Middle-Class Consumption

by Don Boudreaux on October 9, 2014

in Growth, Seen and Unseen, Standard of Living

Scott Sumner has a good post, at EconLog, on the inequality debate.  Here’s a long comment that I left in the comments section of that post (edited and augmented here slightly):

Scott: Nice post. One (non-rhetorical) question: why do you believe that the consumption of the rich has risen faster than that of the middle class? You might be correct, but it seems to me that the very same sort of logic, observations, and data that suggest to you (and to me) that the consumption of the poor has risen faster than that of the middle class also suggest that the consumption of the middle class has risen faster than that of the rich.

You and I both remember the mid-1970s well. Here are my impressions of that era compared to today: Back then, flying was not common for middle-class people. Middle-class people were far less likely than they are today to vacation in Europe or Latin America. Middle-class-people’s cars broke down much more frequently than they do today. Many more middle-class families had only “the” family car rather than multiple cars. Middle-class people personally changed the oil in their cars more frequently than they do today (with the likes of Jiffy Lube performing that dirty job now).

Making long-distance telephone calls was so costly that middle-class people monitored the number of minutes they spent on such calls. Almost no middle-class person had a telephone in his or her car. Middle-class people had access to a less-varied selection of foods – both in supermarkets and in restaurants – than they have access to today. A smaller proportion (than today) of middle-class homes were equipped with automatic dishwashers, central air-conditioning, attached garages, push-button-garage-door controls, and garbage disposals. (I’m pretty sure, too, that the size of the typical middle-class home back then – measured in both square- and cubic-feet – was smaller than it is today. And while the size of the homes of the rich might have increased even more [I don't know], a, say, 10% increase in living space starting from a relatively small space means a greater improvement in living standards than does a 10% increase in living space starting from a larger space.)

While rich people in the 1970s could afford home theaters, middle-class people could watch at home only those movies (and other programs) that the three t.v. networks (and perhaps also a local independent channel) were airing.  No middle-class person shipped, or had anything shipped, overnight.

Again, your claim might well be correct. I have no firm-enough evidence against it. But it strikes me as being as doubtful as is the claim of others that the consumption of the middle-class over the past several decades has grown faster than has the consumption of the poor.

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Talking about Adam Smith

by Russ Roberts on October 8, 2014

in Adam Smith, Books

Nick Gillespie interview me about my new book on Adam Smith and how the ideas of The Theory of Moral Sentiments apply to modern life:

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On today’s Kojo Nnamdi Show, someone named Tom Burford (who’s an expert on apples) issued two complaints that are evidence of just how very deeply economic ignorance runs in society.  He said:

(1) that large apple growers do not care about the taste of their product; they care only about profiting from the sale of apples;

and

(2) because apples are so important to the U.S. (although, he admits, not indigenous to the Land of the Free), he’s quite upset – I think he used the word “offended” – that Americans import apples.  He cannot understand why Americans import apples.

Mr. Burford sounds like a perfectly nice and intelligent human being.  And I don’t doubt that he is.  Yet these two claims that he made publicly are just such ideal specimens of the way so many people ‘think’ about economics that I can’t resist sharing them here at the Cafe.  Note that the problem with these statements isn’t that they express an opinion about preferences that I happen not to share; instead, the problem is that they are economically illogical – thoughtless – hilariously wrong to anyone who knows even a smidgen of economics.

One problem with group decision-making is that people as economically thoughtless and clueless as this Mr. Burford get to have a say in how other people lead their lives.

(I do agree with one main point of this Kojo Nnamdi Show that only one of the two descriptors in the name of Red Delicious apples is true: those apples are indeed vividly red.)

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Quotation of the Day…

by Don Boudreaux on October 8, 2014

in Competition, Politics

… is from page 38 of Steve Landsburg’s insightful 1997 book, Fair Play (original emphasis; link added):

A few years ago I published a book called The Armchair Economist in which I argued that bipartisanship in Congress should be treated as a violation of antitrust law.  We don’t allow the presidents of United and American Airlines to conspire against the public; why should we allow the leaders of the Democratic and Republican parties to conspire?  I got a note back from a copy editor asking whether there wasn’t actually a key difference, in the sense that the airline presidents are conspiring to break laws, while the politicians are conspiring to make laws.  I wrote back, asking if he had any historical evidence as to which of these activities was more likely to be harmful.  My guess is that making laws is on average worse than breaking them.

(Of course, by “laws” Steve here means “legislation” – for the state makes, not law, but legislation.)

