Ear Rational Thoughts

Some links on housing

David Leonhardt on the bears in housing:

If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

Then a graph from Scott Sumner

Some links on capitalism

Arnold Kling on jobs:

Instead, to say that nobody knows how to create economic activity is to self-marginalize. Politicians do not want to hear that at all. They want to hear that there is an Output Gap, and their spending can help to fill it.

David Henderson:

Somewhere along the way, during the last 50 years, the critique of capitalism changed from condemning its failure to spread the wealth to condemning the very opposite. Suddenly the great sin of capitalism was that it was producing too much, making us all too materialistic, fueling economic growth at the expense of other values, spreading middle-class decadence, and generally causing society to be too caught up in productivity and too focused on the standard of living.

Don Boudreaux on fair trade: "The only fair policy — and the only one that ensures long-run prosperity for all — is a policy in which no one’s consumer sovereignty is ever sacrificed"

xkcd on capitalism

Locovores

Two posts on the locovore movement.

First, Steven Landsburg picks apart the emphasis on counting joules:

... The implicit recommendation seems to be that when you’re choosing a tomato, you should care about all the energy costs.

... And here are some other things you should care about: How many grapes were sacrificed by growing that California tomato in a place where there might have been a vineyard? How many morning commutes are increased, and by how much, because that New York greenhouse displaces a conveniently located housing development? ...

Budiansky ignores all that to focus strictly on energy consumpion. But the quality of our lives depends on a lot more than energy consumption, so Budiansky’s narrow-minded computations are strictly loco.

How, then, could one ever hope to do the right computation? How can we possibly gather enough information to compare the opportunity costs of land, fertlizers, equipment, workers, transportation and energy costs (among many others) and reach a conclusion about which tomato imposes the fewest costs on our neighbors?

Well, it turns out there’s actually a way to do that. You do it by looking at a single number that does an excellent job of reflecting all those costs. That number is known as the price of the tomato.

The Rational Optimist continues the commentary:

[The book describes] the lives of six North Koreans in the city of Chongjin before they defected to the south. They lived free from the evils of consumerism, ... . They had few possessions at all, let alone SUVs. Their pets needed no grooming, because they had been eaten. And they lived as locavores off the land, in all its organic purity, recycling their waste so that the local farmland stank of ‘night soil’. ...

... North Koreans learned to swallow their pride and hold their noses. They picked kernels of undigested corn out of the excrement of farm animals...on the beaches, people dug out shellfish from the sand and filled buckets with seaweed.

Sounds like the ideal way of life as preached by much of the western environmental priesthood, does it not? Yet between 600,000 and 2 million died of hunger. The wildlife was devastated. Pollution was terrible.

...

There is something terribly wrong with the standard litany we recite about the environment. It just is not true that extravagant western lifestyles come at the expense of nature. The more I see of the world, the more persuaded I am that human prosperity is actually good for wildlife, because it leads to investment in things that boost biodiversity. ... Things that make it unnecessary to use the local forest as a source of fuel, the local valley as a source of food and the local stream as a dump for waste. Things that value a moose as something other than a meal.

The oft repeated recommendation of the environmental movement that we live more locally, live off the land, live with fewer choices, fewer inputs, fewer resources and fewer possessions would in fact result in devastation not just for human life but for wildlife too. Going back to nature would be a disaster for nature.

H/T Don Boudreaux for both.

Aggregate supply

Via Greg Mankiw:

... [Keynesians claim] aggregate demand is the only thing you need to worry about during downturns. Changes in aggregate supply ... don't matter, they argue, because employment is being constrained by the low level of aggregate demand.

... Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased). That is no surprise: It is normal supply and demand in action.

The chart tells the story.

Idle resources

From Arnold Kling quoting Ed Leamer:

The greatest amount of idleness of assets is due to scheduling problems. Your bed is used only when you sleep and your TV is used only when you are awake.

...Indeed the primary function of the division of labor is to minimize idleness. If you do the hammering while I do the sawing, we can keep the hammer and the saw operating at the same time.

... it occurs to me that one advantage of large factories may be to reduce idleness. The more work being done at one time at one place, the less you have to worry about small variations in productivity at different points in the production process ... (the law of large numbers) ... .

... Hiring and firing workers is an asset disposition issue. If your firm has excess workers, then at the margin the workers are idle whether you keep them or not. If you keep them, you pay for them while they are idle. If you let them go, then they deal with their own idleness. When you scan the horizon and see opportunities, you acquire assets (workers). When you scan the horizon and see threats, you dispose of assets (workers). You rarely make these decisions based on short-term calculations of real wage rates and marginal products. Much of the cost of a worker is overhead, particularly with things like health insurance and training costs to consider. Much of the benefit of a worker is uncertain and lumpy ...

