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As for "inequality in consumption" being bad for innovation, it could easily go the other way. In fact, that is how I'd wager. Because there is a Bentley today, there will be a better accord tomorrow.

And big deal. A Bentley and an Accord both are in the most important respects the same.

These progressives are wearing a bit thin with me.

And yet here we are on the blog of the author of "The Great Stagnation".

I'd argue the opposite to you and offer as evidence:
http://www.interfluidity.com/v2/4366.html and http://www.interfluidity.com/v2/3830.html

There's a lot of food for thought in those links. Thanks for sharing.

This does not strike me as a good example as it represents only one sliver of the goods that people purchase and that determines their well-being.

"Because there is a Bentley today, there will be a better accord tomorrow."

The problem is, this isn't really true. Nearly all automotive innovation happens at the low end of the car market, because 1) you have to sell millions of cars to pay for the engineering that makes it happen, and 2) luxury cars really aren't about innovation. They are about high end finish, unique style, and large engines.

This reinforces the author's point. A lot of luxury consumption is not about functionality by definition. And that limits the amount that it will drive better functionality.

I am skeptical of how much it really matters, though, because luxury consumption is still a tiny fraction of the market.

Nearly all automotive innovation happens at the low end of the car market,

Can you cite some examples?

Navigation, power windows, power locks, air bags, anti-lock breaks, self-parking, dynamic cruise control, emergency breaking, built-in DVD players, those all started in high-end cars, and some of them are still only available in high-end cars. (Elon Musk has been explicit that he needs to sell a small number of expensive electric cars before he can sell a large number of inexpensive electric cars.) You can also see BMW's iDrive for something that wasn't quite ready for prime-time but still showed up in BMW's and the freaking Rolls-Royce.

Things that started low-end . . . well, the Prius was a 20K car. I might challenge by saying that the industry had been doing hybrid buses (which are obviously expensive) for a few years before trying that, but I'll give you this one for kicks. Anything else?

"The problem is, this isn’t really true. Nearly all automotive innovation happens at the low end of the car market,"

I think you are completely wrong about that. Historically, new innovations are tried on the luxury models first, and then if they are successful and as the production costs drop they get added to the mid line models. Eventually, they'll make their way to the low end if the features are can be proven to increase sales.

Trends in consumption are more worrying than trends in income and wealth. (We assume, often wrongly, that they are mechanically related.)

But Yglesias seems to undermine our concern when he says that much of this consumption is simply positional. If that's right, we shouldn't care about the increasing spread.

If it's positional the ones who really care are the upper middle classes who rub up against these people and suffer relative deprivation, not the middle class. I mean in one case, the middle class worker eats burgers and the upper class each sushi. As inequality widens the middle eats burgers and the rich get sushi flown in and hand selected by blind Japanese monks with extraordinary taste. Only those who care about the minute differences psychologically suffer. The middle class laughs at the oddity of the luxury just like they're indifferent about that rare antique chair that looks uglier to them than the furniture they get cheaply from a supercenter.

Yglesias does not know if consumption is simply positional ... no one knows if that is correct.

And as wiki notes even if it is positional who is our reference point: our parents, our neighbors, our co-workers, our bosses, or celebrities? It is simply not clear and the context may matter a lot. And the 'keeping up with the Jones' hypothesis as is implicit in the cited paper does not always hold up so well in the data. Some new work with micro data found low-income households borrowed less in high-income-inequality areas than in low-income-inequality areas: http://www.voxeu.org/article/inequality-and-household-debt-new-evidence So maybe inequality helped lenders sort out good and bad risks and that's partly why lending rose? I don't know ... much more work to do.

If you're wondering whether or not consumption is positional, start following Goldman Sachs Elevator Gossip on twitter. It will disabuse you of that notion.

How many people is that? 12?

Goldman Sachs is as rich and powerful as it is because the US Government saved them with middle class tax dollars, and the cream of the best thinkers on economics printed $5 trillion dollars to replenish their and other's bank accounts.

And everyone blathers on about stupid things that a dozen people say in an elevator?

It's a uniquely blatant microcosm of a much wider behavior. I'm not even really a liberal; I just find the contortions that libertarians will go through in order to deny positional spending to be obtuse and naive.

