Blog: Economics

A college graduate read Barbara Ehrenreich's Nickel and Dimed, about how hard it is to get by on minimum wage jobs, and decided to try to disprove it. He went to Charleston with $25 and a gym bag and in a few months managed to get a job, move up, save money, and pull himself into a decent though frugal lifestyle.

What does it mean? Not much. The comments on the Consumerist thread and the ABC News report are more interesting than the story. Most people point to many reasons that he had a leg up over other people: he's college educated and didn't forget everything he had learned; he didn't have emotional problems stemming from an abusive parent; he didn't have a sick relative (at first; later an illness began in the family, and he had the luxury of leaving his experiment, which others wouldn't have been able to do).

Just look at the lede on the ABC story: "Alone on a dark gritty street, Adam Shepard searched for a homeless shelter. He had a gym bag, $25, and little else. A former college athlete with a bachelor's degree, Mr. Shepard had left a comfortable life with supportive parents in Raleigh, N.C." (emphasis added).

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Via the Freakonomics blog, Freakonomics is one of the top five books ranked by the average SAT scores of colleges where it is popular. Steven Levitt makes the obvious point that most likely reading Freakonomics and the other top books does not improve your score, but rather highly-scoring people read it. One commenter, Dan, suggested,

You could put that on the cover of the next printing—"Readers of this book score higher on the SAT!" It would be risky, though. People might buy the book, read it and learn that correlation does not imply causation, and then protest the authors.

It's actually perfect: a statement that would be most likely to persuade people who don't understand correlation vs. causation to buy a book that would teach them about correlation vs. causation.

Freakonomics blog has an interview with hedge fund manager Neil Barsky, and I was surprised at the progressiveness of his answers. He's not an enemy of hedge funds, of course (nor am I), but does lament the social problems inherent in a system that rewards money managers so handsomely and out of proportion to other jobs like teachers or even doctors. Nothing he says is crazy or even very unusual, but I'm so used to dogmatic defense of the market at all costs from so many people in finance and economics blogs that it's a surprise to see someone take a more thoughtful, nuanced view.

Update: fixed link.

Originally posted at IPac.

Freakonomics co-author Stephen Dubner poses a thought-provoking question on the Freakonomics Blog: If public libraries didn't exist, could you start one today?

The law protects public libraries, and their right to lend books to people. But the publishing industry doesn't like that it can't control what happens to books after they are bought. Dubner analyzes the pros and cons of libraries from the point of view of the publishing industry: on the one hand, many people can read a book but the author and publisher only sell one copy. On the other hand, libraries foster literacy, expose people to new authors, make reading accessible to the poor, etc.

Dubner writes, "Perhaps they'd come up with a licensing agreement: the book costs $20 to own, with an additional $2 per year for every year beyond Year 1 it's in circulation. I'm sure there would be a lot of other potential arrangements. And I am just as sure that, like a lot of systems that evolve over time, the library system is one that, if it were being built from scratch today, would have a very different set of dynamics and economics."

Or, perhaps libraries wouldn't exist at all. We know from experience that content industries often don't act in their own long-term best interest. The RIAA shot itself in the foot with its unwillingness to find a profitable way to allow filesharing; authors and book publishers are suing Google for making it easy for people to find their books, even though the users can't read more than a few lines of copyrighted books without permission. So let's assume public libraries are good (and I believe they are) - unfortunately, we couldn't count on the publishing industry to make it possible for them to exist.

The publishers might insist on too much revenue, in an attempt to protect their margins on existing books, even at the cost of the public good and their own long-term success. This is similar to the way the recording industry is trying to kill Internet radio with royalty fees so high almost no stations could continue operating, or the way Verizon squelches wireless innovation because they won't allow applications on their phones unless they make significant profit.

The movie industry would have stopped the VCR if it could have, afraid that home video would cut into theater profits. It did, but they ultimately more than offset the loss with video rentals and sales. We have every reason to think that publishers would do the same to libraries if the first libraries were forming today.

IP laws give one participant in a market - the content rightsholder - complete monopoly power over that market. Sometimes that's the only way to make a market work so creators get compensation. But often, it just means that the market fails entirely. If we don't give the monopoly holders everything they want, sometimes that's best for them in the long run. Or maybe it's just good enough for them, while the public greatly benefits.

Nordstrom is one of my favorite department stores, with some great long sleeve shirts in their "The Rail" department. Unfortunately, when a new set of shirts comes in, they seem to get about one small, three mediums, ten larges, and ten extra larges. Which means by the time I get to see them, there is probably not a small left, and frequently no medium either.

Yesterday, I had occasion to go there after driving to Paramus to buy some (ok, 60) glasses at IKEA. I then hit JC Penney, which was even worse: at one rack which was far from atypical, there were 17 shirts, of which 11 were large, and the rest medium and extra large (and the mediums in that brand were pretty big).

