One reason that economic growth over the last half-century has not radically transformed the lives of ordinary people is because it doesn’t seem to dramatically lowered the price of stuff ordinary people buy.

Below are spending patterns for the Median Household (40 – 50K) from the BLS. I broke out the top level Housing category into its subparts because I want to make a point about it, and the huge fraction of income attached to housing costs more generally would have overstated my case.

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What you can see is that shelter and transportation are the biggest components of expenditure, followed by food. Food expenditures are roughly half food at home and roughly half food away from home.

Shelter is especially interesting. When I started following the housing market around 2004, I was surprised was what a small fraction of GDP was taken up by fixed residential investment.

Even in the boom years it barely topped six percent. A more normal value for the recent past is between 4% and 5%.

FRED Graph

As far as I can tell this disparity comes from two sources. The cost of housing financing and the cost of the land on which the housing is built. Financing costs are basically a multiplier for the cost of the housing unit. Take down the cost of the unit and the financing comes down automatically.

Land is a complex issue but clearly there are regulatory structures in place which increase the cost of land per housing unit. Most obvious are restrictions on density.

Transportation and housing costs are closely related since what we spend on moving ourselves around depends heavily on where we are located. Many transportation costs are associated with living in suburbia but commuting to an urban core.

Taking all of these things together it seems like the most promising avenue for radically increasing the living standards of the average American is either

1) Sharp reduction in the cost of urbanism achieved by both looser regulation and cheaper construction techniques. The construction of cheap tall residential building would dramatically lower the costs for the median household by reducing: the amount of land they use, the financing costs, the building costs directly and transportation costs.

2) Sharp reduction in the cost of ex-urbanism achieved by radically lower “transportation” costs. This would allow construction using our current lowest cost technique, the standard two-story home. However, with reduced transportation costs it could be done far away from the city on very cheap land.

Most likely this would involve some type of telecommunications infrastructure that allows people enjoy all of the benefits of face-to-face interaction while being in separate locations. Because of the importance of human non-verbal communication this might have to use highly realistic 3D projections.

Other important developments here would be cheap power – possibly solar – and self-driving cars. This would make transit over great distances relatively cheap.

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