I'll leave you with the immortal words of George Carlin:

THOU SHALT NOT COVET THY NEIGHBOR'S GOODS
This one is just plain stupid. Coveting your neighbor's goods is what keeps the economy going: Your neighbor gets a vibrator that plays "O Come All Ye Faithful," you want to get one, too. Coveting creates jobs. Leave it alone.

Why would trends in consumption spending be more worrying than trends in income? If the middle class has one accord in their 2000 square foot house, why is it a matter for policy that the one percent has 5 Jags in their 5000 ft McMansion?

Because ultimately people care about material deprivation, at least on an absolute basis, and probably on a relative basis as well. Surely you can imagine at least some trend in consumption that you'd find concerning, even if the one you identify isn't it.

Why would trends in consumption spending be more worrying than trends in income?

People don't really have a problem with income inequality. Consumption inequality other the other hand, that they have a problem with.

No good comes of no middle class.

@jp - but I once saw the best tax system is one with regressive taxes that taxes the middle class out of existence. The theory is: the middle class will work harder to get out of the middle class and the economy will grow even faster if tax rates on the middle class are oppressive (presumably they don't want to drop into the lower class, if and only if the economy is growing). Not that I believe this perverse "Laffer Curve" of tax rates (not revenue, but rates mind you) will work in today's slowing economy, but I do see the logic if an economy is trending upward, and if you believe, as I do, big government is evil.

When I say "no middle class," I mean none with property, mobility, savings. I don't believe that any sort of "best" tax system would repress that. Unless of course you wan't to give me a 4000 sf government apartment, bullet trains, and a guaranteed income! Re. "big government is evil" I think people tend to conflate "big" all sorts of ways. Is Denmark's government "big?" I think not, and perhaps emotionally it can get away with doing more because it is so "small."

#5 No surprise there, likely because the evidence from these Randomized Clinical Trials, will not support what they are forcing on us. Just like previous RCTs of the effects of health insurance did not:

Baicker et al, The Oregon Experiment — Effects of Medicaid on Clinical Outcomes, NEJM May 2013. Among 12229 subjects randomized to either have or not have health insurance, from the abstract "This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes [..]" http://www.nejm.org/doi/full/10.1056/NEJMsa1212321

Taubman et al, Medicaid increased Emergency Room use, evidence from Orgeon's health insurance experiment. Science, Jan 2014. In this randomized clinical trial on 25,000 previously uninsured subjects, emergency room use increased by 40% among the insured compared to the uninsured, but not to primary care, especially not for non-emergent visits. http://www.sciencemag.org/content/343/6168/263.full.pdf?keytype=ref&siteid=sci&ijkey=GoMYHyTTSQ4.Q

Obamacare was not supposed to "work". It's enactment into law was purely aspirational. Why go to the trouble of testing the concepts?

In other news, homes with fire insurance were no less likely to burn down than homes with fire insurance. Therefore fire insurance is a useless waste of money.

It is getting to. There was an article on Instapundit last year about this. There are less fires so the fire dept is finding reasons to stay funded. I never could figure out why a fire truck responded to my dad's heart palpitations.

Except that there is a large section of commentariat that thinks that giving people health insurance makes them healthier.

If it's silly to think so, please go tell them that.

Who exactly is this 'large section of the commentariat' that you think you are responding too? Healthcare reform has gotten a lot of debate and discussion and I'm sure you will find lots of silly things said on both sides (as well as plenty of things that are very smart but end up being wrong).

Regardless, I find it pretty surprising you consider it a failure that it seems health insurance is not well linked to health outcomes. What exactly would the alternative imply? That losing your health coverage is a death sentence in the US? Not exactly very nice is it?

Ironically that also illustrates why a system of universal coverage is needed. Let me ask you, what would be demonstrated if we studied people who have generous cable TV packages versus those that have none? I suspect those that have more generous packages watch more tv and watch a greater number of channels. Likewise people with lots of accounts at places like itunes probably have more digital music than those who don't know what that is.

So you really have to ask yourself the question why DON'T people who lack coverage have worse outcomes health wise? The answer is that people who lack coverage get, roughly, the same healthcare they need as those who have coverage. At least when it comes to very serious issues that you can measure over a year or two (like whether a heart attack is treated in a hospital, whether cancer is given chemotherapy or something).

