Posts Tagged ‘ economics ’

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.


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…

People Who Complain About Growing American Income Inequality Are Sorry Excuses For Cosmopolitan Thinkers

Here is the kind of chart they like and here is another.

Here is a powerful theoretical explanation for stagnant or stalling average wages in a country and a world where many many more people are far far better off then they were in the 70s.*

Conjecture on why the theoretical explanation almost certainly applies:

The Second World War left the (only recently) industrialized world in ruins. While Europe and Japan rebuilt, American capital and infrastructure were wholly intact. When you consider the huge relative advantage of working in an industrialized economy to begin with, it becomes very hard to understate the significance of the United States’ position at the time. Moreover, Women had not broken into the peacetime workforce and bid down the wages of men. Median/Average income was at an all time high, shocking.

When would we say all of these socio-economic/historical factors began to shift against the lone male American household income earner? Hard to venture a better guess than the 1970’s. The European and Japanese recoveries/miracles were hitting full swing, we opened trade with China, women started entering the workforce in droves and the US economy hit a rough patch. By the time the domestic economy turned around, foreign competition in the labor market was well established and Reagan’s more liberal immigration policy coupled with the recovery to increase the number of low-income earners entering the American economy from abroad.

These trends have largely continued through today and they have been a boon to everyone. It would be very difficult to show that the median American family, or indeed the median Chinese or Indian family is not much better off than they were 40 years ago when we had so much more domestic equality. Technology and efficiency gains have been huge and they’ve been distributed all over the American economy; you’re reading this online article over free wi-fi on your smartphone, you’re no one-percenter and your parents would be awed by your lifestyle at this age.

So America’s middle class of old is in far better shape, the new middle class is lightyears ahead of what was likely third-world poverty a generation ago, but our focus needs to be the fact that we all live like shit because the greed and privilege of 3 million Americans making more than $250,000/yr is robbing us of the life we deserve. The truth seems to be that the middle class were the privileged ones, getting to press buttons and pull levers for fat suburban incomes while the rest of the world lived in real poverty. Now that those people who were once desperate have joined the global economy and proven themselves no less skillful than their American counterparts, the latter have lost their privilege that came at a great price to many millions of people and now sulk despite still living in the lap of luxury.

On the other side are the 1%: A tiny minority of people with highly specialized skills that few have learned despite many having the chance because they are that difficult to master and that dismal to learn even though they are the skills that let you make extremely important decisions about the structure of production that effect the income and consumption of millions. Given the boon to living standards we’ve seen due to globalization and the successful adoption of new technologies on an industrial scale, I’d say the people organizing it deserve quite a premium over the people stamping jars and balancing cash registers.

The moral of the story is that the people narrowly focusing on the slightest possibility that wealthy middle class Americans have been given a raw deal are they same people who call themselves champions of the poor and proponents of progress. My understanding is that humanism was progress in the 17th century and 19th/20th century nationalism was the conservative backlash; yet many on the left prioritize a return to a world of abject poverty for billions so a select few among their countrymen needn’t feel inferior to an even more select few, though this connection very likely does not occur to them. They are, at the very least, myopic, if not outright selfish and malicious in their drive to cultivate an elite that coheres to their aesthetic.



*The second graph was the best I could find in a lengthy search, nothing on global median income, but an endless trove of the headlining charts. This heavily underscores my point.

My Ride-sharing Soap Box

This post will be longer than I’d like most of my posts to be, but I imagine this is one cost of starting a blog a considerable amount of time after being born. I have a lot of old ideas I would like to reference, but since I’ve developed them elsewhere, the blog needs to be caught up before I can develop them in a more incremental, and palatable, manner.

Last month, Bryan Caplan posed this question to his students: how to spend a billion dollars most efficiently and, alternatively, in such a way as to maximize utility. Part of the idea was undoubtedly to distinguish utility from efficiency by proposing plans that differed in their espousal of each principle. Another part was to see whether students could actually identify any low hanging fruit: is there something we obviously could and should do that we haven’t already done?

My proposal would be that we pay ~8 million Americans to become casual cab drivers. Here it is important to qualify “casual;” no one is leaving his job to drive people around, in fact, they’ll be asked to go no more than a few minutes out of their way. Smartphones have made it incredibly easy for people to impersonally coordinate time and locations, why not pay someone a trifling amount to take you to work when you’re right on their way?

There are two general reasons why it wouldn’t work, one preferential, the other structural. The preferential case revolves around general insularity (stranger danger, social awkwardness, misanthropy) and is more difficult to predict as it’s unclear at what prices people would be willing to shrug it off. The structural case is simply that a widespread and reliable ride-sharing network needs a big push and it’s hard to see how you could get the gains from such a scheme to accrue to the source of the push. I think a billion dollars simultaneously remitted to to a few million active participants in a handful of major cities would be sufficient to get the project off the ground and its evident convenience would sustain it from there.

There are a litany of potential benefits. Most immediate is the relief of traffic jams in major cities, perhaps to the extent that it eliminates the need for congestion charges which are a net social gain, but privately costly in terms of time/money/planning. Secondly, its short term labor labor-saving effects would free up cabbies and public transportation workers/dollars while providing people with a lower cost service across the board (t/m/p). The long-term gains are by far the largest. Ownership of private passenger vehicles is the second largest expense most Westerns face in their lives, in many cases approaching one third of the median income (consider these figures for the US). If there were a convenient, reliable way for commuters travelling in the same direction to ride-share, I’m keen to entertain estimates of how many active vehicles could be taken off the road in 15 years.

In the interest of quantifying the efficiency gains, I’ll say that we can reduce the number of passenger vehicles by 15% in 15 years (Ceteris Paribus). There were 255 million registered passenger vehicles in the US in 2007. In the interest of conservatism, I’ll suggest 265 million as a current figure. At roughly $9,000 per car per year the annual expenditure hits $2.835 trillion. 15% of that?  ~$358 billion per year. Say my plan has a low probability of success, or the reduction in car ownership wouldn’t be so great, how low would it have to be and how small would the change have to be? Even if there were only a 3.5% chance of the strategy reducing the number of cars on the road by 1%, you’d still get your principle back in savings every year.

While it may not be the most efficient way to spend $1 billion, it is perhaps the one most highly relevant to the everyday lives of Americans. Also it’s much more easily quantifiable than the promotion of natalism, unspecified scientific breakthroughs, or immigration.

I think I’ve done enough to answer Bryan’s prompt and don’t wish to make this post any longer, though I have much more to say on the topic. For those curious about how far private money has gotten in this endeavor, look in to Lyft and Uber, two services being developed while I’ve been day dreaming.