You are currently browsing the tag archive for the ‘economics’ tag.
The other day I tweeted that “‘voting is irrational’ is the worst argument smart and reasonable people routinely make” after seeing smart and reasonable Matt Dickinson reference it as an aside when making what I think is a different-but-also-bad argument about why people in certain positions should abstain from voting, and got at least one request to flesh out why I think the argument is in fact so bad. Rather than cite to all the people who make the argument (though also not to single out Matt per se, his was just the reference that led to the tweet that led to this post) , since I think it’s fairly well-established both in terms of its contours (that the odds of any individual vote affecting the outcome of an election is tiny ) and that it’s widely made, but here in only some order is a laundry list of all the reasons this argument is bad and I hate it.
Derek Parfit’s “Harmless Torturers” argument – In “Reasons and Persons” Parfit creates a thought experiment summarizes as succinctly as possible as so – if you have 1,000 people each controlling a single machine that each tortures a single person (say with electric shocks), it is clear that electing to activate the machine is wrong. But if each of those persons controls 1/1000th of a single machine that distributes 1/1000th of that torturous shock to each of 1,000 people connected to the single machine, would we still consider the choice of each to flip their switch wrong even if the marginal torture being distributed is at most barely perceptible? The intuitive, and also correct, answer, is “yes” and this is a very potent argument in the context of many cultural problems as well as climate change. It is similarly potent here as well; so long as we accept that collectively high participating in voting is good, it follows that each individual decision to vote is good. I leave it to the reader to note that, in the absence of substantial counter-forces, that doing good is rational.
Anthropology and sociology hugely militate against the narrow economic view of adjudicating individual actions on a narrow benefit-cost of marginal action – Human societies are vastly complex networks bound together as much as or more by norms and custom than formal rules, and rather than seeing collective action as the sum of individual action it often makes more sense to see individual action as a note in a multidimensional matrix of complex social, economic, familial, and communal networks. This, BTW, is why the whole quest to “microfound” macroeconomics is fundamentally dumb but that’s another blog post.
There’s no reason not to vote – the costs to voting are extremely small, and declining as time in transit or in queue can be spent in communication with others or playing Hoplite which I just discovered and is super fun. It can obviously be irrational to do the ethical thing in a context where that leaves one likely to be harmed or exploited; this is related, in some ways, to the theoretical finding that won George Akerlof a Nobel Prize, as well as just being obvious. If nobody’s paying taxes don’t pay taxes, etc. But in a general equilibrium that is either positive or near a tipping point, especially given the prior point, if the costs of doing the socially beneficial and ethically sound thing are low or negligible, it is absolutely rational to do it. Plus, the time-money equivalence isn’t purely scalar on the margins, most people distribute their time in lumpy ways that don’t make marginal time-use decisions, especially on the scale of “an hour every two years” costly in a way that can be easily quantified.
Voting is fun – I like voting! It is rational to do things one likes to do!
Voting is empowering on an individual and communal level – making one’s voice heard in the formal political process has a two-way legitimation effect, legitimizing one’s own equal right to be a part of the civic process as well as legitimating that civic process as the correct channel for making one’s voice heard. It is rational to pursue this, which also leads into the next argument…
This argument mitigates against all public and civic participation – if voting is irrational, so is signing a petition, joining a protest, donating to a candidate, or even voicing one’s opinion. Unless one takes actions so drastic that purely in isolation they affect political outcomes – and, without getting too much into it, one can clearly extrapolate that most such actions are violent or otherwise bad – this argument mitigates in favor of total non-participation in anything civic or even communal.
This argument is particular to first-past-the-post elections on a very large scale – in a proportional voting system, or in elections for mayor, city council, or even Congress it can be clear that much smaller numbers of votes can affect substantial political outcomes. A ~36,000-28,000 vote in suburban Virginia deposed the second-most-powerful House Republican. But if you’re going to vote for everything, the marginal cost of voting for everything on the ballot is so vanishingly small that even the narrow, economic argument against voting is thin as straw.
Making this argument is immoral from a consequentialist standpoint – even if you think individual voting decisions are irrational, so long as you think high participation in voting generally is good then by making this argument you are helping to damage that. Maybe you think that making the argument is damaging it so slightly it barely matters, but then why are you bothering to make the argument at all? It is clearly irrational to do so since it’s not having any impact.