So here's a problem, with most other products you do NOT get the benefit if you are unable or unwilling to pay for it. Those that don't pay their electric bill will typically find themselves in the dark. Don't pay your Netflix bill and you won't be able to stream movies. You get the idea. We don't want to do this with health care. We aren't going to say to the 23 year old "we're going to let your tumor grow until it spreads and kills you because you thought it was better to spend a few thousand a year on a nicer car than health insurance...sorry". So in effect we have decided that everyone is going to be covered, one way or the other. If you want to challenge that make it clear how you want to challenge it and why.

"America's high uninsured rate kills people" jumps to mind. Yglesias was far from the only one pushing that.

The study Yglesias refers to seems a bit Ptolemaic to me. They begin with the idea that the bottom 95% were economically disadvantaged so that their consumption up until 2008 came from dissaving, and the narrative is stuffed into that box.

If that is the case, having an outcome where the overwhelming factor is that housing and durable commodities are bid to stratospheric values seems a bit odd. I'd love to see a single reference from before the year 2000 where anybody says, "You know, the bottom 95% is getting squeezed and their consumption is unsustainable. Be prepared, because this means gold and home prices are going to go through the roof."

It seems to me that there is a lot going on here, involving money illusion, the difficulty of measuring savings, and the large amount of exposure of the American middle class to residential home values that would be more relevant than this "bottom 95%" story.

There have been several reports of widespread reduction in debt by the middle class over the last 5 years. Well, if your income is constant, then any reduction in debt means deferring consumption. I would expect the middle class to come out of this period in better shape than it's been in a couple of decades.

my biggest concern with the cited study is that they do not use individual-level consumption data to create the two spending groups. They "dis-aggregate" aggregate consumption data (as is part of GDP) using formulas (aka assumptions) into 5% and 95% groups. They may get the right trends but until it is confirmed with micro spending data, I am skeptical. I have other qualms about empirics. All said, the link between inequality and the recession / recovery is a subject of much debate ... and I would be shocked if the story is as simple as the cited study suggests.

Re: #5b, the summary states "Free care increased the use of formal healthcare and reduced health spending." I am inferring that the reduced health spending was on a per-household basis, what about overall? I taking it that "free care increased the use of formal healthcare" means that overall spending went up, correct? The next bullet point says that there was no difference in health outcomes, so that rules out the model where preventative medicine yielded overall savings. Can somebody with access to the full study clarify this for me?

#3: This was already pointed out by Shakespeare (JC Act I scene 2):
Let me have men about me that are fat,
Sleek-headed men and such as sleep a-nights.
Yond Cassius has a lean and hungry look,
He thinks too much; such men are dangerous.

2b. As usual with these articles, no mention of Chipotle, Starbucks, Whole Foods, lululemon, Apple...

> 2b. As usual with these articles, no mention of Chipotle, Starbucks, Whole Foods, lululemon, Apple

Those brands serve to illustrate the point .... today there is no longer any such thing as a luxury smartphone, or luxury coffee.

The unfortunate thing is that we will never get to the point where the same commoditization happens to education, health care, or housing.

"The unfortunate thing is that we will never get to the point where the same commoditization happens to education, health care, or housing."

Why not? If the flipped classroom becomes the norm, all students will have access to the same quality instructional materials, and the skill of the instructors (who are no longer doing lesson planning or giving lectures) will matter less. Already in the western world, there are no luxury pharmaceuticals or luxury medical procedures (other than cosmetic) that are denied to those of modest means. And as pharma research slows and more and more drugs go off patent, there will be even greater leveling.

And housing? Modest middle-class houses in the U.S. are equipped with every modern convenience that you'd find in a wealthy home (which certainly was not true a few decades ago). What the rich have now is rarely functionally superior in any significant way. Virtually all the wonders of the modern world are mass-market wonders. And they have to be -- the only way to pay for the enormous R&D is through millions or billions of sales in the mass market.

So the rich end up spending their money on relatively silly gilding. Their luxury cars arguably function worse than the run-of-the-mill Camry -- less efficient, less durable, less reliable. It's perfectly normal to drive an Accord or Camry for 10 or more generally trouble-free years, but you'd be crazy to try that with an Audi or Mercedes -- the off-lease maintenance will kill you.

You make some good points but the cost of health care, property taxes and higher education are tens of thousands of dollars per year. Do you really anticipate any of the price tags to come down, even with MOOCs and generics? A "cheap" Obamacare plan is $5K plus $2K in deductibles - you're paying $7K before you get one free doctor's visit.

