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Maybe it’s my anticipation to read The Leading Indicators (right after Piketty, that’ll be a breezy one, right?); maybe it was listening to the Planet Money podcast on Kuznets; or maybe it’s just because it’s Friday, but the question popped into my head this morning – how much is the nonconomy worth?

The boundary between what is and is not “the economy” is both a very well-defined and a very fuzzy one; the NIPA Handbook does a very nice job explaining the division criteria but the more you muse over them the more they reveal themselves as pragmatically arbitrary with a dash of “I know it when I see it.” Which is all fine and useful but still means that all the stuff that’s not “the economy” is not only, you know, the stuff of life, but also just as measurable and worthwhile to measure. Because I am a giant nerd, I have decided to measure it. Because I am decidedly not a one-man BEA, this is going to be pretty back-of-the-napkin stuff. All data 2012:

Americans worked 230 billion hours in 2012. There were 314 million Americans in 2012, so they experienced roughly 2.75 trillion hours. Which means the economy took up ~8% of American time in 2012.

But that’s a little unsatisfying, for the following reasons:

1) It includes retirees and children.

2) It neglects the question of sleep.

3) It neglects the question of work-supporting activities, like commuting. I’m going to exclude them from the nonconomy for now.

So let’s pinpoint working-age Americans, of which there were ~201mm in 2012. Let’s assume that, of their total time spent existing, they spend 1/3 sleeping and another 10% in work-support (the average round-trip commute is roughly an hour, and I rounded well up to encompass all the other little things that shouldn’t be lumped in with the nonconomy with that definition. That leaves us with a pool of ~1 trillion hours pretty much exactly; subtracting the 230 billion hours working, Americans spent 770 billion hours in 2012 laboring in the nonconomy.

How to attach a number? Simplifying assumption: output-per-hour is the same in the nonconomy as in the economy, so you just divide GDP by hours worked. In 2012, that was just around $70/hr; multiplied by 770 billion, you discover the nonconomy was $53 trillion in 2012. Let’s use a sophisticated data visualization to compare:

chart_1 (3)

GDP is Gross Domestic Product; GDA is Gross Domestic Awesome.

If anything, this is a substantial undermeasurement, because old people count too! And since by this calculation they don’t work at all, they would be contributing an additional 200 billion hours to the nonconomy, which is another $14 trillion of nonconomic activity:

chart_1 (2)

Just a little perspective on life and the economy on this new-jobs-number Friday.

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The Washington Post busted open the big story about the raisin market, then opined about it, then Planet Money did an excellent story about it. For those without time to click through the genuinely fascinating links, the basics of the story is that raisins, somewhat uniquely, have their supply and demand managed centrally by a government committee, who essentially confiscates a share (sometimes a very large one) of raisin farmers’ output and with varying levels of compensation. This is probably bad public policy, and there’s no reason that this shouldn’t be done away with.

However, there is a sense in all these stories that there is something unusually unjust about the structure of this market. But I’m not sure that’s true. Let’s imagine, instead, that there was simply an additional sales tax on raisins, not unique to raisins at all. In that case, the price would rise, so demand would fall, so supply would contract and the price would rise and eventually we’d settle on an equilibrium where the overall raisin supply is lower and the price is higher and the government collects some revenue. You could even have the tax vary each year to target a price (as opposed to a tax that is a consistent percentage of the otherwise-market-determined price).

In this case, what we have instead is situation where the government targets the supply side rather than the demand side, but to pretty much a similar result, except the government collects its revenue not in money but in-kind.  Now, the fluctuations in the crop portion taken for the reserve and the uncertainty of compensation definitely feels more unfair, but the biggest difference I can see in this scenario is that in the tax scenario you’d probably have fewer raisin farmers, whereas under the status quo there seem to be more raisin farmers than the eventual market price would otherwise produce.