Making this argument is immoral from an anthropological standpoint – of course, I do think it has an impact, especially as more people make it, and I think it corrodes the necessary normative construct of individual obligation to the collective and civic well-being that makes our society and similar societies function well. Promoting cynicism and non-participating is bad.
Making this argument makes you look like a smug, dislikeable cynic – this is self-explanatory. Seriously, doing this just makes you look like a narrow-minded pedant who wants to prove their intellectual superiority by making an obnoxious debator’s point at the expense of, like, you know, democracy, and people will dislike you for doing it.
And all that without referencing Florida c. 2000, and without referencing the many counter-arguments for voting that play somewhat more on the turf of the original argument for irrationality; for those see Andrew Gelman who is good on this issue (paper here, posts here here and here).
All that being said we should vote less, for less, and on the weekend, and maybe it should even be mandatory, but that’s a different story.
It seems like discussion of Piketty’s Capital has run its course and much of the commentary has moved on (though not necessarily from the broader topic) so now is as good time as any to peer back and reflect on how the debate around the book ended (if such a thing can be summarized). From my own vantage point, the debate about the book (not necessarily the discussion) stalled out around a single question, so I will do my best to restate and clarify that question so as to focus where more evidence and argument is needed, should this be a conversation anyone wishes to resume. None of this is new, exactly, but it’s worth recanting given the importance of the question and the stakes surrounding it.
Around 1800 AD, living standards in some countries began to rise substantially, and over the past 200 years, that rise (as measured in GDP per capita) has been on the order of a factor of 50. This generally seems to correlate with other indicators of increased living standards to a degree that, with some exceptions (such as thinly-populated resource-rich countries) it is generally, though not universally, accepted practice to use GDP per capita as a good-enough shorthand for broad living standards. Whatever the case, exactly how and why this increase transpired is still a matter of debate, in no small measure because most people would find it desirable to replicate the phenomenon in those areas that have not yet experienced it. Indeed, some countries that did not begin experiencing the phenomenon in its initial emergence have experienced it since, leaving, essentially, three groups of countries – those who have experienced it, those who have not, and those in transition.
Piketty’s book, while not exclusively, overwhelmingly is focused on the first kind of country. A compelling portion of his narrative is documenting that transformation, yet the broader focus of the book is on what has transpired since that transformation was consolidated in the era following the Second World War. There are two key factors to be documented. The first is that the countries that have fully experienced this transformation are themselves not ‘complete’ in this regard – average living standards (recent economic troubles excepted) continue to rise and are generally, though not universally, expected to continue to rise in the absence of extreme calamity on the scale of global catastrophic climate change. The second is the change in the distribution of income – since a moment of ‘peak equality’ in roughly 1970, most of the countries Piketty analyzes have seen a sharp increase in inequality, the specific degree of which dependent on method of measurement but whose general contours is not really disputed. This, Piketty and many other believes, poses a problem for these countries that is not alleviable solely by continuing increases in average living standards or aggregate wealth and income growth.
Piketty devotes a lot of space to developing a simple model of how the aggregate quantity and distribution of capital can drive income inequality. This remarkably simple model requires only three input variables – the growth rate of the economy, the average return to capital, and the savings rate (perhaps better phrased as the rate of capital formation relative to national income) – to generate a long term prediction of two key ratios: the ratio of capital to income, and the capital share of national income. From there, wealth inequality can be used directly to compute a floor on income inequality – for example, if 1% of the population owns 50% of the national wealth and the capital share of income is 30%, then that 1% captures, at a minimum, 15% of national income.
And here we arrive at the crux of the debate. Piketty’s model implicitly assumes a certain exogeneity between those three input variables and the two ratios they converge towards, ie, that they are not inherently correlated with each other. This exogeneity poses a fragility in Piketty’s model and a challenge to mainstream economic theory. The fragility is that, if they are strongly correlated (in the direction such correlation is expected), and especially if there is iterative feedback between them over time, then Piketty’s model no longer produces outcomes in which wealth inequality drives income inequality. The key example here is the average return to capital; were it to fall in proportion to the rise of total capital accumulation, then the capital share of national income would be invariant to the quantity of capital, and thus largely undermine the mechanism by which present wealth inequality drives future income inequality. Furthermore, were this anticipatable decline in the in return to capital to drive a decline in savings, the capital/national income ratio would converge at a substantially smaller value than that projected by extrapolating from the initial period. This further depresses the likelihood of ever-increasing wealth-driven income inequality.
