Archive for the ‘ Economics – General ’ Category

Follow the Goods, not the Money: The ‘I Am Rich’ App and its Discontents

A bit late to the party, I recently stumbled upon this story and, more importantly, this response to it. It naturally got me thinking about wealth transfers since the moral and economic consequences of purchasing the ‘I am Rich’ app lend themselves more toward that description than one of proper consumption.* Treating and scorning these purchases as bona fide consumption I think is an instance of a common economic fallacy: following the money.

All exchange is fundamentally the same phenomenon at the micro level: someone values a physical good, service or any psychological consequence that comes of transferring their resources to someone else, so they do it and, if the exchange was voluntary, there is an ex ante increase in utility for both parties. At the macro level, however, it becomes useful to delineate consumption and transfer; the implications for society matter. Pure transfers have no effect on the allocation of resources unless some very specific behavior induced the transfer and would do so predictably in the future. If transfers like this were profitable enough for many prospective recipients, it would soon develop into a market for services, much like I speculate the market for street beggars to be. However, to the extent transfers are not behavior induced or are sufficiently isolated/unpredictable, their effect on the structure of production is precisely a transfer from the marginal consumption pattern of the transferer to the marginal consumption pattern of the transferee with a magnitude of the sum transferred. To call money wasted or opportunities foregone in this instance is inappropriate; it depends on what the recipient will do with his windfall.

In the case of the app, its developer did adjust his behavior to meet some perceived market demand and his minor success may have signaled others to do likewise and, to that extent, it was a humanitarianly wasteful venture. I, however, measure this extent to be quite small in comparison to the money he received given his presumably moderate opportunity costs and very low resource commitment to the project. This was mostly a one-off transfer in my view and its effects on the actual distribution of resources in the world are negligible given the sums involved; their impact was (circa 2008) still yet to be determined. Armin Heinrich can still make the world a better place, and the world has lost very little for his app.


There’s a Silverware Lining to the Restaurant Recovery

This. So Much This.

This is Ashok.

I’ve seen many posts today about our sluggish jobs recovery. Most people are pointing to data that show most of the job creation is in ultra low-wage, crappy sectors like fast food. (Here are James Pethokoukis, Tyler Cowen, and Mark Thoma on the matter.)

I think there’s a silver lining to this. Without considering part time jobs (which are not relevant to this post) there are three types of households: dual income, single income, and no income. The latter two indicate that one or both earners, respectively, cannot hold their job consistently, have high turnover, and are living off insurance.

Dual-income families have higher median incomes not only because there are two earners, but each individual earns more on average. Educated people from healthier backgrounds are more likely to get married – and stay married.

Let’s say I’m a genie. I can create jobs as I want. The…

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Dissonance: Fun for Everyone

I suppose I’ve been beating up on the political left a bit lately, but I want to take this chance to remind my readers that I’m an equal opportunity hater. This won’t be a make-up post simply shaming the right for something, but it will begin a long regress toward my libertarian mean. Republicans and Democrats often find some neat rhetorical symmetries in their constant battle to differentiate themselves whilst remaining indistinguishable from a policy point of view and some of these symmetries often reveal glaring inconsistencies in their underlying ideologies. A pair that I’ve recently hit upon both revolve around the already ridiculous issue of immigration.

A common retort offered by conservatives against those criticizing their position on wealth redistribution is that marginal investment spending is more socially beneficial than marginal consumption spending, populist translation: we’re taxing “job creators.” The assertion is often coupled with a diatribe about how “it’s not a fixed pie,” i.e. investment can grow the economy and subsequently raise living standards across the board or allow for more beneficial redistribution at some later date. “A rising tide lifts all boats,” “the wealth will trickle down,” etc.

When it comes to immigration, however, the pie gets very fixed, very quickly. While economic theory and all the empirical evidence from the last 40 years has shown immigrants to add to the division of labor and indeed “grow the pie,” they only come to “steal” jobs from Americans by “accepting freely offered employment from American businesses.”

On the other side you have Democrats, the steadfast defenders of laborers everywhere and the unions that bring them dignity. What people tend to miss is that unions, while often increasing compensation for their own members, do so at the expense of scabs and aspiring professionals everywhere. There are many people willing to accept unions jobs for lower pay, and I think it’s fair to say that this willingness is indicative of their being in greater “need.” They are denied jobs because the labor market is either too selective or restricted in quantity, both on account of higher union compensation. Then there are people who see union compensation as an entry signal, grad students being a perfect example. They pour resources into getting credentials in hopes of getting the return of a comfortable and protected position, but often find themselves in debt and out of luck, or in the very unenviable position of adjuncts.