That, to me, is the biggest curiosity – why don’t more farmers do what the one farmer in the Planet Money story does and switch out to a less-regulated crop like almonds? The answer is that if we were in an equilibrium where no raisins were being confiscated then the existing raisin farmers would probably be making substantial profits, thus attracting new entrants into the industry, each one individually having no impact on the market but collectively driving up supply to the point where confiscation would begin. That, along with emotional attachments and the transaction costs of switching crops, probably keeps an equilibrium where you’ll always have more raisin farmers producing more supply than the eventual raisin price would otherwise demand.

In some ways, this solution is more socially optimal – because you still have farmers incentivized to produce as many raisins as possible even as the government is driving up the price, when in the taxation scenario you’d probably have a lower raisin supply. This allows raisins to be donated to school lunch programs, for example, that otherwise wouldn’t exist. In the tax scenario, however, the government could give the money to schools to spend how they see best fit, and that way would probably be better.

Additionally, you could raise the overall sales tax a miniscule amount and deregulate raisins and that would really be socially optimal. Freedom!

big externalities spending g's

This is probably belaboring the obvious, but especially in light of the prior post it is worth noting that there are large external benefits to a society that increases in total aggregate wealth even if that wealth is not equally distributed. This becomes obvious when, like Planet Money did, you ask people whether they would rather be rich 100 years ago or middle-class today. Of course you’d rather have an iPhone and antibiotics – having the ability to consume a high share of social output matters less when “social output” is mostly servitude and pheasant. The vastly increased volume, quality, and diversity of what we have now means that you can eat delicious food for $10 from your local Thai or Vietnamese or Burmese or Indian or Bengali or Japanese or Chinese or Korean or Mexican or Salvadoran take-out joint (just to name a few) that would have been mind-bogglingly exotic to the insanely rich American or European of the McKinley era. This also becomes obvious when you ponder whether you’d rather be rich today but in a poor country like, say, India. Being rich in India would be nice. There are amazing houses to live in and some really great shopping, and you’d get to consume a lot more servitude than a similar-rich American. On the other hand, major roads in India are still clogged by goats and cows. Take your pick.

This is likely what frustrated me so much about Mr. Money Moustache – not his own choices, which are his own, but his preachy self-righteousness. Mr. Money Moustache can live so well on so little in large part because the rest of us are working so much harder to keep streets clean, power running, vaccinating, fighting crime, and so on and so on. Mr. Money Moustache is massively benefiting from the positive externalities of living in the wealthiest society Earth has ever produced and is sufficiently oblivious to that fact as to suggest his own choices could and should be everyone’s simultaneously.

Without more commentary, it is also worth noting the latest research on happiness and income both across and within countries.

So I’m listening to the latest Planet Money, re: Bitcoin, and lately I’ve also been listening to FT’s Hard Currency podcast, and I’ve just got to say: foreign exchange markets are really, really weird. And there’s a reason for that – unlike other asset markets, the point of currencies is not to become more valuable, ceteris paribus. Usually, if your currency becomes more valuable it is a signal that good things are happening in the relevant political unit (if there is one), but the direction of causality here is important. Stocks are supposed to become more valuable, as are bonds, etc. But currencies are supposed to be stable. They are supposed to make all the other stuff in the economy possible.

So it’s odd to hear things like "which currency had a good year?" or "I’m long that currency" or other things like that. Forex traders serve an extremely valuable role in ensuring exchange rates reflect social information, but the mindset that leads to is in-and-of-itself a strange one. If Japanese folks decided to buy more Swiss chocolate and Americans decided to buy exactly the same amount less, the Swiss franc would appreciate against the yen and depreciate against the dollar and then the dollar would appreciate against the yen to exactly the amount that would forestall arbitrage and then Swiss and American consumers might decide to buy more Japanese stuff than they did before and so on and so forth until you get to "general equilibrium" (whatever that is) but the whole point is that if the central banks were targeting, oh, say, the level of nominal gross domestic product, none of these secular changes in consumer preferences (unless they were really huge) would have any effect on the overall level of economic output in any of these countries.