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Government officials violate the public trust – in this case by, well, let the New York Times tell the tale of how the ballyhooed-at-its-birth 1998 Tobacco Master Settlement isn’t quite working out as planned:

Only a small fraction of the money has gone to tobacco prevention. Instead, the states have used the windfall for various and unrelated expenditures. In Alaska, $3.5 million in settlement money was spent on shipping docks. In Niagara County, N.Y., $700,000 went for a public golf course’s sprinkler system, and $24 million for a county jail and an office building. And in North Carolina, in the ultimate irony, $42 million of the settlement funds actually went to tobacco farmers for modernization and marketing.

But that’s not all: Nine states — Alaska, California, Iowa, Michigan, New Jersey, New York, Ohio, Rhode Island and West Virginia — and Washington, D.C., Puerto Rico and Guam decided to get as much of those annual payments as fast as they could by mortgaging any future payments as collateral and issuing bonds. They traded their future lifetime income for cash today — at only pennies on the dollar.

Shocker.  Fine pronouncements and loud boasts from 16 years ago about irresponsible tobacco companies finally being held accountable by responsible (!) government officials are proven false – all up in smoke – and in ways that yet further reveal the explanatory power of public-choice economics.  Isn’t the miracle in the government-intervention formula supposed to prevent such shenanigans?  Maybe next time the miracle will finally work!  Or is government incurably cancerous?

(I thank Peter Minowitz for the pointer to this NYT report.)

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Another Danger With Nudging

by Don Boudreaux on October 7, 2014

in Hubris and humility, Seen and Unseen

I highly recommend Michael Huemer’s 2013 book, The Problem of Political Authority.  Thumbing this morning through my heavily marked-up copy I re-read the following passage from page 134; this passage from Huemer occurs during his discussion of Philip Zimbardo’s famous Stanford Prison Experiment (in which students volunteering to role play as prison guards, and other students volunteering to role play as prisoners, displayed disturbing traits of power-abuse and acquiescence in such abuse) (original emphasis; footnote excluded):

Another lesson of the Stanford experiment concerns the reactions of others to authority figures. The prisoners in the experiment, initially at least somewhat resistant, were reduced to meek submission by the end of the experiment.  They complied with nearly all, even the most offensive demands issued by the guards.  On the face of it, this is puzzling, as the guards had no real power to compel the prisoners to obey.  The guards were prohibited from using violence and in any case were, in each shift, outnumbered three to one by prisoners.  If the prisoners had resolutely refused to obey the guards, it is unclear what the guards could have done.  Yet the prisoners obeyed, despite the increasingly irrational and offensive nature of the guards’ commands and despite the arbitrary nature of their supposed authority.  Nor was this obedience to be explained as a result of a sense of a contractual obligation.  While the subjects had agreed to be part of a simulation of prison life, they had not agreed to obey all guard commands.  And even if they thought themselves obligated to be obedient to some extent, this would not explain why the prisoners became more submissive as the study wore on and the guards’ demands became more unreasonable.  One lesson to draw from this is that psychologically, power is self-validating.  Even when the ‘authorities’ are selected entirely arbitrarily and everyone knows this, the mere assertion of authority tends to be accepted by others.  Furthermore, the longer one obeys an authority figure, the more one feels ‘bound’ to continue to do so.

The realities of humans’ psychology revealed by the Stanford and several other similar experiments are further reasons why concentrated power or even anything resembling sovereign authority is never to be trusted.  But what in particular struck me as I re-read this passage earlier today is that it offers a warning against the policy of so-called “libertarian paternalism.”  This policy, as many readers know, is the source of the suggestion that government should actively but not coercively “nudge” people to make ‘better’ choices.

Nudging might always be better than outright coercion.  This fact, however, does not make nudging an acceptable policy for government to pursue.  As Mario Rizzo, among others, points out, libertarian paternalistic nudging is plenty dangerous.  The above passage – although not explicitly about nudging – highlights one reason to beware of the danger of nudging: power corrupts its holders and simultaneously dopes its victims.  Power, in short, causes people to lose their minds.  So even power exercised through nudging rather than through jailing or shooting is never to be trusted to generate outcomes acceptable to any sane person.

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Tim Cavanaugh reports on George Selgin rightly taking Nobel laureate Eric Maskin to task for the latter’s pretense of knowledge.  (This exchange took place at last Thursday’s excellent Mercatus Center celebration of the 40th anniversary of Hayek’s award of the Nobel Prize.)

