Harford (and Tabarrok) on Macroeconomics

by on January 25, 2014 at 7:23 am in Economics | Permalink

Tim Harford gave an excellent talk at Cato on his new book The Undercover Economist Strikes Back.

You may have heard recently that the richest 85 people in the world have more wealth than the bottom 3.5 billion. Tim began by pointing out that his 2 year old also has more wealth than the bottom 2 billion since his 2-year old has no debt. Later in the talk Tim gave a brilliant explanation for how and why economists began to treat data like an unfaithful spouse. Watch for that!

Tim’s talk begins around the 7:20 mark. I come in around the 34:00 mark and after saying some more nice things about Tim’s book I have some critiques focusing on how long can wages and prices really be sticky and also giving a brief introduction and defense to “Real Business Cycle” theory especially the recent sectoral approaches of Gabaix and also Acemoglu et al.

At the link you can also find links for iTunes and downloadable formats. CSpan also covered the event.

prior_approval January 25, 2014 at 7:50 am

‘Tim began by pointing out that his 2 year old also has more wealth than the bottom 2 billion since his 2-year old has no debt.’

And this is an observation which meets approval on our way to a better world? Because it also provides a profoundly damning perspective of how the world currently works, where simply not being in debt puts you in a better position than more than a quarter of the globe’s population.

Keith January 25, 2014 at 8:25 am

How is the fact that some people borrowed money a damning perspective on this world? If they borrowed money to buy frivolous things then it is a perspective on their morals not the world’s. If they borrowed money just to survive then it means the world is a better place than the days when they didn’t have this option.

prior_approval January 25, 2014 at 10:22 am

Well, the percentage of the world population that is under 15 is over 25% – who, by definition have no debt.

So, that is basically two billion people worth more than those in debt – though legally, that two billion people essentially own nothing in their own name anyways. Many who quite likely live in families (such as those of rural farmers) who are indebted – but like that two year old, they are wealthier than their indebted parents.

Anyone notice how silly that is?

This is simply meant to be a cute dismissal of the idea that massive amounts of wealth are concentrated in a few hands, by using the glib example of someone who can own nothing legally being wealthier than a couple of billion other people.

Best satirical web site on the web, bar none.

Keith January 25, 2014 at 10:38 am

I understood the original post, it is your comment I don’t understand.

Extinct Species January 26, 2014 at 7:29 am

I live in the Philippines and while there are lots of extremely poor people I doubt many of them have a negative net worth. Whatever meager belongings they have would in almost all cases be worth more than any token amount they would be able to borrow. Many may be living off family members but no true debt obligation is created. I suspect that would be the case with most of the low/no income people in the third world. The people with the largest negative net worth(s) would be overextended OECD citizens. The comparison reference to billions seems pretty much a misdirection.

Anon. January 25, 2014 at 8:28 am

You’re assuming that being in debt necessarily means you’re in a “bad position”. But this is obviously not the case. People’s finances are very different depending on their age and education/career trajectories. Someone graduating from medical school will almost certainly be in debt, but they’re obviously in a pretty good position financially given the expected PV of their future earnings.

Wow January 25, 2014 at 9:44 am

No silly man, it says that one side, the wealth of the top 85, is completely irrelevant to the statement and added only for propaganda purposes. Sorry if this was too complicated, or upsetting to your socialist simplicity.

Brian Donohue January 25, 2014 at 12:30 pm

rem acu tetigisti!

Michael January 25, 2014 at 8:03 am

That reminds me of a story Ivanka Trump once told of her father, Donald. Back in the 1990s (I think?) when Trump was deeply in debt and near bankruptcy, he was walking outside with his daughter. He pointed to a homeless person begging for change and said, “that person is richer than me.” Ivanka said she was incredulous at that–how was that even possible–but it was also a point that changed her understanding of wealth and the world.

It was eye opening for me, too. That story made me realize how the credit market, and the concept of creditworthiness, is a powerful tool in solidifying social classes and restricting economic mobility in both directions.

Keith January 25, 2014 at 8:36 am

Credit worthiness keeps social classes fluid not solid. Homeless people don’t start life that way, they become homeless by messing up in big and small ways.

Michael January 25, 2014 at 9:13 am

I imagine credit can easily do both at the same time.

ummm January 25, 2014 at 9:46 am

kinda..when you hear about a celebrity of a rich person incurring debt it means they have a present debt but that doesn’t preclude incoming earnings or other stores of wealth. A debt isn’t a big deal if you’re making millions a year, so technically such a person would have negative networth but high income potential. It’s why amazon.com and salseforce stock keep going up even though those companies have incurred a lot of debt because there’s rapidly growing revenue in the background and once the R&D, infrastructure and other expenses are turned off profits will explode.

Hojat January 25, 2014 at 8:11 am

The global income or wealth equality don’t matter since no one really will be ready to transfer a huge sum of money from US or Japan or China to Pakistan for example to help solve the problem. The inequality in each country matters much more. For example, the fact that the middle class in the US is not doing well but the top 1% is gaining wealth fast, will remain a hot political and economic issue for the foreseeable future and may result in higher taxation of the rich.

ummm January 25, 2014 at 9:40 am

Given the post-2008 restrictions on credit some can’t even get to net-negative worth. The irony is only those that least need credit can most easily get it .