This is also precisely the challenge to mainstream economic theory. These correlations and feedbacks are precisely what are predicted by fundamental, strongly-held ideas about economics held by economists; most centrally that investment behavior is driven by that most central economic force, supply and demand. Piketty, however, is not simply laying down an alternative model, but an empirical challenge to this challenge. The most crucial assertion made by his model – that the return to capital fails to decline in proportion to the supply of capital – is not simply a theoretical alternative but one derived from the meticulously researched and calculated estimates in his unprecedented data. As I myself pointed out in my write-up of Piketty’s book, the data show that the return to capital is sufficiently resilient to its accumulation to justify Piketty’s model. At least, that is, without controlling for any additional factors.
And here is where debate stalled, with one side asserting that theory demands these variables be tightly correlated, and the other side responding that empirics demonstrates that they are not. The problem, of course, is that macroeconometric panel empirics is extremely sensitive to model specification, to the point of being perhaps the perfect example of how any decent statistically-versed researcher with strong priors can generate the outcomes from the data they which to receive. Certainly it is more than possible to generate a superfluity of complex models demonstrating the theoretically-predicted correlations, and these models will collectively have zero persuasive power because it is trivially easily to create as many or more equally-plausible equally-complex models that demonstrate the obvious.
Why does this all matter, to the degree it’s worth recounting in such detail to the tune of a thousand words? Because it strikes directly at the heart of the most important argument for tolerating high income inequality.
There are basically three arguments in favor of tolerating high income inequality, which I will attempt to summarize as fairly as I can.
- The ‘Just Deserts’ Position: incomes reflect the inherently just outcomes of markets. Beyond a certain threshold to prevent the worst form of miseries, it is therefore a violation of justice to take from the deserving and distribute to the undeserving.
- The ‘Pink Salt’ Position: income inequality is irrelevant except to the irremediably envious, resentful, or spiteful. What matters is preserving and increasing human happiness, which is largely driven by civil liberties, non-market institutions such as family and community, and the secondary impacts of economic progress.
- The ‘Golden Egg’ Position: income inequality may be ceteris paribus bad but aggregate economic growth is extremely good to a degree that in most plausible scenarios swamps income inequality. Furthermore, income inequality and economic growth may be conjoined outcomes of our economic system and cannot be modified independently. Therefore, we should be extremely cautious about attempting to alleviate income inequality through policies that slow the rate of economic growth, as this may reduce not just aggregate utility but the utility of those benefiting directly from redistribution.
It will shock nobody to hear that I reject outright the first argument in the strongest possible terms, and the second in quite strong terms as well. Indeed, I believe that the majority of Americans, and certainly the majority of voters in developed countries, disagree with those arguments as well. It is that third argument that gives pause to many – including, to a degree, me (though that pause is still far from convincing in my own case). The average person living in a developed country today as compared to a person living in that same country in 1800 is vastly better off, and it is not impossible to imagine that the average person living in a developed country in 2100 will be vastly better off than that average person today. Impeding our shared progress in that regard could simultaneously defer developments that improve the quality of most lives while simultaneously deferring developments (like innovation in renewable energy sources and storage) that could mitigate or reverse the worst consequences of economic growth to date.
This all converges on something of an ironic surprise. In this debate, it has been the left that has been advocating, implicitly or explicitly, on behalf of the resilience of capitalism (broadly defined) and its ability to deliver human prosperity, whereas it has been the right that has claimed, implicitly or explicitly, that capitalism and the prosperity it delivers is fragile, so much so that even increasing post-market redistribution (as opposed to pre-market regulatory redistribution through minimum wages, stronger protections for unions, and abridging the current rights and privileges of lenders and shareholders) could, to use a tired aphorism, kill the goose that lays the golden eggs. This ideological positioning isn’t wholly novel, and whether it is instrumental and ephemeral or representative of something larger remains to be seen; but it is notable, and worth pondering for what it says about the state of both the contemporary mainstream left and right movements in the United States (if not beyond).