Retailers aren't dumb - they employ a host of techniques to entice a few more dollars from shoppers, from the appearance and layout of the store to the music and smell. I realize that most American men buy large or extra large. But still, if a store regularly has many larges available and no smalls, wouldn't that mean they are buying too many larges and not enough smalls?

Is this an intentional decision on the part of the store? Maybe people will buy a shirt that's too large but never too small (I sometimes buy a medium if I really love a shirt and that's the smallest available size). Maybe they are buying the same numbers at all stores, and in urban areas the people are thinner?

Interestingly, French Connection (fcuk) seems to have more plentiful small sizes. Are they buying for a more European size range? But that would suggest that the stores aren't planning effectively for their local clientele, which I find hard to believe. On the other hand, maybe retailers aren't as smart as we think - at one Urban Outfitters recently, the clerk had to call other stores by hand just to find out the price of one item which was missing a tag, because they had no computer inventory.

Tech entrepreneur Paul Graham gives his take on Richard Florida with an essay on what a region needs to develop a startup culture. In a nutshell, it's not about office buildings, it's about people - nerds (who start the companies) and rich people (who fund them).

He's definitely oversimplifying - Graham says Pittsburgh fails because the rich people don't want to live there, though Florida's research showed Pittsburgh was less appealing to the Creative Class (including nerds) as well. And Graham clearly doesn't understand why New York City is so great; my personal biases aside, New York is much more than "a hub of glamour, a magnet for all the shorter half-life isotopes of style and fame" where people "pay a fortune for a small, dark, noisy apartment in order to live in a town where the cool people are really cool". There's that culture, for sure, but a lot more, and the fact that Google's New York office drew people from the West Coast and Seattle and Pittsburgh , I think, shows that many nerds do want to live here. Ultimately I think it boils down to the fact that Graham is generally right but it's all a little more complicated than in his model; NYC's expensive real estate and bad weather are obstacles, but Boston's only slightly less expensive real estate and comparably bad weather are overcome by its enormous edge in large research universities with great engineering programs.

Ultimately, though, as a heuristic for understanding the development of high tech centers, Graham's rule is useful. And he's absolutely right when he concludes by saying, "San Francisco and Berkeley are great, but . . . Silicon Valley proper is soul-crushing suburban sprawl. It has fabulous weather, which makes it significantly better than the soul-crushing sprawl of most other American cities. But a competitor that managed to avoid sprawl would have real leverage."

Via the Freakonomics blog, Canadian musician Jane Siberry lets fans downloading songs choose whether to pay, and how much. There are four options for every song: A gift from Jane ($0), Standard price (whatever it would sell for on regular services, usually $0.99), Pay now (prompting the user to enter a price), or Pay later (allowing a free download and asking for money later).

Jane also posts statistics for individual songs and aggregate. The most people (46%) choose to pay later, and 14% pay more than the suggested price, while only 8% pay less. While record companies insist that putting downloaders in jail is the only way to get people to pay for goods of value, respect, at least in this case, can do a lot.

Not only are Canadians really good musicians, they seem to be more sensible about copyright, too.

I've long been interested in figuring out the "end game" of the economic shifts we're currently going through. After World War II, the U.S. experienced an unprecedented period of prosperity, where wage growth and an increased quality of life created the "middle class" ideal of houses and picket fences for all. Today, wages aren't growing, jobs are moving overseas, and the gap between rich and poor is widening. Where does this lead? Will we end up back in a post-Industrial Revolution, Gilded Age type society of abject poverty for most of society? Will automation generate an Asimovian leasure society where the only human work is highly skilled robot programming for a very few? Will social upheval doom democracy?

At Ren's wedding I had a very interesting discussion with another guest, Ernie, who works in Asian equity research (analyzing markets and securities in Asia). As we discussed topics ranging from trade deficits and currency exchange to urban planning, we evolved the following line of reasoning: if we continue toward a global free trade economy, then American jobs will shift more toward creative and service industries; wage growth will continue to slow, but the cost of living will also go down, increasing the quality of life - but only if housing can also become commensurately cheaper.

If this is all true, then the ideal "end game" is a giant Williamsburg: an America where writing or acting isn't a thankless career for all but a few celebrities, but actually a decent living; and where expenses for food, medical care, and most of all rent are low enough to sustain a populace engaged in these pursuits. It's the artists' paradise writ large.

I don't know enough about economics be sure to whether this is solid (and perhaps nobody really does), but follow me through this line of reasoning and post in comments where you think it might be wrong.

Free trade is necessary.

Most economists and politicians have reached this conclusion, but the populace as a whole has not, at least not yet. Most people are very concerned about jobs moving to less expensive countries. Other nations like France are trying to protect their high wages through short work weeks, but that is creating very high rates of unemployment.