But extreme inequality is a byproduct of an economic system that rewards creators, whose contributions produce a disproportionate economic return. Apple had revenue of $200 billion for 2013. why shouldn’t its founders earn more for the value Apple creates? In a meritocracy, such as the USA and to a lesser degree in the rest of the world, an individual’s success is a direct function of his merit, or contribution. Economic inequality would be a natural consequence of the wide range in individual skill, talent and effort in human population and, being the result of natural variation, individual effort and voluntary exchange, would not be considered ethically problematic in its own right.

Michael January 25, 2014 at 10:26 pm

“why shouldn’t its founders earn more for the value Apple creates?”

Well for one, one of its founders is dead and the other one is only marginally connected to Apple these days. Also, the founders of Apple as well as the people who had a hand in creating and designing the iPhone, iPad, iMac etc. get a tiny sliver of the profits from those products–the bulk goes to shareholders or is stored as cash. Thirdly, Apple’s founders didn’t actually produce the millions upon millions of units that they sold in 2013–Chinese laborers did under nightmarish conditions, many of them earning less in a month than many here earn in a day. Fourthly, Apple’s ability to continue to make profits off of its designs are possible only under thread of a gun, thanks to government-enforced laws.

You know, you libertarians sure are loud on the internets, but I’m really happy to see you grow increasingly irrelevant in the real world as people get better informed about the realities of our socio-economic and cultural systems.

Marie January 25, 2014 at 9:59 am

But as an American, doesn’t his kid have about $200,000 in collective debt already?

dearieme January 25, 2014 at 12:44 pm

Harford’s child is an American? Poor show!

Alex K. January 25, 2014 at 10:48 am

I hate video talks — any chance for a transcript?

I love the Acemolgu et. al paper.

Bill January 25, 2014 at 11:04 am

Let’s see if that baby can get a loan.

Is this an economics website?

I am surprised that only a few people have identified the fallacy.

TMC January 25, 2014 at 12:34 pm

That doesn’t negate the point at all.

Bill January 25, 2014 at 2:02 pm

TMC. Please tell me what IS the point? What is the point of saying Baby has more wealth than the bottom 2 billion. No he doesn’t. It’s a phony statement. Would you lend to Baby? Would you lend to a person with a job, with current earnings, but no wealth, just like Baby? Is Baby and the current worker with an income, but no assets, equivalent? If so, you would never see anyone lending money to a person with no assets but with a job, earning income.

Is the point that lenders lend on the basis of future earnings, so if you currently have a job, but no wealth, you can get a loan. Baby doesn’t have a job, and no human capital.

Or, is the point that the audience is stupid. That if I said “IBM (insert the word government, if you wish) has an unfunded liability of $x billion dollars” you would run into the street, screaming, without thinking: hmmm, IBM has an unfunded liability, that is, IBM has bonds, that are maturing in the future, but I am confident that IBM will pay them because, in the future, it will still be in business, still have assets, and still making a profit from which to pay off that unfunded liability.

Ton_Chrysoprase January 25, 2014 at 11:23 am

I don’t get it. Is the claim that 2bn people have negative net wealth? That would rather support the initial premise. I am sure they can’t be referring to a net financial wealth.

Now if I see people here conflate that with socialism (public ownership of assets), which could be the cause but not the consequence of more egalitarian distribution, I am led to believe that a dispassionate discussion is not to be had here.

Donald Pretari January 25, 2014 at 11:47 am

Harford’s Quip does not dull the point of the observation. Rather, it falls under the heading “Things Well-Off People say to other Well-Off People to make themselves feel good about being well-off,” an amusing if not edifying mode of discourse. The proper response from a person who is serious about defending and justifying a regime of free markets and smaller government is to acknowledge the point about vast amounts of wealth and power being a problem and then proceeding to discuss how best to deal with the problem, which is what Henry Simons did. Sadly, We are not seeing his like again.

dearieme January 25, 2014 at 12:46 pm

The global poor are concentrated in countries that don’t have anything approximating to free markets.

Donald Pretari January 25, 2014 at 12:57 pm

And?

TMC January 25, 2014 at 2:18 pm

“acknowledge the point about vast amounts of wealth and power being a problem”

Stawman alert!

Donald Pretari January 25, 2014 at 3:05 pm

TMC… A SM could make a better point than you did since you don’t have one.

Who January 25, 2014 at 5:06 pm

Yes, he did, you advocate redistribution and unfree markets quietly like a coward, and he pointed out you have it backwards, but you don’t or pretend not to see.

Donald Pretari January 25, 2014 at 11:06 pm

Coward? WHO & TMC. You don’t even use your real names!

Doug January 25, 2014 at 8:51 pm

” the point about vast amounts of wealth and power being a problem”

Why assume this is a problem? Talent and intelligence are distributed quite unevenly, society runs better when the best and brightest of the best and brightest are firmly in charge. Such a world looks like a world where “vast amounts of wealth and power are highly concentrated.” There’s a reason why every functioning civilization in human history has been highly hierarchical.