I anticipate that the powers that be will force students to spend 6 years in college instead of 4. In our present economy you essentially need 6 years of higher ed to get a decent job - 4 years of college plus a masters so I don't think it will be a stretch for colleges to insist on 6 years for an undergraduate degree. The per year costs will be lower because of MOOCs but they will force you to stay in school longer for the final degree. The guilds have already increased the requirements in many areas - e.g. the CPA exam is 4 parts instead of two, future physical therapists are now required to get Phds, the social work requirements keep climbing.

A “cheap” Obamacare plan is $5K plus $2K in deductibles – you’re paying $7K before you get one free doctor’s visit.

Last time I looked it up, the US spends on average $8K per person on health care. In comparison we spend maybe $4K on food.

What's interesting is that food has quite a few'free market' advantages. You can choose to eat well, or eat poorly. There's lots of expensive places to eat, and plenty of cheap ones. Ditto for making food yourself at home. Why is it not this way with health care?

Well gov't isn't really the cause. There's plenty of violations of free market principles by the gov't in food. For example, there's gov't approval for cartels that 'fix' the price of milk. There's all types of subsidies, price supports, and 'crop insurance' the gov't runs out of the farm bill. On smaller scale the gov't provides subsidies to consumers in the form of food stamps to boost demand for food. Needless to say, on the local level restaurants face all types of gov't regulation.

The real difference between the two is consumption patterns. However you like your food, you're eating your 2K calories every day until you die...nice and evenly spaced out. Sure you could go a day or two without eating anything, but not much more. Likewise you can try to gorge yourself every now and then but you're never going to be able to eat a weeks' worth of food in a single sitting...let alone a month or year!

Your consumption of health care is likely to be both not very smooth and not very predictable. At 30 you might, in one illness,consume a lifetimes of care. Or go decades with just a few doctors visits a year. This unpredictability implies you will end up paying $7K or so a year almost never actually using anywhere near that...until you do.

The standard Obamacare policy must cover three doctor visits plus two labs plus a few other tests (eg mammogram) every several years as no charge preventative care, and that includes Medicare, and any employee plan that has changed its coverage and lost it grandfather exemption.

Around here, property taxes for average houses in lower-tax areas are a couple of thousand dollars a year. But obviously that varies enormously from state to state and region to region. You mention physical therapists. It's true that several medical specialties have increased requirements (these are implicitly intended as barriers to entry in an attempt to raise wages -- and also to raise status and thereby improve the odds in the endless 'scope of practice' political battles with MDs). These clinical doctorates aren't PhD's though -- there's no research required, just more years in the classroom. Still, if you want to be a physical therapist or a social worker, there is no reason not to do the first couple of years at a community college and the last ones at a regional state U where tuition is nowhere near Ivy levels (and people with modest incomes pay much less than full retail). Health care costs are obviously a special case, but still, there are no non-elective 'luxury' medical treatments -- poor people in the U.S. who need a new hip get one.

Well said, Boonton. Nice post.

3. I await my coronation.

#3: There appears to be a lot of overlap between what the article describes as attributes of a good leader, and what Tyler suggests will make a good machine partner in Average Is Over.

Smart enough to participate in the process, but passive enough to let the machine run the show.

@6 was pretty weak. Erik B. and the host did concede that we're in uncharted waters now that machines are on the verge of defeating us cognitively. Erik B. said that while technology makes the pie bigger there is no guarantee that everyone - or even most people - will be better off. Erik B. suggested that we need to measure things better - GDP doesn't really work in a digital world where the goods and services are low cost or free. Finally, there were several kisses blown to TC.

Erik B. said we need better education (yawn) and we need to staple a green card to every Phd awarded (to foreigners) in the USA (I thought that was Steve Jobs' idea).

#2. I don't like discussing it until I know the income level in $. If possible area of the country.

#2
If Tyler Cowan is right, and the top 15 percent will, on merit, garner the lion's share of income---and that is showing up in consumption patterns---should not polygamy become the new norm?

Why should a man struggle to raise a family if another man has 20 times the income? Why should a wife marry an economic loser when a multi-millionaire is open to a second or third wife?

Why should the state outlaw any form of marriage, be it gay, monogamous, polygamous or communal?

If we believe in free markets and free choice, then we also believe in the right of people to form their own living arrangements.

