces comes out. And as we all know, there will come a time in the future when Mercedes will release a car that is just a giant chromed grill that wraps around all the way to the back of the car.

I want to leave you all with a bit of advice that I try to follow as much as possible. If something seems like it has gone up in price too much, then you probably shouldn’t buy it. However, if something seems like it has gone up in price too much and you must buy it, don’t get depressed, first do the math and think about whether this item is truly going up in price too fast relative to your own means or if you might have an unfair expectation about all goods and services to get cheaper over time.