Marie January 25, 2014 at 9:16 pm

Certainly those who work harder and better deserve higher compensation.

The perception is that folks are getting much higher compensation when they are *not* that much more talented, or industrious. That they are getting more because the system is rigged, the free market is distorted, and the meritocracy is defining merit incorrectly.

Make some comparisons —

Realtor / midwife
School Vice Principal / school teacher
Newspaper ad salesman / newspaper reporter
Bill Gates / any of the many people actually creating the products Bill Gates sells
Defense contractor / plumber

My personal perception is that in each case, the first of the two isn’t necessarily going to be harder working or more creative or intelligent (although he may be, and if he’s successful he must have some industry and intelligence), but the first of the two is almost always going to make drastically more money.

Part of this is differences in how we value things — many folks may find Realtors more contributing to society than midwives, I would not.

But part is also the perception that government rigging has made for a lot of errors in market value of different occupations. For example, if there weren’t so many regulations in housing and in health care, the midwife would be richer and the Realtor out of a job, right?

I think very few people (over the age of 20) think that people should make equal pay for very different contributions. But the vast difference in pay makes it clearer to us that we are not seeing pay based on merit in many cases, and that even when one person should earn more on merit than another, the degree of “more” often seems off.

dearieme January 25, 2014 at 12:56 pm

I don’t believe Harford’s story about Bill and the Truck. No 14 year-old from the house of a tinkerer father, who encouraged his boy in matters mechanical, would be unaware of how an internal combustion engine worked. I’m also disinclined to believe that he signed up for Engineering at the LSE. I’m also puzzled that in WW2 he solved the problem of synchronising machine guns and propellers, that problem having been solved satisfactorily in WW1.

Presumably these stories may have some basis of fact, but how odd that no-one who’s heard Harford on this topic before has cried “bollocks” to his favoured form of them.

Thomas January 25, 2014 at 12:59 pm

His point is salient. A related point a couple, each earning $13.00/hr, are at the median household income. Or that a two earner family maxing ROTH IRA contributions each year reaches the median net worth in less than 10 years. Even a family completely dependent on welfare saving $50/month would quickly rise above their peers. Granted, most of us will not have the opportunity to join the 1% or the “top 85″, but the bar to reach medians in this country is incredibly low, presumably because most people are irresponsible.

Bill January 25, 2014 at 3:17 pm

Thomas, perhaps you could state the median net income and the median net worth, and the you would see why we have Social Security, and even Obamacare.

Post the numbers below

Thomas January 25, 2014 at 9:26 pm

Median household net worth (2011) is approximately $57,000. The median household income (2011) is approximately $51,000. Social Security and Obamacare are internal to the system. It is tautological to say that ACA and SS can be afforded by the same group of people whom the above figures describe.

Bill January 26, 2014 at 11:35 am

Internal to the system means that people pay medicare insurance and ss insurance out of their paychecks, some paying more and others less.

Marie January 26, 2014 at 11:52 am

You do get that most of your post is math, but the last clause is, well, presumption, right?

$50 a month might be cigarettes. It might also be the electric bill. If you consider it easy to save $50 a month, maybe you don’t have a lot of understanding of the situation of a family completely on welfare.

The bar to reach median could be low (and unreached by many) because people are irresponsible. Or it could be low (and unreached by many) because many are in a situation where it’s hard to reach even a low bar.

Thomas January 26, 2014 at 12:14 pm

Workers per household (2010): bottom fifth, .42 workers; second fifth, .9 workers; middle fifth, 1.29 workers; fourth fifth, 1.7 workers; highest fifth, 1.97 workers.

I suppose not being able to work is a uniquely first world problem.

Marie January 26, 2014 at 12:25 pm

Suppose? ;)

No, not being able to work and still being alive is a pretty first world problem.

So, I may seriously not be understanding, are we switching from “it should be easy for a household with $1000 in welfare and $1200 in bills a month to save $50 a month, it’s only $50″ to “they should be working anyway”?

‘Cause I can go there, too.

Again, your stats can work for our against you, as far as I can tell. Yeah, it’s awfully hard when there’s .4 members of a household working to save as much as when there’s 1.97 members of your household working.

It seems like maybe you’re assumption is that there’s .4 in the poor households because of irresponsibility. Do you know a lot of 50 year old single men with Parkinson’s, or 23 year old women whose husbands dumped them after they got fat with the twins? Yes, exaggeration, but it’s not all folks who just choose not to work, even though McDonalds is hiring.

Noah Smith January 25, 2014 at 5:28 pm

RBC???

Nooooooooooooooooooooooooooooo

*shakes fist*

Khaaaaaaaaaaaaaaaaaaaaannnnnnnnnnnnn

Bathea January 25, 2014 at 5:44 pm

Doesn’t Tim’s baby require handouts just to survive? Do we really want another 2 billion 2-year-olds flooding across our borders? Wouldn’t they require more handouts and lots of naps just to survive? Tim is a fool. Only an economist would come up with this idea.

Floccina January 27, 2014 at 4:40 pm

Supposedly at one time Donald Trump pointed to a homeless man and said, This guy is worth $900 million more than me.

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