The fact that some currency goes up or down against another doesn’t really tell you anything about relative levels of inflation or prosperity. So there’s no underlying normative preference for one direction in exchange rate fluctation over another. I’m going to Turkey and Germany in September, so I really hope the dollar appreciates against the euro and the lira between now and then but if in October I get hired by a company that exports a lot to Germany then boy do I hope the dollar depreciates againts the euro. But there’s no reason to prefer one over the other from the standpoint of the overall national interest unless you’re super-dependent on a certain kind of international trade pattern.

Also, I realize I’m pretty down on Bitcoin generally on this blog, so I should say – certain things about Bitcoin are awesome, and I’m certain that whatever money looks like in 10-20 years, it will look more like Bitcoin then it does today. I’m just down on Bitcoin specifically due to Bitcoin-specific issues of trust and governance. I’d gladly use Bitcoins to transact, but I’d also gladly use Paypal or Square and be certain that the ~225 USD I sold my Pebble watch for last week can still be exchanged for the same basket of goods next week or next month or even next year, more or less. If I wanted or had to transact in BTC I’d want to get in and out of having any position in the currency ASAP, but somebody has to hold them and those people either need BTC for transaction-specific reasons or are speculating. I want to be able to hold my money (or deposits denominated in money) for long periods of time without having to feel like I have a position (although I of course do). You’ve got to have some liquidity so if the value of your currency is pretty stable it’s pretty easy to just hold cash or deposits.

robot_bomb_sized.JPG

Just listened to Planet Money discuss subsidies for having babies, and thought, first of all, since I am now engaged to get married and both the fiancee and I are on the same page re: having a couple kids, I hope the United States institues such a policy! Maybe it could united pro-lifers (incentive to carry pregnancy to term) and progressives (it would largely be a very progressive redistribution of wealth)!

But more importantly the economic logic behind it sort-of-tangentially reminded me of a pet concern of mine:

This can be good for a little while. With a young workforce and fewer babies to take care of, a country can show enormous growth.

But then people start to get old, and governments say uh-oh.

"Who’s going to pay the bills? Who’s going to pay for pensions?" says Patricia Boling, a political scientist at Purdue.

In many countries, including the U.S., workers pay for retirees’ pensions. Fewer kids means fewer workers funding those pensions.

"And in countries that have really low fertility rates, that’s a very extreme problem," Boling says. It "makes what we have in the United States … look like peanuts."

All true! And yet one would think that overall economic growth could fund a higher retiree-to-worker ratio, right?

Here’s my vision for the future of the economy:

  • Robots replace humans at doing some job. A few humans are unemployed, but overall there is a consumer surplus.
  • Repeat.

Here is where my simulation diverges. Essentially, replacing a human worker with a robot is substituting capitol (the machine) for labor (the worker). On a small scale this will simply cause sectoral shifts; if it gets cheaper to buy some tchotchke because a robot made it instead of a human, when I buy the tchotchke I save some money which I will then use to buy coffee and when demand for coffee goes up it causes a commesurate rise in employment in the coffee sector. Yay! But on a sufficiently large scale you are faced with what I like to call the reverse-Ford problem:

Mr. Ford announced that he was doubling the pay of thousands of his employees, to at least $5 a day. With his company selling Model T’s as fast as it could make them, his workers deserved to share in the profits, he said. […]

The mythology around this story holds that Mr. Ford wanted to pay his workers enough so they could afford the products they were making.

In fact, that wasn’t his original reasoning. But others made the point, and, in time, it became part of Mr. Ford’s rationale as well. The idea became a linchpin in an industrial philosophy known as Fordism.

More production could lead to better wages, which in turn would lead to more spending by the public, yet more production and eventually even higher wages.

"One’s own employees ought to be one’s own best customers," Mr. Ford said years later. "Paying high wages," he concluded, "is behind the prosperity of this country."

So what happens to Ford Motors if making the same number of cars requires far less labor input, replaced by less-expensive capitol input? Well you get higher and higher wealth and income inequality as those at the top need not share their profits with a large workforce.

So what happens when there exist enough robots to basically obviate human labor from the fundamentals of the economy?

