• Category Archives Economics
  • Initial Thoughts on Econ 101

    One of the things that my professor said yesterday stuck with me. “If an economy does not produce enough capital goods, it will not be able to grow.”  So, he said, you always want your economy to be producing as much as you possibly can, aka you want it to be ‘on the Production Possibility Curve’, but you don’t want the balance of what you produce to be weighted too much towards consumer goods, and not enough towards capital goods (and training and whatever). And you also want to be producing those things with as few resources as you can. (It’s murky whether ‘money’ counts as a resource here. Economists seem to randomly flip-flop between counting it as one and not counting it as one, and they never ever tell you until you’ve already misunderstood them, when it’s too late. I think many of them get a kick out of this.)

    So. Sure, some of this is obviously true. If you don’t have the equipment you need to do your job (we’re assuming a closed economy here) and your equipment is slowly breaking down, all other things being equal, your economy is shrinking, not growing. And what’s the point of not producing everything you can? Sure, you don’t want to be polluting too much, but if we want to pollute less, we can produce more jazz dance classes and solar panel research facilities instead of more cars. However, entirely absent from the conversation so far, and from my textbook so far, is another concept which seems to fit right here, and which seems every bit as important as the capital goods/consumer goods balance. And that is that if you want your economy to grow in the future, in addition to that balance, you can’t be producing things with the fewest possible resources, at least if you count money as one of those resources. Because if you pay your workers starvation wages, then they won’t be able to buy anything tomorrow. (And won’t be willing to work anyway. I would make some kind of snide remark about the American South having solved that one, but… oops, I just did.)

    Now, I’m not saying anything new here. Practically everybody knows the quote from Ford about paying his workers enough to buy his cars, and too many of them trot it out proudly when given the least opportunity. But I find it quite telling that it is simply not part of the Econ 101 conversation at this stage, where you’re talking about how you grow the economy in the future, and where it would fit perfectly into the discussion. Why isn’t it here?

    Also missing is the subtler point that the relationship between producing capital goods and consumer goods has to be a curve, with an optimum point. Why? Well, assuming a closed economy, if you produce zero capital goods your machines all fall apart and you can produce much fewer goods next year. If you produce zero consumer goods, though, your workers all die and you can produce zero goods next year. If you produce few capital goods, your equipment is crappy and/or badly maintained and you produce fewer goods than you might. If you produce few consumer goods, then your workers may well all be fed but their morale will be crappy, and as little as Americans (workers or employers) like to admit it, morale has a huge impact on the productivity of a worker.

    Instead, the textbook, and the teacher, painted this as competing interests: more production next year if you make more capital goods, a higher standard of living this year if you make more consumer goods. That’s true at some places on the curve, and just completely false on others. The Soviet Union, an example he trotted out of a place sacrificing consumer goods to make capital goods, is a beautiful example of what I’m saying too: their productivity was horrible. Some employees were literally negative inputs, sabotaging the things they were working on as they were making them, destroying the value that other people had already added. A major reason that the Soviets were so unhappy was because they were so poor. (The brutal repression may have been another reason, or it may well have simply been the reaction to the unrest caused by that extreme poverty.)

    You don’t have to go into this now, I guess. But if you don’t, then why go into the ‘an economy can’t just make consumer goods’ argument? It seems like you should be making both or neither.

    I don’t know. What I’m learning so far seems woefully incomplete… not just in the ‘this is only a 101-level course’ way, but in the ‘welcome to class, here are your blinders, they are required wearing anytime you are thinking about economics for the rest of your life’ sort of way. And isn’t it funny exactly who those particular blinders just happen to benefit?

  • Econ 101: The Economing

    I have finally decided to take economics 101. Well, that’s actually a lie… I decided to take it about twenty years ago. But this time I actually registered to take it, and then I actually started attending it. It’s 8 AM to 9:30 AM every morning, and it’s directly on my jog to work, so I was pretty sure I wasn’t going to find a better opportunity barring suddenly becoming wealthy enough to retire and travel around the world on my own private yacht with an econ tutor. Which probably wouldn’t be an efficient allocation of resources anyway, so.

    The nice thing about this is that when I make a pronouncement about economics, it will probably be at least a tiny bit more informed than it was when my only source of knowledge is some desperate attempts to understand Brad DeLong (who once posted a picture from my other blog, The Dogs of San Francisco, although he took it down before I even noticed!), Paul Krugman, and the inimitable Mark Thoma and everyone he links to, without any more background than 30 seconds on Wikipedia can provide. The not as nice thing about this is that I am probably more likely to make pronouncements about economics in the future. Oh well, you win some, you die alone and unloved in a tarpaper shack up to your ankles in sewage, which incidentally is the name of my new punk band.

    So anyway. I am going to post some observations about Econ 101 as I take it. I say this knowing that I might be implicitly lying here, because it might well be that the only set of observations I actually post about Econ 101 will be the one I post tonight. But hey, I’m going to try.

  • Interesting Critique of Picketty

    I find this essay, by Gary Burtless (an economist at the Brookings Institution, which is one of the few think tanks not entirely staffed by hacks) quite interesting. His argument is that inequality is nowhere near the level it was in the 1920s, because government programs that transfer money (and goods)  to lower- and middle-income people are dramatically higher than they were in the 1920s. I think that’s a fair critique, although since I haven’t yet read Picketty it’s kind of hard to know.

    However, one of the points he makes is that because of these transfers from the government, income has risen a lot for the bottom three fifths of the country since 1970. And he cites things like Medicaid (and ACA) spending as a primary driver behind this. To me, it seems rather disingenuous to claim that the government paying $10 ($56 in 2010 dollars, accounting for inflation) for a doctor’s visit in 1970 for me, and then paying $112 for a doctor’s visit in 2010, represents an increase in income for me of $56 over that period. It’s still just a doctor’s visit. (Meanwhile, food is much less expensive, adjusted for inflation, than it was in 1970, but the food aid we give now buys less than it did then. Or, at least, the amounts that I see certainly don’t match up with the amount of food, including government cheese, that I recall being able to afford as a child on food stamps.)

    He also argues that because household size has shrank, actual incomes for individuals have gone up even if average household income has stayed the same. This seems to me to be rather missing the point: even if household sizes on average are smaller now, the trend of two-income households becoming more prevalent is much stronger, so that although there are more single-parent households now than there were in 1970 by far, there are also drastically more two-income households than there were in 1970. And yet average household income hasn’t changed significantly, even though many households have twice as many earners as they did before.

    Finally, and this is a point I think a lot about: in 1970, pensions were the norm, but were not figured into average wages as income at that time… they are instead figured as income when you receive them, after you retire. So let’s say that in 1970 you were making $10,000 a year (~$56,000 in 2010 dollars). In addition to that your employer was putting aside money for you in the pension fund. Your take-home pay was in the $40,000 a year range in 2010 dollars, plus you had a pension. If you had to spend all $40,000, that was okay… you were still gaining on retirement.

    Contrast that with today’s worker, making $56k a year in 2010. We’ll be generous and assume a 401k: putting aside $10k means that you have $34k to spend. But according to the usual analysis, you are making the same wages that the 1970 worker was. That seems… ill-informed.