NYT Bits blogger Nick Bilton tries to come up with lots of reasons why iPad is whooping Surface, only to be very politely smacked down by Matt Yglesias with the actual reason, which is first-mover advantage. However, Yglesias ends his post there, without making the very Yglesias-y point that Bilton’s desire to find deep, meaningful, and tech-related reasons is symptomatic of the sometimes-perverse incentives of journalism. You are a tech writer. You write about tech for a very prominent institution. There is a phenomenon in the world of tech. Anyone can write "well iPad was first." But only you can write "SD cards! stylus! user interface! power vs. options!" You have to press your comparative advantage hard, even when you’re barking up the wrong tree, because it’s your tree, dang it.
A couple weeks ago Noah Smith wrote a very sharp piece for the Atlantic about the limits of macroeconomic models that nevertheless, IMHO, fails to reach the most important conclusion of all.
Let’s say I devise a macroeconomic model that can accurately predict the economy. Whoohoo! Now, what to do about it? There are two broad categories of action I could proceed to take, both which end in the same confounding paradox – either publish the model, or proceed to make a massive killing in the markets.
Either way, someone is going to make a massive killing, either immediately or once the value of the model becomes clear. So much so that model-adherent traders and investors will quickly grow to the point where they are a substantial share of the market itself. So the model will make a prediction and traders and investors will act in such a magnitude as to alter the economy’s path. But the model will then consume all the new data and spit out a new prediction, which will then spur traders into a new path-altering round of trading, and is the paradox clear yet? Essentially, the very existence of this model would send markets into a Gödelian-loop of accelerating paroxysms of wild trading. Imagine this model connected to HFT algorithms and you get the idea – volatility without end, markets seizing.
The moral of the story is that all finite formal systems are limited by their inability to account for themselves (ie, can never be complete, consistent, and decidable) and that more broadly human behavior is in part determined by human knowledge about human behavior and thus as the latter changes so does the former and thus can never be complete or settled.
Mind, n. A mysterious form of matter secreted by the brain. Its chief activity consists in the endeavor to ascertain its own nature, the futility of the attempt being due to the fact that it has nothing but itself to know itself with.
A musing after a long week buying, shopping, and returning various and sundry items at various and sundry brick’n’mortal establishments:
You run a large chain of clothing retailers – say, HC Annstrom’s. You decide you aren’t using enough data in designing your stores and incentivizing your employees and customers, so you hire a team of data analysts to report back on what works and what doesn’t.
The findings are returned, with great news – there are certain things that, when your employees or customers do them, result in more sales or more profit. So you begin to implement them post-haste:
When a customer touches an item, they are 27.4% more likely to purchase it, so employees are incentivized to hand items to customers.
When a customer tries an item on, they are 17.1% more likely to purchase it, so employees are incentivized to encourage customers into the dressing rooms.
When small, inexpensive items are placed strategically around the register and queue, overall sales volume increase 7.2%, so placed they are.
When clerks recommend signing up for the HC Annstrom’s store credit card, customers are 21.9% more likely to sign up for a card; when they ask again after an initial refusal, this time stressing the discounts, they are still 9.3% more likely to sign up for it. Cashiers are duly incentivized.
This is going to be great!, you think. But there is one thing you didn’t realize: everyone else is doing this too. And not just that, but each of these were measured in isolation, not in tandem.
So what you and every other brick’n’morter clothing retailer is collectively make shopping a miserable, pressure-filled, harrowing experience.
Your homework assignment: explain what this story tells us about:
-The future of internet retail
-The future of Big Data
-The quest to establish “microfoundations” for macroeconomics.
Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.
Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!
Wait, let’s start over.
The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).
Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.
Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.
And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.
So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.
But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:
So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.
So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.
Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.
Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.
And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?
So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.
The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:
1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity
assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).
Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.
And the same in real-world examples. There would definitely be differences between these two alternative scenarios:
1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).
But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.