I see three possible futures:

  • Robot dystopia – a few scions of capitol control all the machines, make vast fortunes, and surrender as little as possible, leaving most of the rest of humanity living at subsistence levels.
  • Robot utopia – socialization of wealth through whatever mechanism, meaning the vast surplus is shared relatively equitably, meaning most people have most of their needs met and are free to pursue higher levels on the Maslow heirarchy.
  • Robot apocalypse – the robots rise as one to destroy us all.

I don’t know what to do about option #3, but I am concerned that ruling that out that option #1 is more likely than option #2. And the reason I think that has to do with, well, baby subsidies. To some extent we are facing a similar problem – the economy is producing more but finding that more and more of the humans in the system don’t have a great deal of utility but still require resources. In theory this shouldn’t be hard, but in practice it’s proving difficult. Even in Japan where they had some nasty economic times they have still passed their original peak GDP and are have a very high GDP per capita, though not nearly as high as the United States. Keep in mind also that a lot of Japan’s troubles here are culturally based; a different country facing similar demographics would probably not have such a difficult time. But looking at the United States where GOP scissors are already being aimed at Social Security despite being projected not to run into any trouble for the next 75 years because raising taxes on wealthier individuals is the dread socialism doesn’t necessarily leave me optimistic that we’ll be able to wrest sufficient control of the Great Robot Surplus from the hands of its nominal owners before they are able to consolidate control.

I’m quite surprised to find myself in agreement with the Tea Party but here we are:

Some House Republicans have proposed a bill which would kill the 1-dollar bill and replace it with a mandated dollar coin, The Hill‘s Peter Kasperowicz reports.

Rep. David Schweikert (R-AZ) and two other House Republicans introduced the Currency Optimization, Innovation and National Savings (COINS) Act last week, saying the U.S. would save $184 million a year by moving to the dollar coin.

But Massachusetts Sens. Scott Brown (R) and John Kerry (D) have introduced a competing bill called the Currency Efficiency Act which is supposed to protect the paper dollar from what they’re calling the "massive overproduction" of the "unpopular one dollar coin."

"The one dollar coin is misleading because it costs taxpayers so much more," Brown said. "In fact, we have over $1 billion worth of extra one dollar coins sitting idle in vaults and that’s set to double over the next several years." Their bill would stop $1 coins from being minted while the current surplus of $1.2 billion in dollar coins exist.

The Dollar Coin Alliance claims that Kerry and Brown are just covering for a business in their home state, Crane & Co., which supplies the paper used to produce dollar bills.

"Unfortunately, it seems the senators have chosen to protect a local business at the expense of the American taxpayer," former Arizona Rep. Jim Kolbe, the honorary chair of the Dollar Coin Alliance, said, according to the newspaper. "At a time when the government needs to be looking to save every dollar, we can’t continue to play the same Washington game of serving narrow special interests with half-measure legislation."

NPR’s Planet Money investigated the use of dollar coins earlier this year, finding pallets of them sitting around in Federal Reserve storage unused.

In a 2010 report to Congress, the Federal Reserve said the coins were being held "with no perceivable benefit to the taxpayer" and that banks are sending them back in increasing numbers, according to NPR.

"We have no reason to expect demand to improve," the Fed said. "We also note that a 2008 Harris poll found that more than three fourths of people questioned continue to prefer the $1 note."

Now I’m not sure if the Kerry-Brown axis is really just a front for Big Paper, but other than that everyone is right here – the dollar coin is unpopular. But it also represents vast savings for the government and should be widely adopted, and that’s why Congress ought to go the unpopular route and scrap the dollar bill. It’s more efficient and more ecologically sustainable. Plus, we’d get to circulate all the dollar coins we already printed. The euro doesn’t circulate any bills less than €5 in value but while that might annoy people at the margins that’s been the one thing about the euro that hasn’t incited riots and social unrest.

goinggoingGONE to the guy in plaid!

Planet Money has informed me that Ticketmaster, tired of watching so much surplus go to scalpers, has decided that they have seen the enemy and it is them:

Ticketmaster wants in on the action. So later this year, the company will introduce variable pricing. For shows where everybody wants a seat, the price of a ticket may rise. When there are lots of unsold tickets, the price will fall.