Price sensitivity in employment

From Arnold Kling:

[E]mployment is closer to a relationship than to a market. When you are making hiring and firing decisions, small differences in the wage rate do not mean much. If you really don't want to go out to eat with a guy, how much difference would it make if he offered to split the check 60-40 instead of 50-50? By the same token, if you really do not want to hire someone, how much difference would it make if that person would take a 10 percent lower wage?

Job turnover

From Arnold Kling:

[Tyle Cowen:] In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are "good" jobs in the first place.

... in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.

A long vacation

From the Economist, quoting Megan McArdle quoting the Economist, referring to retirement:

I don’t know if it’s ever going to be realistic that everyone saves enough to spend the last third of their life on vacation.

Well said. They conclude:

As we live progressively longer we must also rethink our retirement expectations. Retiring at the same age that your parents did, or earlier, can no longer be the expectation...

The problem is a double-whammy. First, the cost of keeping people alive goes up exponentially the older they get. Second, the longer people live, the longer they spend "on vacation", reducing the fraction of their life that they spent producing things. The problem is exacerbated for the infirm, who cost even more to keep alive and must (rather than choose, as is the case for the healthy) retire earlier. The result is a larger fraction of our resources going to keep people alive who are not ever going to produce additional resources in return.

If people were paying for those resources out of their pockets it wouldn't be a problem at all. But unfortunately, we have made an open-ended commitment to entirely insulate people from both costs. When thought about in this way, it seems clear that this path can NOT be sustainable.

Addendum: See this post from Arnold Kling:

As McArdle puts it,

Whether you collect a dividend check, get a corporate pension, or live off your social security, your retirement is funded by real claims on the output of people in the workforce.

For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else.

Don Boudreaux continues his quest

... to educate the masses, here:

You assert that “The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home”

... Why do foreigners accept green pieces of paper in return for the goods and services these foreigners produce for Americans? It’s not because foreigners have an insatiable demand for tiny monochrome prints of dead American statesmen. Rather, foreigners accept dollars because they want to spend those dollars, either on American exports or on American assets. Another term for spending dollars on American assets is “investing in America.”

The U.S. trade deficit rises whenever the amount of dollars foreigners invest in America rises relative to the amount of dollars foreigners spend on American exports. ...

and here:

Observing that suburban lawns consume land as well as other resources, Laura Vanderkam concludes that lawns are wasteful and environmentally destructive...

Newspapers – such as the one that Ms. Vanderkam writes for – consume trees, petroleum (in the form of ink), electricity, and numerous other resources. Were I as confident in my knowledge and speculations as Ms. Vanderkam is in hers, I might divine that newspapers are an unfortunate “fashion” that we would be wise to avoid. ...

Laffer maximization

Megan McArdle reminds us of a very important point:

... I have been puzzled by the number of liberal bloggers who have been taken with Dylan Matthews' compendium of economists and politicians commenting on where the Laffer Curve might maximize.

I mean, it's an interesting side question, but it doesn't really tell us much about policy, unless you actually think that the object of policy is to maximize the share of income the government takes.

Megan is of course correct. The goal of government policy is not to maximize how much its citizens send it in tax revenue. Government taxes are an expense for citizens and as with all expenses (gasoline, food, shelter, etc.), people should seek to minimize them.

But she doesn't go far enough. The Laffer Curve - which relates tax rates to government revenue - does tell you where the government should set tax rates. But it's just not at the peak. The amount the tax rate should be set at is the amount that maximizes total earned income for its citizens. After all, if it sets it any higher, it will deprive citizens of income - i.e. it will make them poorer.

The way to find this from the Laffer Curve is to divide total government revenue (Y axis) by the tax rate (X axis). For example, here is a sample Laffer Curve (to my knowledge, no one knows the exact shape of this curve so I just made one up). As you can see, the peak of the curve (blue line) is at a tax rate of 70% and it smoothly slopes from 0 in either direction:

The dashed orange line is the total income of the citizens in that country. As you can see, in this (albeit fictitious) example, the peak of that curve is at a tax rate of 0.

Will this value - tax rate = 0 - hold for all Laffer Curve shapes? No, and it probably doesn't hold in the "real world" version. But it's worth noting that it is rather difficult to devise a shape of the Laffer Curve where the tax rate that maximizes wealth for the citizens is not quite low.