Polygamy strikes me as the right and healthy social response to increasing income disparities, and it is a government-mandated perversion that prevents this natural evolution from happening.

You interest me strangely.

I feel what I suspect is a similar tingly sensation in my loins.

I am only stating the logical culmination of free market income distribution and a non-nanny-state government...attitudes can change...see gay rights...next up polygamy? Why not?

2. Consumption average is over. And more on the same theme from Nelson D. Schwartz.

How about instead "economics is zero sum - labor income must equal labor consumption"

Somehow since Reagan we have had the rise of free lunch economics where going deeper in debt the way to create wealth. Both public and private debt have exploded since Reagan as everyone latched onto Reagan's "we will not accept Jimmy Carter's claim that sacrifice is required".

Hey, we can invest in a big house and not sacrifice anything. We can get rich by buying a bigger house, and going on vacation, because sacrifice is never required.

The bankers were happy because they stopped being fiduciaries and became rent seekers lending other people's money to people who could never repay it.

And the idea that a decaying property was increasing in value because high inflation hiked the price, and economists promised price defines value, was just a free lunch that could not be questioned.

And then on top of that, economists keep talking about how hiking wages will hurt growth as if labor income is a liability on the economy because labor never consumes, and consumers never labor. Consumers are those with infinite credit that will buy up everything supplied if the price is low enough.

No one seems to argue that the only way to grow the economy is to pay workers more in total income, but instead argue that lower incomes will produce faster growth.

#2. Analogous evidence has been presented in the past re the rich turning left when entering the plane and others turning right, headed for the sardine can. Many comments here on the plane example went something like: those at the back can only fly because of the price those upfront are paying. I do not recall any position by Tyler and Alex on this, but I get the impression that they are sympathetic to this argument.

Maybe we are getting to the point where the vast majority ought to be thankful for a 10 cu ft Amana because of the price that the top 20 (or is it 5) percent are willing to pay for the Cafe line of appliances. If many of us here are consistent with our views, we ought to see nothing wrong with this.

From 5.:
' ' “It’s the greatest irony,” said Gordon Berlin, president of MDRC, a nonprofit organization whose studies have influenced American policies on welfare, job training and education. ' '

Let's see, name three areas where no one has answers on how to solve society wide problems that are not health care...

Gee, they would be welfare to work, job training, and a return to the great education of the 50s and 60s.

And health care innovation is needed on a scale that is huge and very costly too get up and running.

For example, the idea that products from multiple vendors can be sold on the Internet to millions of customers has proven difficult to test over and over. Amazon went through years of trials to prove that you could sell stuff on the Internet for delivery by mail. It was years before Wall Street accepted it as more than a failed idea, even though Bezos was doing little different that Sears & Roebuck did a century earlier. Then QVC. So, selling medical insurance on the Internet should be simple, right?

Well, the private sector failed to do this simple task in two dozen separate cases. We had two dozen RCTs on selling insurance on the Internet. The national market place and the dozen and a half State market places, all by different private sector vendors. Oracle totally failed to get a system working for one State that fell back to manual order taking on paper.

The cost of this RCT was in the billions because understanding how to implement something like this requires working with hundreds of thousands to millions of test subjects.

I wish that one of these market places had been done totally by government employees and no private sector involvement but COTS solutions.

1) Perhaps, the most instructive civics game of all might be Fantasy Regulator. Students draft teams of regulations, regulatory bodies, and policy makers, which earn points based on the consequences of the regulations. The twist is that negative points are earned whenever an opponent identifies negative, unintended consequences of the regulation. Students might find that the best, winning strategies involve avoiding bad regulation.

"Fantasy Regulator:
...The twist is that negative points are earned whenever an opponent identifies negative,..."

That must be the Fantasy part.

#3: "Lazy" is a lazy word for this attribute, but the easiest one for large groups to grasp. Right across an infinitesimal border from lazy is ruthlessly efficient. You cannot get one of these people to engage fully in work that the clearly see or even strongly suspect does not add enough value. Intelligent and diligent people will waste a tremendous amount of energy on any "good idea" assigned to them. As leaders, they also waste vast resources under their control on the same. "Lazy" intelligent leaders won't engage on a "good idea" until they can see that it is "good enough" to move the needle and they don't allow their resources to be wasted. We love having intelligent, diligent people working for us because when we spot the great idea/project/opportunity they execute well.

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