This is all well and good but:

But putting this into practice could be complicated.

“When you’re talking about a concert ticket, it’s about an artist,” Marie Connolly, an economist who has studied the music industry, told me. “There’s this weird emotional relationship that comes into play here.”

A concert ticket isn’t a cold, calculated exchange between two people who are never going to interact again. It’s one transaction in what is typically long-term commercial relationship between the musician and the fan.

So in the long-term, it may be in the musician’s economic interest to sell tickets at a price that’s lower than the absolute maximum the market will bear, Connolly said. That way, fans still have warm, fuzzy feelings about the musician — and keep coming back for more.

I am sympathetic to this in my own warm, fuzzy feeling nodes but the cold, hard critical analyst in me says that never again will such a model be sustainable. As it happens buying tickets to your favorite band consists of:

  1. Go on the ticket-selling website a few minutes before the tickets go on sale.
  2. Hit CTRL+R a whole lot.
  3. Try to buy tickets at the stroke of 10:00AM.
  4. Fail.
  5. Vent.
  6. Buy tickets on StubHub.

So it’s not like the status-quo really works.

Anyway I happen to have a great way to fix this problem – concert tickets should be digitally auctioned. On sale day any individual can make a bid of $X for 2-4 tickets. After the auction closes later that day the highest bidder gets their tickets, then the next highest, and so on until the event is sold out. Perhaps you could suggest a “target” price that you expect to be the median. Here’s why this would work:

  • Most people would bid, presumably, something close to the maximum they would want to pay to see the show, tempered by not wanting to drastically overpay. This would allow for demand-sensitive pricing, with the surplus captured by the original seller.
  • Scalpers would have no angle. If they outbid the field and get a monopoly on the tickets they’ll be outbidding the maximum everyone was willing to pay to get the tickets in the first place, and be stuck selling them for a loss.
  • This would be good for the sellers because I suspect the mean and median price of the auctioned tickets would be higher than the set price they would have charged otherwise.
  • It’s less time-sensitive, and thus far less stressful and arbitrary.
This would work especially well with general admission venues where every ticket is of equal value. If you had leftovers after initial bidding you could sell the remainder at the median price of the auction. I think this would work especially well if you were transparent about what shares of the ticket price went to the venue and the band, because people would probably be less inclined to feel ripped off if they knew that most of the money was going to their favorite band or venue as opposed to the various middlemen (whether or not that’s the “right” way to think about it). On StubHub it is painfully clear that the scalper is in fact claiming a scalp so anything is probably better than the status quo.
Thoughts?

he takes his risk premium in stock options

I just listened to the most recent episode of Planet Money, which if you don’t listen to you should and if you haven’t listened to the most recent episode do so immediately. The episode is about the economics of illegal drugs and is oriented around an interview with “Freeway” Rick Ross, a former crack kingpin of Los Angeles, and is fascinating throughout.

The broad conclusion you can draw from the episode is that the distinction between “law as enactment of public policy” and “law as statement of fundamental moral principles” is blurry and often tough to sort out. But there was also an interesting economic moral to be drawn as well; there’s no transcript up yet, but basically Ross disputes a widely-held theory in academic literature that there is a risk premium in the wages of dangerous jobs. Ross cites the desperation and despair of poverty as why himself and others were willing to engage in work that could risk prison or death for relatively little in compensation (although Ross himself was well-compensated).

I think what this really challenges is that there’s lots of assumptions based into the cake of economic theory that, when you remove those assumptions, makes the “free market” look a lot less hospitable. It’s a lot nicer to think that miners will be paid generously for risking their lives in a dark, dreary shaft, but that assumes a diverse and open employment market operating at full employment, in which plenty of non-dangerous work is available and so people have a clear choice in taking the risk premium along with the risk. In real life, though, sometimes the choice given to you is miner or unemployed, which could mean “my family doesn’t eat,” which is rarely a choice at all. Especially during a recession, anyone offering a job is offering a product for which demand far exceeds supply, and thus can negotiate the price of the job – ie, how little someone will do it for – from a strong position no matter how dangerous or distasteful the work is.

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