John Cochrane rightly takes Martin Wolf to task for the latter’s sloppy analysis of inequality.  A slice:

You bet “children from poor backgrounds are handicapped in completing college.” They go to terrible schools, hijacked by inner city teacher’s unions. They come from broken homes, where nobody reads to them at night. They don’t see anyone around them who is working at legal jobs. And so on.  This is just the case that Kevin Murphy and others have made about the increasing skill premium.

But that’s all inequality as a symptom of other things gone wrong, and those things desperately needing fixing no matter how much the top 1% earn.

James Pethokoukis rightly takes “Progressive” tax-hikers to task for insisting that a lot of tax revenue remains in the U.S. to be extracted through higher tax rates from “the rich.

Richard Rahn rightly take tax-hikers to task.

GMU Econ PhD candidate Abby Hall rightly takes to task those who turn blind eyes to the reality of national-defense programs: they’re government programs – and like all government programs, subject to corruption, chock-full of waste, pregnant with unintended ill-consequences, and not remotely guided by acceptable general principles.  A slice:

It is particularly important for those of us concerned about liberty to recognize these issues of national defense are of particular importance. It’s the star-spangled elephant in the room. These “defense” activities, as opposed to protecting our freedoms and expanding the rights of those abroad, often have the opposite effect. They diminish the liberties they are intended to protect.

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Fare Wage

by Don Boudreaux on October 7, 2014

in Seen and Unseen, Work

On one of DC’s news radio stations this morning (either WTOP or WNEW, I don’t recall which) I heard a report of “community activists” protesting a proposed increase in fares to be charged by a government-operated bus line in Washington.  The activists (according to the reporter) insisted that “any fare hike will reduce ridership.”

Indeed so.  That’s the universal effect of higher costs: if the costs that an individual incurs as a result of his or her choice to engage in activity X rise, that individual will choose to engage in less X per period of time than he or she would have chosen to engage in had the costs to that individual of engaging in X not risen.  (Note that this effect of higher costs does not imply that higher costs are unjustified.  If X is a scarce good or service, or if people must use scarce goods or services to engage in X, then it is often beneficial for people to engage in less X.)

But my question: How many of the community activists who correctly understand the dampening effect that higher bus fares will have on the quantity of bus-service demanded also believe that government should raise the minimum wage?  I’d not be surprised if a great majority of the very same people who argue against raising bus fares (because higher bus fares reduce ridership) deny that raising the minimum age reduces the job prospects of low-skilled workers – or at least never stop to make this connection.

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… is from page 140 of Diane Coyle’s excellent 2014 book, GDP (original emphasis):

Meanwhile, it is above all important not to confuse GDP with social welfare.  The way the economy has changed has made the gap between GDP and welfare bigger than it used to be.  The acceleration in the variety of products, in customization, and in the blurring of the boundary between leisure and work in many creative professions and occupations – all of these mean that GDP growth increasingly underestimates increases in welfare.  Contrary to the popular impression that it exaggerates the improvement in our standard of living, the opposite may be true.

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Here’s a letter to a correspondent from my home state of Louisiana:

Mr. Eddie Bergeron

Mr. Bergeron:

Thanks for your e-mail.

You ask why I cannot “be more practical about trade.”  My answer is that unconditional support for unconditional free trade is the most practical policy that is practically available.  Unconditional free trade is far more practical than is your proposed alternative of empowering government officials to decide when, for how long, and to what degree trade should be free.

Free trade is simply consumers spending their money as they - rather than as government officials - wish.  Yes: changes in the pattern of consumer demands destroy some jobs.  But this reality is true whenever consumers change their spending pattern.  It is as true, for example, when consumers shift their demands from domestically produced steel to domestically produced aluminum as when they shift their demands from domestically produced steel to foreign-produced steel.  Anytime consumers change their spending pattern some incumbent producers suffer – and others gain.  There’s absolutely nothing about freedom to trade across political borders that uniquely “destroys” (or creates) jobs.

What is unquestionably impractical is your notion that politicians and bureaucrats can be trusted to superintend the spending decisions of millions of individual and diverse consumers.  Do you honestly believe that government officials with such awesome power will consistently resist political pressures to use that power on behalf of formidable interest groups?  And do you really suppose that even if such officials, by some miracle, rise steadily above politics, they can ever gather enough knowledge to distinguish correctly between changes in consumer demands that are (to use your term) “economically tolerable” and those that are not?

With respect, your fantastical confidence in the motives and competence of government officials leads you to endorse policies that are profoundly impractical in comparison to a policy of unconditional free trade.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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