The dissonance? Those on the left tend to be more sympathetic to the plight of immigrants, whose situation is almost perfectly comparable to those of scabs and aspiring professionals. The American Union insists on keeping out wage and job competition, so would be immigrants are forced to live in squalor to protect the well-being of people no more deserving than they are.

All in all, the left have a better excuse in that it’s much more likely they are just ignorant of the disemployment and rent-seeking effects of unions. But of course, ignorance of the law is mitigating at best, not a full-fledged excuse. Happily, I think this leaves this post’s conservative bashing credentials slightly stronger on balance…

GDP Fetishism is Anti-Economic

While I will never deny that GDP and other measures of national income are useful metrics, I tend to fall in line with the view that economists, and to a greater extent, people in the public sphere greatly overrate its significance. My view is a relatively critical one because 1) there are important goods that GDP leaves out, 2) there are definite wastes and evils that it counts as goods, and 3) there is no mechanism in the calculation of GDP that serves to cancel the effects of 1) and 2).

The goods left out: production for exchange in kind or by volunteers, any untaxed monetary exchange, the cost of work and the value of leisure. I feel I’ve listed these in ascending order, with the latter two being the most significant. I realize that theory dictates the only reason we work is because the utility of consumption outweighs the disutility of having to work for it, but the ambiguous size of the spread between them really does make all the difference.  Still, shouldn’t everything listed above remain relatively stable in proportion to GDP? When GDP shrinks can we assume that any deference to the underground economy only highlights its status as an inferior market? Certainly the preference for leisure is stable…

A sturdier retort to the fetishists hones in GDP inclusion of various evils. In recent years, government spending in the United States has directly accounted for ~20% of GDP. Factoring in transfer payments and Government spending not contributing directly to GDP, and the figure could easily be 40%. My point is not to say that Government = waste, but there are both some clear-cut instances (half the worlds military spending for 4% of its population, mayors’ extended families always see lush parks and smooth roads popping up in their neighborhoods, etc.) and powerful theoretical explanations (No market test, government slack, favor doling) for why we’d expect government to be more wasteful and even destructive than some other parts of the economy. Also, it’s safe to assume that production would be marginally but significantly lower if actors bore the full social costs of production; we could easily slash GDP by making oil companies pay for the right to pollute…

But just as GDP can be slashed by altering our social institutions in a beneficial way, so to can it be increased by altering those institutions in a destructive or wasteful fashion. Whats odd is that this is the basic economic insight into almost anything, but it seems lost on most economists when it comes to GDP: like any good, we face a marginal trade-off between it and other goods. I presume most economists don’t see it the way I do, not because they’re unaware of all the criticisms I raise, but rather because GDP is the best macroeconomic metric they have and the intradisciplinary norm has been to trivialize its shortcomings.

The consequence is that economist regard any increase in real GDP growth as positive and and decrease as catastrophic. What an unbiased analysis should show is that their are times when GDP grows too quickly and the public has inefficiently shifted their resource allocations away from leisure/non-monetary exchanges/risk-aversion and towards frivolous consumption/investment. In most introductory macro classes, students are taught to fear the “contractionary spiral:” Mike gets laid off, he can’t spend as much at the bakery, so they lay off Juan, who can’t spend as much somewhere else and so on until we’re all paupers. Never discussed is the “expansionary spiral:” Mike thinks his assets will appreciate rapidly in perpetuity, thinking he will be rich forever, his willingness to pay leads him to spend far more than he would otherwise; consumer prices are bid up, followed by factor prices, wages and asset values rise more rapidly, more people feel like Mike. Eventually the market finds a highly leveraged equilibrium and only a small decrease in the speed of the spiral growth will send it all crashing down, leaving people worse for wear and deferring to less preferred consumption, i.e. leisure, barter, etc.

So it turns out GDP is just as easy to manipulate as macroeconomists believe it is. The problem is that GDP has been interpreted as prosperity itself, rather than an indicator of it, largely because few see a problem with the expansionary spiral if only it can be kept going. Unfortunately, in real terms, such a spiral will eventually make leisure (foregoing the disutility of producing) too cheap, and once people start to cash out of the spiral and into happiness, the instability of the thing is revealed. As far as assessing the state of the economy goes, it’s truly an exercise in knowing the current trade-off between measured and unmeasured activity. There’s no doubt that real GDP per capita growth should be the norm, but at what rate is very unclear if you’re not taking sides; 1% per year is well below out running average, but would still see the average person’s income double in the course of one lifetime. As with every decision, quality matters. We can’t just aggregate people’s decisions and say the more the merrier when there may be a lot left on the table.