Effect of Recession: Four Ways This Recession Will Change Our World

This recession — our generation’s Great Depression — will profoundly transform the way we live, think, and work.

I’d like to encapsulate four of the effects of this recession I think we’ll see over our lifetimes. Whether you agree or disagree, please write your own blog post (and link back to this one) or comment here with your own thoughts on how our world will change.

1. America’s birth rate will continue dropping, and will eventually get below the replacement rate. A common statistic is that it takes 2 births per woman to sustain a population. America, so far, has barely managed to stay above this rate. However, with the cost of having children increasing, many parents will opt to have fewer kids. Thus, in the next 40-50 years, we may well face an odd situation: whole towns disappearing, since there won’t be enough people to keep them going.

   Whatever your personal opinion is on this situation, it will certainly make for some interesting political drama.

2. The number of houses needed for the general population will nosedive. This will puzzle and catch off-guard the real estate industry and many pundits.

   Right now, there are many huge houses on the market: 4000sq.ft.+. Their prices are coming down, but they’re still not selling. Why? Maintenance costs! Heating and cooling gigantic houses is extremely expensive. Rather than disappearing, however, I believe multiple families, or multiple generations of a single family, will buy these houses as they become dirt-cheap.

   Multiple generations in the same house is already common in many Asian, Hispanic, and Indian families. This will become a defining trend in the U.S., as minorities are having more children than whites, and whites will eventually figure it out and embrace this trend.

   Since day care may be prohibitively expensive for many lower-income families, this trend will become even more pronounced. I expect to even see homebuilders responding to this trend by creating new types of McMansions to help these multi-generational families with their needs — in 10 years or so, when they recover from the current bust.

   There is a corollary trend that goes along with this. Since it will become commonplace for families to live together, fewer houses will be needed for the general population. This may start out as a small trend — virtually unnoticeable due to birth rates. The good news is that it means that rent prices as well as home prices will drop.

   The trend of rent prices dropping may be most noticeable over the next 2-3 years as foreclosures hit the market, since by some estimates up to 50% of people being foreclosed on are not renting or buying another property, but instead moving in to an existing homestead. It may then get lost for several years as people shrug it off when the economy gets better. However, I think the resiliency of this trend (and its huge cost benefits) will be underestimated by the media, and the trend will continue to gather steam for the next few decades.

3. A backlash against expensive colleges, as well as lack of funding for state schools, may open up new entrepreneurial opportunities in higher education. Throughout the past 20-30 years, student loans were easy to get, so more people went to colleges, so colleges raised their prices, so the government and banks made student loans easier to get…repeat ad infinitum.

   The costs of college have far outpaced inflation for the past century. In the book Going Broke by Degree, economist Richard Vedder writes:

   “In 1958, it took a bit less than 57 days for a typical family to earn enough money to pay for [annual] tuition at Northwestern. As of fall 2003…instead of 57 days, the typical family would have to spend almost 195 days.” This explains the persistent rise in student loans and scholarships.

   You will, of course, see a government push to make loans easier to get, as the banks pull back. This doesn’t help anyone over the long term, however, as it simply inflates real college prices. (The economic details of this scenario are worth a blog entry of their own — one I may do later this month.) The easier government makes it to get college loans, the slower prices will drop. New parents and those planning to have a baby should consider a 529 savings plan for their kids. Saving just $100/month in a 529 (and putting it into the stock market) will turn into $40,000 or more for your cild once he or she is 18!

   If you’re in college now, simply be as frugal as possible and bear it out. Avoid taking on student loans as much as possible.

   Is college worth delaying until later simply because it will be cheaper then? I’d say no. However, if you are considering going to college in the next year or two, get as much education as you can done at a community college. Not only will that save you a lot of money up front, but you may also benefit from enrolling 2-3 years later at a more expensive college, instead of enrolling now.

   There is a prevailing mindset in our society that college is necessary. I’d expect some backlash against that in the next few years, although it will mostly take the form of “Ivy League schools aren’t necessary” and my above recommendation of attending a community college for the first few years.

   Over a longer time frame, I expect to see many college alternatives popping up. In Going Broke by Degree, Vedder cites the for-profit University of Phoenix, as well as tech certification programs, as two valid alternatives to traditional colleges. If state funding disappears and college costs continue to go up, savvy entrepreneurs will fund alternatives, and traditional college enrollment may drop for the first time in our lives.

4. Commercial office space and retail shopping centers may never recover to the square footage used in 2007. This is another one that will catch the pundits off guard. I realize this is an extreme viewpoint, but here’s my reasoning.

   I was here in San Jose in 1999, when companies like Webvan euphorically declared that the need for grocery stores was over. I agree that those companies were overly optimistic, but I also think the continued immersive experience and growth of the Web will kill many retail companies in the long term.

   Stores don’t exactly go out of their way to make the customer experience friendly. Safeway (a local grocery store chain) thought they were geniuses by firing 50% of their staff and forcing everyone to wait 15 minutes in line to check out their groceries. (They didn’t even install self-checkout machines…just closed most of their registers!) They later realized their mistake, but expect to see more asinine decisions like these by retail stores intent on cutting costs instead of building better customer relations.

   Compare this to the experience I believe we’ll see on the Web in the next 5-10 years — a virtual “personal assistant” on the store’s Web site, 24×7, to help you choose something that fits, free shipping both ways (thank Zappos for that!), and easy tools to measure yourself and ensure you are getting the right size and quantity. With people in India or Vietnam who speak excellent English and are willing to work for a few dollars a day, this sort of service will become commonplace.

   If Web 2.0 was about community, Web 3.0 will most certainly be about personalization, simplification, and ease of use. Retail will learn that, to survive, they must personalize and deliver excellent customer service. The Web, where you can hire people for a few dollars a day instead of $10/hour, will be the place to do that.

   Once the Web retailers figure out personalization, and do it right, old-school retail will never recover. It is very likely that my kids will find going to a store antiquated for anything that doesn’t need to arrive right now. And far less needs to arrive right now than you or I believe — the main reason people go to stores is customer service; the human touch. The Web will figure this out, and do it far better than the nose-picking, bored-looking 19-year-olds at Best Buy.

There you have it: four effects that will change our world as a result of the recession. What effects do you think the recession will have on our society? I welcome your comments!

Recommended Reading:

• Making Kids Worthless: Social Security’s Contribution to the Fertility Crisis. Postulates that Social Security programs are the cause of the declining birth rate in many developed countries. Interesting theory — very Malcolm Gladwell-esque.
• Going Broke by Degree. The author recommends specific policy decisions that should be made to decrease the cost of college for everyone. Worth reading if you would like to know more about the economics behind the expense of college.
• Forget Presents; We Want 529 Contributions at Frugal Dad. Giving a young family member the gift of education savings is far more important in the long term than the latest video game or another new pair of jeans.