• Consumer spending

    Jun 21 • Households, Innovation, Macroeconomic Measurement • 255 Views

    In Pursuing Happiness: American Consumers in the Twentieth Century, economist Stanley Lebergott asked us to imagine that automobiles, penicillin, electric washing machines, refrigerators, disposable diapers, electricity, television, and “every economically significant good added since 1900″ all disappear.  Next, he tells us that the remaining items would include “salt pork, lard, and houses without running water.” You get the picture. Our purchases have changed a lot during the past century.

    Next, I checked a Bureau of Labor Statistics report (2008 data) too see how we spend our money today. In descending order, the average household uses close to 34% of its total spending on housing; 17%: transportation; 13%: food; 11%: personal insurance and pensions; 5.9%: healthcare; 5.6%: entertainment; and 3.6%: apparel and services.

    As you might expect, the amounts are quite different when we look specifically at income levels. For example, a family spending $34,687 annually will use $4,818 on food. At the other end of the income scale, a family spending $124,678 will allocate $13,011 to food.

    The Economic Lesson

    Just an interesting spending fact today. On July 4, 1776, Thomas Jefferson noted that he spent 27 shillings on 7 pair of women’s gloves.





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    Conspicuous Consumption

    Jun 20 • Economic Thinkers, Households • 312 Views

    I once read that Thorstein Veblen let his dirty dishes accumulate until his cupboard was bare, then sprayed them with a hose and started all over again. Maybe a good idea, but unusual. This early 20th century scholar (1857-1929) was somewhat eccentric.

    We remember Veblen for his The Theory of the Leisure Class (1899) and his theory of conspicuous consumption. According to Veblen, affluent consumers try to convey their power and wealth through wasteful and unproductive behavior. The affluent can do less because their servants and employees do more. And then, to display their prestige and power, everyone else also wants to do less. As expressed by Veblen, “The members of each stratum accept as their ideal of decency the scheme of life in vogue in the next higher stratum, and bend their energies to live up to that ideal.”

    In a 2009 essay, columnist Daniel Gross asks whether Veblen is still right. Does wasteful spending convey prestige? Yes, he concludes. But, when Veblen says the affluent become unproductive, times may have changed. “Type-A” behavior has become prestigious. Maybe now, “there’s a sort of reverse prestige associated with leisure.”

    More tomorrow with specifics on what the rich buy.

    The Economic Lesson

    Using Lorenz curves developed by statistician Max Lorenz, we can look at income distribution in the U.S. Lorenz divided the total number of families into 5 equal groups as the X-axis of his graph. For the Y-axis, he looked at the total amount of income that all families received. Then, he used coordinates to show how society’s total income was distributed. For example, a dot at (20.20) would mean that 20% of all families received 20% of all income. If the line moved from (20.20) to (40.40) to (60.60) and finally to (100,100), income distribution would be equal. Displaying unequal income distribution, in the U.S., the most affluent quintile receives close to 50% of all income. 

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    A High, Low, or No Soda Tax?

    Jun 19 • Demand, Supply, and Markets, Government • 300 Views

    States debating a tax on soda have to decide whether they want to raise revenue or diminish obesity. If a sales tax on soda is not very high, people will continue buying sugary drinks. The result? The state gets more money. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then a major cause of the “obesity epidemic” in the United States will be addressed. 

    When will a tax impact sales? A recent study described in the American Journal of Public Health concluded that soda prices need to increase by 35% (45 cents up from the baseline price) for people to diminish soda purchases by 26%. With health care costs soaring and obesity spreading, all a state needs to do is levy a 35% soda tax. Are they? According to a 2009 Kaiser Family Foundation study, the highest soda tax rates, at 7%, are in California, Indiana, and New Jersey.

    With state budget crises erupting everywhere, do you expect state lawmakers to opt for health over a revenue stream?

    The Economic Lesson

    An economist would say the sales tax debate is about the price elasticity of demand. If price changes a lot and the quantity we buy remains the same, as with medication and gasoline, then our demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. With soda, within a certain price range our demand is inelastic. Once we reach the 35% level, though, we switch to an elastic response. 

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    Fashion Rules

    Jun 18 • Economic History, Regulation • 328 Views

    If Miuccia Prada sees a vintage designer jacket that she likes, she can copy it. She can even replicate it exactly and call it a Prada. Illegal? No. And yet, if Michael Lewis included a page from another writer’s book, he would be accused of violating intellectual property rights.

    In a TED talk, Johanna Blakley explains that a jacket and most other clothing cannot be copyrighted because they are “utilitarian”. A logo on the jacket can receive copyright protection but not the jacket or blouse or coat or shoe. Contrary to what I would have expected, she believes that the industry is helped by the absence of protection. Copying begets trends; copying stimulates innovation. The threat of copying makes people repeatedly move onward to newer, better, and more unique designs.

    Writers of jokes, designers of furniture, and inventors of autos also find it tough to secure patent protection.

    Your opinion for protecting music? 

    The Economic Lesson

    I wonder whether Alexander Hamilton would have disagreed with Ms. Blakley. Convinced it would foster invention, protect infant industries, and thereby stimulate economic growth, as Secretary of the Treasury, during the 1790s, Hamilton promoted a patent system. 



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    Transportation Matters

    Jun 17 • Economic History, Macroeconomic Measurement • 224 Views

    Reading about India’s inadequate railway system, I thought about the Erie Canal. Currently, massive freight containers that took four or five days to travel from Singapore to Mumbai will then take 28 days to reach New Delhi because trains and tracks are too congested. To continue growing, India will need a better transportation network.   

    By contrast, during the nineteenth century, a transportation system of roads, canals, and railroads increasingly crisscrossed the United States. Dug between 1817 and 1825 from Albany to Buffalo, N.Y., the Erie Canal was the last link of an all-water route between the port of New York and the Great Lakes. Because of the Erie Canal, eastern manufacturers could easily trade with western suppliers of raw materials. Instead of traveling via slow and expensive overland routes, goods could move across the Erie Canal more cheaply and quickly.

    Specifically, to ship freight 100 miles by land during the early 1820s would have cost $32 a ton. By canal, the expense dropped to $1 per ton. Several decades later, in 1852, moving over rivers and canals between Cincinnati and New York City, freight arrived in 18 days. By rail, it took 6 to 8 days.

    The Economic Lesson

    Canals and railroads could also be called capital. Defined as tools, buildings, and inventory, capital is crucial for economic development because it saves time and increases knowledge. Because capital investment involves postponing current consumption, India has politically difficult choices.

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