Meanwhile, China, India, and other smaller Asian nations have enormous numbers of people and rapidly growing markets. Right now, they export many goods to the U.S., and therefore the central banks of Asia are propping up the dollar. If they suddenly stopped doing that, our economy would crash. But they don't want to do that because their economies would crash too. And for the same reason, they don't want any big wars or other conflict. So the interdependence, as long as it continues, underpins a much greater level of global stability that ever existed in the past.

The types of jobs held by Americans will shift more to creative industries.

As the people of China become more prosperous, Chinese businesses will be able to sell to consumers there, reducing their reliance on the U.S., and the need to prop us up, creating a long decline. Or, perhaps U.S. businesses will develop products to sell to this enormous growing Chinese market, cutting the trade deficit and allowing our economy to stand on its own without declining.

These products aren't going to be manufactured goods, but they could be intellectual property of various kinds - software products such as operating systems and search engines, or cultural products like movies and music. We now have a race to grow the creative, export economy before losing the constant foreigh investment that sustains the import economy.

Wage growth will continue to slow, but the cost of goods and services will go down.

Wages in the U.S., Canada, Europe, etc. are much higher than in the developing world. It's unrealistic to expect that our wages would continue to increase at the rate they did during most of the 20th century. However, technological and scientific advances in manufacturing, medicine, food production, and other areas will make products cheaper and cheaper. Instead of needing to make more and more money, people can buy what they need for less.

Housing availability could become the next bottleneck.

One major area where people can't buy what they need for less is in real estate. Quite the opposite: housing prices in the most desirable metropolitan areas like Boston and New York have skyrocketed, to the point that most potential first-time home buyers are being priced out of the market. It's harder, not easier, to live in these cities, and rising unemployment and slow wage growth make it worse.

But people continue to want to live in such places - the rising costs are proof of that. And if the economy shifts toward entrepreneurial and creative industries, it's these very areas desired by the Creative Class that will be most needed. Whether creating a startup tech company or a movie, concentrations of creative people are a necessary ingredient.

Exurbs, therefore, won't be the engine of the economy. It'll either be major urban areas or else smaller cities that explictly attract the Creative Class. And either way, that means more housing in denser, transit-oriented, New Urbanism districts. The challenge is building such places, when most people in any area want to keep the density at whatever level it already is, preserving their own property values and the character of the area at the expense of others who would want to move there.

One way or another, if the above reasoning holds, then incomes will fall and large numbers of Americans will need cheaper places to live. Whichever cities accommodate them and build creative hubs will be the growth engines of the next generation. Those that don't will crumble. And either we provide enough housing at lower real cost than today, or we cope with widespread poverty, crowding, and homelessness.

The above reasoning: right or wrong? I'm not sure. What do you think?. History will be the ultimate judge.

All of economics grows from one simple principle: scarcity. Everything people want is finite, thus we need money to decide who gets the finite things. Price balances supply and demand.

What would happen if scarcity were eliminated? Is that even possible? Many works of science fiction envision such a future — Star Trek, for example, has no "money" and people supposedly seek only personal enlightenment rather than material goods. But they still have Ferengi and gold-pressed latinum and space freighters when plot lines demand it. My co-worker Saskia recently posed the question of why the Harry Potter universe has class distinctions based on wealth (the Weasleys are poor while the Malfoys are rich) when they have magical spells to do all the housework, and so nobody should have to wear ragged clothes, for example. But Rowling isn't an economist and good fantasy & science fiction literature is really about telling stories about our society through the mirror of another world, so she uses the same social and economic structures from the world she knows.

In truth, we have no idea what a society without material scarcity would look like. Since human beings by nature compete with each other, we might expect the method of "keeping score" to revolve around something other than material possessions. Would individuals compete on intelligence? Charisma? Ownership of real estate? Our would our desire for material goods, or our population size, simply expand so greatly that no matter how much energy we could gather from the sun and no matter how technology advances in order to use that energy to create material goods, the demand would grow to keep pace with the supply?

Matt Stoller, filtering Stirling Newberry, says that an economy revolves around its bottlenecks. Our bottleneck today is oil. In the past it has been other things, like labor. If we remove one bottleneck we go through a period of great economic prosperity where everyone benefits until we inevitably run into the next one. So absent the development of interstellar space flight, if we somehow develop magic spells or replicators, I'd put my bet on real estate becoming the bottleneck. The population will grow, and now having a single-family home with a lawn and a picket fence isn't so cheap anymore, giving us a future more like Asimov's super-cities in "Caves of Steel".

But then, who's to say magic spells or replicators are any more likely than warp drive? We can't predict scientific breakthroughs, so until there is one, energy is where it's at.