The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”
As you might have noticed, in my initial minimum wage-related salvo against Don Boudreaux, I used a somewhat unusual graph:
Needless to say, it did not come from nowhere. In fact, it came from a lot of thinking and a decent amount of work, partially inspired by, curiously enough, Don Bourdreaux’s “Catalog” project, as well as by Scott Sumner’s work in general as well as his frustration with conceptual understandings of inflation. Rather than beat around the bush any more, though, I’m going to tell you what I’ve created, then explain it and defend it, then provide examples:
I have created a new econometric index. It consists of dividing the nominal price or value of something across time by nominal GDP per capita and representing it as a percentage. This divides out the currency unit, and so is an index measure of quantity, not price. I am calling the index, as well as the index unit, the “Percappy” (plural “percappies”).
Now – why?
It is theoretically and empirically sound. The Percappy tells us what share NGDP-per-capita could obtain a single unit of a given thing at a given time. It requires only three measurements – GDP, population, and the nominal price/value at a given moment in time – none of which need to be additionally weighed, balanced, or adjusted in any way. It does not need to be controlled for inflation over time, since inflation would affect equally both numerator and denominator. It does not need to be controlled for PPP or exchange rates across national borders as long as correct local prices are used.
It tells us something new and useful. The Percappy tells us, essentially, what share of per-capita national income it would take to acquire a single unit of some good, service, or financial product. This allows us to easily compare living standards (again, controlled perfectly for inflation) across time as well as across national borders, even diagonally (for example, you could compare other countries’ present consumption frontiers to the United States’ current consumption frontier).
It is analytically powerful. With a minimum of computation and weighting, using only easily-accessible publicly-available data, many different things can be compared – the prices of goods, services, commodities, financial products, and even more (as we shall soon see) can be compared while controlling for any number of factors that tend to complicate such comparative analyses.
It is simple to understand. Unlike inflation, which is conceptually challenging and whose definition is not universally agreed on, both the idea and the process behind the Percappy is very simple and easily understood – it answers the question
“how much more or less of some thing can be bought in different times and places?” by dividing prices by per-capita national income.
What it doesn’t tell us (and other limitations). It tells us very little about inflation or exchange rate fluctuations unless a large amount of data is computed and compared. The Percappy index is powerful because it easily divides away these factors to look at “objective” standards of living; but the trade-off is that it can tell us very little about the monetary, financial, fiscal, and other policy-related factors that may drive those changes. It also tells us nothing about quality. Also, historical prices can be hard to come by.
Let’s look at some examples. Firstly, a simple one – the price of a McDonald’s hamburger over time (note: log scale; all prices are per-unit and all measurements in %; the formula is 100P/[GDP/POP])
Unsurprisingly, we are richer in terms of McDonald’s burgers than we used to be. What about some other delicious items?
Interestingly, while Oreos and Hershey’s Bars seem to both be trending downwards (albeit not as sharply as McDonald’s burgers) Cornflakes seem to have bottomed out in the early-to-mid ’90s and have since climbed back to 1960s levels.
What about some other consumer prices people care about?
FRED has only been keeping track since 1990, but clearly we’re not doing well on that score.
But the true power of this is to tabulate more than just common consumer prices. What about the value of the S&P 500?
What about the average dividend of the S&P 500?
And, to be fair to the goldbugs, what about gold?
Hopefully even these examples, as simple and unprocessed (and, thanks to Google Spreadsheets, amateurishly presented) as they are, show some of the power of this index. Essentially, it can “crunch” almost anything, including (at least in theory), other indices (I’m thinking about feeding it the Case-Shiller index).
I am hoping other people think this project has some value – if you do, you can help! Here’s how (bleg time):
1) Data! Find historical prices is harder than you might think! If you can send me time-series price data of just about anything I would be quite grateful – or, you can do it yourself! It’s pretty easy. This could be easily crowdsourced.
2) Mathematica. I got this software and I love it, but haven’t quite figured it out yet. Especially the “get large volumes of data into it so you can crunch with with panace” part. Any Mathematica aficionados out there want to send me tips?
Here’s hoping people find this useful, helpful, interesting, worth picking up on or helping out with, or some combination thereof.
