Wednesday, April 27, 2011

Hard-to-measure good stuff...

Timothy Lee puts his finger on something I have been trying to get my mind around as I adopt upgrades and free apps: Is GDP adequate for measuring our new forms of wealth?

Now imagine an alternate universe in which industrial products did not work this way. Suppose we lived in the world of Harry Potter, and one day in the late 1950s RCA hired a wizard to wave his magic wand and transform all of the world’s black and white sets into color sets. This would clearly represent a large increase in the standard of living—a larger increase, in fact, than the non-magical process whereby people have to buy new, more expensive, televisions. Yet the government in the alternate universe would almost certainly have recorded a smaller increase in GDP. Our own BLS would see consumers buying more expensive televisions while in the Harry Potter universe consumers would be happy with the old, cheap ones. Hence, consumers circa 1970 would be wealthier in that universe than in ours, but official GDP statistics would show just the opposite.Today these magic wands exist. For example, a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP. Cowen writes that the Internet is producing wealth that “is in our minds and in our laptops and not so much in the revenue-generating sector of the economy.” This isn’t exactly wrong, but it fails to appreciate the extent to which the software industry is entangled with the “revenue-generating sector of the economy.” The digital revolution isn’t just introducing novel ways to amuse ourselves, it’s rapidly displacing a wide variety of “revenue-generating” products and services: typewriters, newspapers, magazines, books, maps, cameras, film development, camcorders, yellow pages, music players, VCRs and DVD players, encyclopedias, landline telephones, television and radio broadcasts, calendars, address books, clocks and watches, calculators, travel agents, travelers checks, and so forth.Paul Graham and Reihan Salam have been popularizing the term “ephemeralization”, originally coined by Buckminster Fuller, to describe this process whereby special-purpose products are replaced by software running on general-purpose computing devices. As the list above suggests, ephemeralization is affecting a growing fraction of the economy. And with technologies like self-driving cars on the horizon, its importance will only grow in the coming decades. Ephemeralization offers an alternative explanation for the puzzling growth slowdown of the last decade. Every time the software industry displaces a special purpose device, our standard of living improves but measured GDP falls. If what you care about is government revenue, this point might not matter much—it’s hard to tax something if no one’s paying for it. But the real lesson here may not be that the American economy is stagnating, but rather that the government is bad at measuring improvements in our standard of living that come from the software industry. [More]
The reason this is important is we are beginning to use GDP as THE yardstick for problems as varied as national well-being and taxation fairness. While I have been hard on conservatives who downplay the growing inequality in the US, their point about being poor isn't as bad as it used to be has some merit.

For brains evolved on scarcity, the immense wealth of the US, and indeed the globe, presents unique hurdles to rational thinking. Indeed, on an issue a seemingly as straightforward as hunger, we often are misled by a) our increasing separation from the knowledge of the actual lives of people who are affected by hunger and 2) the unexpected choices the poor make in the face of non-intuitive options. 

It seems the more we really get to know - rather than merely document with data - the poor, the more confusing the world gets.

So it shouldn't surprise us that the poor choose their foods not mainly for their cheap prices and nutritional value, but for how good they taste. George Orwell, in his masterful description of the life of poor British workers in The Road to Wigan Pier, observes:
The basis of their diet, therefore, is white bread and margarine, corned beef, sugared tea and potatoes -- an appalling diet. Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread or if they even, like the writer of the letter to the New Statesman, saved on fuel and ate their carrots raw? Yes, it would, but the point is that no ordinary human being is ever going to do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots. And the peculiar evil is this, that the less money you have, the less inclined you feel to spend it on wholesome food. A millionaire may enjoy breakfasting off orange juice and Ryvita biscuits; an unemployed man doesn't.… When you are unemployed … you don't want to eat dull wholesome food. You want something a little bit "tasty." There is always some cheaply pleasant thing to tempt you.
The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim. We shouldn't forget, too, that other things may be more important in their lives than food. Poor people in the developing world spend large amounts on weddings, dowries, and christenings. Part of the reason is probably that they don't want to lose face, when the social custom is to spend a lot on those occasions. In South Africa, poor families often spend so lavishly on funerals that they skimp on food for months afterward.
And don't underestimate the power of factors like boredom. Life can be quite dull in a village. There is no movie theater, no concert hall. And not a lot of work, either. In rural Morocco, Oucha Mbarbk and his two neighbors told us they had worked about 70 days in agriculture and about 30 days in construction that year. Otherwise, they took care of their cattle and waited for jobs to materialize. All three men lived in small houses without water or sanitation. They struggled to find enough money to give their children a good education. But they each had a television, a parabolic antenna, a DVD player, and a cell phone.
This is something that Orwell captured as well, when he described how poor families survived the Depression:

Instead of raging against their destiny they have made things tolerable by reducing their standards. But they don't necessarily lower their standards by cutting out luxuries and concentrating on necessities; more often it is the other way around -- the more natural way, if you come to think of it. Hence the fact that in a decade of unparalleled depression, the consumption of all cheap luxuries has increased.
These "indulgences" are not the impulsive purchases of people who are not thinking hard about what they are doing. Oucha Mbarbk did not buy his TV on credit -- he saved up over many months to scrape enough money together, just as the mother in India starts saving for her young daughter's wedding by buying a small piece of jewelry here and a stainless-steel bucket there.
We often see the world of the poor as a land of missed opportunities and wonder why they don't invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible and celebrating when occasion demands it.
We asked Oucha Mbarbk what he would do if he had more money. He said he would buy more food. Then we asked him what he would do if he had even more money. He said he would buy better-tasting food. We were starting to feel very bad for him and his family, when we noticed the TV and other high-tech gadgets. Why had he bought all these things if he felt the family did not have enough to eat? He laughed, and said, "Oh, but television is more important than food!" [More]
Of course, my bleeding "liberaltarian" heart cannot quite condemn the poor for being wholly responsible for their poverty because of poor choices. Their lack of faith in longer term rewards is the product of a system that pretty well sucks the lifeforce out of those dreams.
But we should consider many of our approaches are not working in the new age of under-the-radar forms of wealth and instinctive choices that are wholly inappropriate to modern economics. I suspect the economics of poverty will become a significant field for research for economists, and econometricians will be struggling to better translate into hard numbers the new forms of "goods" being delivered to us.


