Category Archives: Introductory Economics

College women and the future of economics

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Catherine Rampell writes,

The shrinking of the middle is largely due to a recent rise in the share of women (who also represent a majority of college students) who identify as either liberal or far left. The share of female respondents, but not male respondents, who describe their political views this way was at an all-time high (41.1 percent for women, 28.9 percent for men).

Pointer from Tyler Cowen. Note that this survey is of incoming freshmen and freshwomen.

My hypothesis is that these left-leaning women (and men) use small-community intuition in arriving at their political beliefs. They want the relationship between government and citizen to be one of parent and child. They want to see communal sharing, as if we lived in luck village rather than effort village.

When I went to college, I was on the far left. Those views began to change, in part because taking an economics course shifted my paradigm from small-community intuition to thinking about a complex society in more systemic terms. I am not sure that today’s young leftists will undergo a similar transition.

1. In the systemizer-empathizer dimension, women are more likely than men to lean toward empathizer. Empathizers probably will be less likely to take an economics course, less likely to enjoy an economics course, and less likely to be affected by an economics course.

2. I think that economics courses are going to tilt left and toward empathizers. I have an essay forthcoming in which I suggest that in a few decades economics may turn into a left-wing ideological monoculture comparable to sociology today.

Household Production, Continued

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The insightful Handle writes,

free YouTube videos combined with cheap and quick home delivery of tools and parts have made my own home, computer, and auto repairs much more worth my time than trying to arrange for an experienced professional.

I get it that having a YouTube video that tells me how to fix my toilet can lower the time it takes me to do it myself. But the Internet also makes it easier for me to find a cheap handyman. Overall, I think that my propensity to spend time fixing things myself has gone down rather than up over the past decade. Not that it was very high to begin with.

Another commenter writes,

I think Prof. Kling misunderstood Prof. Cowen’s point. Less household production as share of GDP is not necessarily a bad thing and the best number may very well be 0%.

However, household production is generally not included in the GDP figures, even though it arguably should be. If actual GDP, including household production, used to be 37% higher than measured GDP, but now is only 20% higher than measured GDP, then the growth in actual GDP over the period has been even lower than the pretty dismal numbers we are observing.

Hence, this statistic supports Prof. Cowen’s hobby horse of the Great Stagnation, regardless of how one feels the ideal percentage of GDP household production ought to be. I think he is right on this point.

In a follow-up, the commenter writes,

My neighbor and I live in identical houses and we are equally messy. Initially, we both clean our own houses and nothing is added to measured GDP.

Then we decide to pay each other $100/week to clean each other’s house. Suddenly, measured GDP is $10k/year higher than it used to be. But economically nothing has changed. This suggests that we ought to include our cleaning labors in GDP regardless of whether we clean our own houses or each other’s.

I think this is misleading. I prefer to look at it this way:

1. Suppose you are willing to pay me $100 for 5 hours of cleaning services. Then that puts a value on my time of $20 an hour.

2. Now, suppose that I decide to spend 5 hours cleaning my own house. You want to say that I have produced $100 of output.

3. I would say instead that the 5 hours I spend cleaning my own house is a waste of time!

Maybe if you assume that the most valuable work I can do is cleaning houses, then you are sort of right. But if I am a surgeon, then you are pretty much wrong. And I claim that as an economy gets more efficient at using specialization, you become less and less right and more and more wrong.

In terms of comparing well-being now with well-being 50 years ago, suppose that most of the reduction in housework is due to the prevalence of permanent-press clothes rather than having to iron them. Suppose that our entire (market-based) GDP consists of shirt production. It would be really nice if the GDP calculation subtracted the need for ironing from the cost of today’s shirts. But it could only show up as a quality adjustment that I suspect is too sophisticated to be captured in the statistics.

Suppose that actual shirt production remains the same as it was 50 years ago. Then measured GDP might be the same, also (it could be a little higher, if the statisticians pick up some of the quality adjustment). But the alternative concept, of GDP + household production, has gone down from 50 years ago, because we have stopped ironing. To me, that makes GDP + household production a stupid concept. It has things exactly backwards.

If you are going to add anything household-related in GDP, it ought to be leisure, not housework. If you show me that leisure + GDP is not growing very much, then I would count that as an argument for a Great Stagnation. But I am not the least bit persuaded by a measure of GDP + housework.

Household Services: I have a different take

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Timothy Taylor reports,

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP.

Tyler Cowen implies that this is a bad thing.

I think of it this way.

“Household production” is inefficient. In the limit, if you produced everything you consume and consume nothing that you do not produce, then you will be at subsistence level–if you are lucky. Our standard of living depends entirely on specialization and trade.

If a surgeon mows her own lawn, it means either one of two things.

a) she likes to mow lawns, so this represents consumption; or

b) this is a market failure, and she would much rather get paid for doing another surgery and use that money to pay for lawn mowing and other things, but for some reason she cannot.

What the Commerce Department is doing is imputing a value to the time that people waste doing housework. All that tells us is the value is lost by not enabling those people to engage in specialization and trade instead of doing housework. It is a measure of market failure.

And of course this imputed (i.e., artificially made-up) value has gone down relative to GDP, because people (women, mostly) are spending less time on housework and more time engaged in specialization and trade. This means that there is less market failure nowadays than there was back then. We should be happy that the number is going down, and we should hope that it heads toward zero.

The Economics of a Border-Adjustment Tax

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Timothy Taylor writes,

Most countries around the world and all high-income countries other than the United States have “border adjustments” in their tax code, but a key point to recognize is that border adjustments are typically part of a value-added tax–not the corporate income tax.

. . .the Trump administration proposal for revising the corporate income tax is actually a first-cousin-once-removed of a value-added tax.

Taylor cites scholars of various political persuasions in support of this analysis. Greg Mankiw makes a similar point. If you prefer taxing consumption to taxing saving and labor, then you should get to know the economics of the border-adjustment tax in the context of a shift from taxing corporate profits to taxing corporate net revenue.

But John Cochrane points out

a tax system in which you tax $100 of sales, but offer $99 of deductions (costs, wages, earnings retained for investment), then tax only the last $1, then tax that $1 again as personal income, would seem to offer lots of room for shenanigans on just what gets deducted. Along with interesting financial engineering to “invest” more earnings and pay less dividends and interest.

The more radically you reform taxes, the more you risk creating new distortions, both foreseen and unforeseen.

Tyler Cowen has a point about politics.

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way. Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

It is true that lowering the corporate tax rate would reduce the malincentive effects of loopholes in the tax. Lowering the stakes involved would lower the rent-seeking. Also, simply lowering the rate seems less risky (see John Cochrane’s whole post.

The economic theory of how a border-adjustment tax should work is worth knowing. However, theory tends to apply to concepts in the abstract. In practice, a lot of tax policy turns on what gets defined as taxable and what does not. And those regulatory and legislative decisions are where the rent-seeking and the distortions kick in.

Where are the Servants?

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I asked this question five years ago. Recently, on Facebook, Nathan Smith wrote,

Consider the following hypothesis. Once upon a time, there was a notion of “respectability.” Society, represented chiefly by the gossip of housewives, imposed honesty, chastity, and maybe some degree of piety, not so much by force as by public opinion. And I think that mere “respectability” qualified one for certain jobs, such as child care, handling money, personal service, etc. Nowadays, tolerance and the Sexual Revolution have abolished the category of respectability, but there are still a lot of jobs where people don’t need special skills but do need to have good character, so some filter is needed. So education has become the new respectability. . .A whole social stratum finds it hard to get access to jobs they could do, because our nonjudgmental society refuses to circulate the information about people’s characters that potential employers need, and the substitute for respectability, education, can’t be universal because, while everyone could be chaste and honest, many don’t have the academic ability to succeed in college, and/or can’t afford it. So personal service, which almost vanished during the economically egalitarian mid 20th century, but would be well worth reviving today, doesn’t make a comeback for lack of an identifiable class of respectable people whom the rich would allow to be present in their homes. . .

My thoughts.

1. There are a lot of jobs that involve personal care. Elder care and child care are what I have in mind.

2. What Smith calls “character” might be described as conscientiousness.

3. I do not get the impression that the personal care market fails in any dramatic sense. That is, I do not get the impression that there are many conscientious people willing to take jobs in personal care who are unable to find such jobs. If such a market failure were to present itself, it could be solved by entrepreneurs forming companies to vet and guarantee the quality of individual providers of elder care and child care.

4. Not that Smith was responding to my original post, but there I was suggesting that the high concentration of wealth would imply not so much that every middle class family should have personal servants but that rich people should have hundreds or thousands of personal servants. I think it is an instructive issue to ponder, but I have not come up with any new theories in the past five years, although I would add that the “supply problem” might include the fact that there are many people who are not conscientious.

Robert Murphy on Mises and Economic Calculation

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Murphy writes,

If a particular operation is unprofitable, that means that it absorbs resources that have a higher monetary value than the outputs it produces. In other words, everyone else in society outside of that operation thinks that its input resources are more valuable than its output goods (or services). This is feedback from everyone else telling the people running this operation: “You are reducing the value of economic resources available to the rest of us, so consider carefully what you have been doing. Is there a tweak you can make to your enterprise, so that you absorb fewer inputs and/or produce outputs that the rest of us value more highly?”

I often point out that government-promoted recycling operations tend to be unprofitable. For me, this creates a presumption that the value of the output in recycling is less than the cost of the inputs. In short, recycling wastes resources.

Read the whole essay. This is the sort of analysis that ought to be stressed to first-year (and later) economics students.

Not So Renewable?

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Timothy Taylor writes,

annual global production of lithium has more than doubled from from about 16,000 metric tons in 2004 to over 36,000 metric tons by 2014. Even with this rise in quantity produced, the price of a metric ton of lithium carbonate has risen from $5,180 in 2011 to $6,600 in 2014.

He cites a report from Goldman Sachs on emerging themes, one of which is “Lithium is the new gasoline.” (The other claims in the report are also provocative.)

Changing our energy technology does not automatically eliminate scarcity. It is instead a form of substitution.

Hunter-Gatherer Economics and Sustainability

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To many environmentalists, sustainability means leaving the world the way you found it. I think that this may reflect the instincts of a hunter-gatherer.

If you are a hunter-gatherer, how much you can eat is limited by the natural rate of replenishment. If you eat game or plants faster than they are replenished, your tribe will die.

Modern human welfare is not governed by replenishment. We use knowledge to add value to our environment. Cultivation of crops means that we can grow more food than we could obtain by gathering. And we apply ever-increasing ingenuity to this cultivation.

Sustainability of modern life is thus much more complex than sustainability of hunter-gathering. Our modern ancestors have left us the gifts of their ingenuity, so that what they took out of nature has not hurt our welfare. And we are likely to do the same for our descendants.

Tariffs vs. Quotas

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Greg Mankiw writes,

rationing under price controls is never perfect. Under rent control, for example, apartments do not automatically go to those who value the apartments the most. The misallocation due to imperfect rationing makes the actual welfare cost of price controls much higher than the standard deadweight loss triangle.

Suppose that the minimum wage is $10. You have one worker who would be happy to work for $8 and another worker who would be happy to work for $10. If the second worker is the one who happens to get the job, you lose $2 of surplus due to what Greg is calling “imperfect rationing.”

I remember being taught the equivalence between tariffs and quotas. But it seems to me that such an equivalence fails by the same reasoning. The quota may be imperfectly rationed, unless rights to sell within the quota are tradable.