I am genuinely grateful (and a little surprised) that Don Boudreaux has responded (and quickly!) to my response to his many posts re: the minimum wage. Firstly, I want him to know that I only referred to him as a “cantankerous archetype” in the most affectionate way. Secondly, while I am grateful he responded, and while he said quite a bit, I’m not sure he really said anything that directly responded to the point I was trying to make, which is that even should the President’s proposal become law (unlikely) that an hour of minimum wage work in the United States has been becoming more, not less, affordable over time even as the minimum wage is raised. His response to that is to conjure a fantastical and prima facie absurd and loathesome policy that he then equates to the minimum wage, a trick he has used before and one that, given my stated belief that differences in degree are equivalent to differences in kind, I obviously don’t find terribly convincing. In fact, I would rather respond to the first part of his argument, where he says:
The proposition that, ceteris paribus, the more costly it becomes to acquire some good or service the fewer will be the number of units, per period of time, of that good or service that people wish to acquire is not an ancillary or secondary proposition in economics. It’s foundational. So when someone argues that this proposition doesn’t hold for good X or service L, the burden of persuasion is on that someone to make a compelling case for such a startling proposition. And it is a heavy burden.
I’m first going to try and approach this on Boudreaux’s terms as much as possible, which means avoiding many of the good arguments in favor of a minimum wage, but does mean I get to use some basic economics, which is fun.
The Econ 101 rejoinder to Boudreaux is very simple: if you assume that demand for labor is inelastic, you can set a price floor and thus create a great deal of producer surplus at little change in quantity purchased.
Boudreaux isn’t exactly wrong about very much, per se – he is certainly right that the empirical evidence on the minimum wage is a scattershot, to say the least; requiring strong evidence before instituting new public policy isn’t unreasonable; and certainly even if you accept that a minimum wage won’t have a large disemployment effect, it may have some and therefore even a minimum wage that results in a net producer surplus to labor involves a trade-off between giving some, even most, low-wage workers more money and denying some, even a small number, employment opportunities, and that trade-off may not be adequately grappled with by minimum wage advocates.
The issue I have with Boudreaux is that he displays an extreme version of the disregard that many economists have for the social value of certain economic policies, as well as the detached way that “labor markets” are treated as if they are no different than markets for commodities. Boudreaux comes from a much more blue-collar background than I, so I don’t expect to come out ahead in any argument relating to the lived experience of those closer to subsistence of the minimum wage, but I will note an experience that I had in India a few months ago that could shed some light on the situation:
My wife and I were in Amritsar, and we wanted to rent an auto-rickshaw to take us from the central city back to our guesthouse. The drivers were waiting in an informal taxi-stand awaiting passengers. We approached one driver, and asked him to take us to the guesthouse. He cited us a certain price, which we felt was a little too high. But when we tried to bargain (which, as we learned, is the true national sport of India) the other drivers took note and quickly swarmed around us, ordering both us and the driver to cease negotiating and agree on the quoted price.
This informal cartelling/guilding was a kind of commitment mechanism. “We will all be better off in the long run,” the drivers seem to agree, “if we all refuse to accept no price below a certain level, even if some of us could sometimes be better off by taking a slightly lower price.” Note that demand for rickshaw rides in Amritsar is probably quite inelastic.
Note also the long history of organized labor fighting for restrictions on hours worked, which is strange if you think about it from a purely economic perspective (why shouldn’t a worker have the right to work more if they so choose?) but makes much more sense from a game-theoretic perspective, as Matt Yglesias notes on the subject. A minimum wage allows labor, especially low-skill labor, which now more than ever is a very dispersed interest, to reclaim some bargaining power against employers, who are much more concentrated (as well as well-capitalized) by essentially being tied to the mast.
Indeed, the minimum wage is more complicated than many advocates will have you believe; but it is also more complicated than many opponents would have you believe as well. In conclusion, I tend to think there is an optimal minimum wage or an optimal range of minimum wages, and both the current and proposed minimum wage are comfortably within it. Certainly, though, if Boudreaux and I were co-consuls of the American Republic and had to strike a deal, I would trade increasing the current minimum wage or maybe even repealing it in exchange for some other policy like a guaranteed income.