Why life in the city has become so much more expensive

Sign up for Derek’s newsletter here.

Several weeks ago, I needed a ride home from late-night drinks about two miles from my home in Washington, DC I opened the Uber app and entered my address. When the price appeared on the screen, I assumed that I had entered the wrong street and perhaps in the wrong state. I wrote again carefully. But the same price appeared on the screen: $50.

that’s outrageousI thought; $50 for a 10 minute ride? So I kept thinking. Aren’t gas prices and inflation near half-century highs? Isn’t the labor market so tight that low-paid workers are changing jobs at historic rates? Isn’t nominal wage growth rising faster for the kind of workers who are most likely to drive for Uber? Yes, yes and yes.

But something beyond rising energy and labor costs led to that surprising price tag. With markets falling and interest rates rising, money-losing startups and tech companies are changing the way they do business. In a recent letter to employees, Uber CEO Dara Khosrowshahi said the company needs to “make sure our unit economics are working before we grow.” That’s what the CEO is talking about: We gave Derek a nice discount for a while, but the party’s over and now it costs him $50 to get home.

Over the last decade people like me (young, urbanites, professionals) got a sweet deal from Uber, the Uber-for-X clones, and all that patchwork of urban travel, delivery, food, and retail conveniences that I vaguely intended be technology companies. Almost every time you or I ordered a pizza or called a taxi, the company behind that app lost money. In effect, these startups, backed by venture capital, were paying us, the consumers, to buy their products.

It was as if Silicon Valley had made a secret pact to subsidize the lifestyles of urban Millennials. As I pointed out three years ago, if you woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered lunch from DoorDash, took a Lyft home, and ordered dinner through Postmates only to find out After your partner had already started with a Blue Apron meal, their household interacted, in one day, with eight unprofitable companies that collectively lost about $15 billion in a year.

These new companies were not nonprofits, charities, or state socialist enterprises. Eventually, they had to do capitalism and make a profit. But for years, it made a strange sense to them No be profitable With interest rates near zero, many investors were eager to invest their money in long-term bets. If they could get into the ground floor of the next Amazon, it would be the one-in-a-million bet that would cover all other losses. So they encouraged startup founders to aggressively expand, even if it meant losing a ton of money on new consumers to grow their total user base.

Consider this simplified example. Let’s say the costs for ingredients, labor, and transportation for a pizza delivery in New York City average $20. If a company charges $25 for the average delivery in New York City, it will make a profit. But if a new company charges $10 for the same thing, you will lose money but get a batch more pizza orders. More pizza orders means more total customers, which means more overall revenue. This deal is tailor-made for a low-rate environment, where investors are more attracted to long-term growth than short-term profits. As long as money was cheap and Silicon Valley told itself that the next consumer technology company to take over the world was one round of funding away, the best way for a startup to make money. of venture capitalists was losing money acquiring a gazillion customers.

I call this arrangement the Millennial Consumer Subsidy. Now the subsidy is ending. Rising interest rates turned off the faucet on money-losing startups, which, combined with energy inflation and rising wages for low-wage workers, has forced Uber, Lyft and everyone else to make their services more expensive. Meanwhile, global supply chains have been unable to keep up with demand from domestic consumers, meaning lead times for important items like furniture and kitchen equipment have risen from “three to five days” to ” sometime between this fall and the heat death of the universe.” That means higher prices, higher margins, fewer discounts, and longer lead times for a microgeneration of yuppies accustomed to low prices and instant delivery. The age of bougie’s on-demand urban tech discount gold has come to an end.

I must stress that the old ways were made possible by an era of lower demand and weaker labor markets, which was not a winning combination for most workers. Many people drove an Uber or delivered Thai food because they didn’t have competitive job offers that clearly paid more per week. Today, job openings are historically plentiful and nominal wages are rising faster for low-income workers. That virtuous adjustment has been reflected in higher prices for Uber and DoorDash.

This is not the end of the story. With inflation on the rise, the Federal Reserve will continue to raise interest rates several more times in the next six months and could tip the US economy into recession. If that happens, oil prices are likely to drop and rising unemployment could send more Uber drivers back on the road. At that point, rideshare prices would drop again.

But the deeply discounted prices of the 2010s aren’t coming back. The Millennial Consumer Subsidy has ended, and for the foreseeable future, residents of the metro area will have to continue living the old-fashioned way: paying what things really cost.

Source: www.theatlantic.com