Steve said...

I served a customer base that ran the range from rich to poor. In rural farm country the farmers all paid me annually for service. About half of the small town folk paid me promptly on a monthly basis. The remainder had a hard time making monthly payments. There were other priorities in their life like tobacco, alcohol, or just sitting back an enjoying life. There priorities were not the same as the others. No government program, no church, no economic condition will change what is most important to them.

I also used to work for a small firm in Chicago where the average wage was $150,000 a year. Plus about $50,000 a year in bonuses. Some got more. I was the newbie on the low end. What was interesting was that there were about 25% of these well paid employees that had to rush their paycheck to the bank each payday so that their checks didn't bounce. One would not consider them poor but if the paycheck failed to show up for them they would be poor very rapidly. Their personality was to spend everything they had on things that gave them very little long term value.

Again, I can't force people to spend their money on the things that I think they should. Nor do I want anyone to force me to spend it on things I don't want.

I have no problem helping out those that are poor because of a disaster or because they want to get out of the situation that causes them to be poor. Usually children with a different attitude than their parents. But to give money and aid to a person that just wants to continue to their existing spending habits is a waste.

People that are more liberal or socialist in nature tend to think that most people would like to be like them and if we only give them access to the money and resources that they will seize the opportunity and become model citizens.

The conservatives tend to have a different set of delusions about how to change people.

My opinion is that people are what they are. Using laws to control social behavior is generally just as unproductive as trying to make everyone's revenue and assets the same.

Anonymous said...

Steve, just this past weekend I had a discussion with a 20-something relative. He was talking about borrowing his Dad's lawn mower last year and this year because his was inoperable. Shortly thereafter, he was showing me his $300 phone and talking about his $120 monthly phone bill.

I agree, no type of program will change that thinking. but by the same token, I do not attribute that thinking to the government either, unless the government raised that kid.

Anonymous said...

GDP loosing credibility and the poor spending where it doesn't logic out can both be some what explained by a 12 year old publication called "The Experience Economy".
Experience quality is relative to income and spending follows accordingly.

John Phipps said...


Thanks for the comments. I am reluctant to embrace the lament that we need a "better class of poor" and resign them to their deserved fate because we have historic proof that social mechanisms can provide avenues of choice. Many of us are children of those who worked, studied and earned their way to greater prosperity.

What truly concerns me is 1) the decreased value of hard manual labor and 2) removing the rungs of education on the ladder up.

Technology is eviscerating the former, poor public policy the latter.

It may be the poor are always with us, and as this post illustrates perhaps for good reasons, but if we do not address this issue and restore higher economic mobility, this will not be the America we claim to love. It will be another momentary plutocracy that will fal behind those societies with vibrant middle classes.

Steve said...

Providing a poor man a million dollars will not stop him from being poor if he doesn't also change how he spends his money.

I have no problem with providing people with a way of escaping poverty. But I also realize that many people will not choose to live that life. Give their kids a way of escaping. But it isn't easy to protect them from the anchor that the leeches in their family will demand of them.

John. You are a smart guy. Think of what it means to eliminate poverty. It means everyone's income and assets are the same. So assuming you don't want all of the problems that come with the non-existence of poverty but would accept a limit on the gap between the top and bottom, what would that limit be. The top can't have more than 10x, 100x, 1000x, ... than the bottom. What is that multiple? Why did you pick it? How do you enforce it?

History has shown that the rich are not immune to someone taking away what they have no matter how rich they are. Various Roman Caesar's often killed some of the rich families so he could seize their wealth to pay the army with. Russia recently jailed one of the richest because he dared to challenge the guy with the most guns. And then everyone has that little problem of not being able to take it with them. There are many examples of where the masses have decided that another group has too much and it is simply taken from them.

John Phipps said...


I would suggest eliminating poverty is not the same as eliminating wealth and would not mean "everyone's assets and income the same". In a relative sense there will always be those at the bottom, even if it is a higher bottom. Nor would it take much to move us further along that direction. And I will accept some waste since waste at the bottom is dwarfed by the waste at the top of our wealth distribution.

I'm suggesting progressive taxation is not the job and incentive killer currently being asserted. Nor would shifting focus from defense and tax cuts to infrastructure like schools mena the end of growth.

Relatively minor policy nudges could at least put us m ore in line with income distribution patterns seen in more successful nations.

Part of this gets back to our obsession with GDP. If we use the wrong yardstick maybe we should not be surprised that GDP growth doesn't make lives as good as the numbers would seem to indicate.

Steve said...

On the topic of wealth distribution, you might find this interesting.

derek said...

My Dad, an admirer and campaign worker for Robert F. Kennedy sent me this quote today related to GDP...

"Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product ... if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans."