Russell Roberts's Blog, page 1481

Cataloging Improvements in Americans' Living Standards

Writing about comments – some from Tyler himself – on Bryan Caplan's and Arnold Kling's reactions to Tyler's new e-book, The Great Stagnation, EconLog's David Henderson says:

I would still like to know Tyler's answer on choosing between spending a given number of nominal $ on items in the 1973 catalogue vs. spending on items in the 2000 catalogue. Even better would be 1973 vs. 2010.

Of course, I can't answer for Tyler.  But I can – prompted in part by my vanity – reprise here two posts from January 2006 in which I compare Sears-catalog offerings from 1975 to products available in 2006.

Here's the first post:

I just made my first purchase using eBay: I bought a Fall/Winter 1975 Sears catalog. (I paid $2.99 for the catalog and $13-something to have it shipped to me by FedEx.)

This catalog was issued at the start of my senior year in high school. I have decent memories of the mid-70s. Perusing this Sears catalog confirms my sense that my recollection of those days is pretty good.

The days themselves, however, were — compared to today — not so good.

Other than the style differences, the fact most noticeable from the contents of this catalog's 1,491 pages is what the catalog doesn't contain. The Sears customer in 1975 found no CD players for either home or car; no DVD or VHS players; no cell phones; no televisions with remote controls or flat-screens; no personal computers or video games; no food processors; no digital cameras or camcorders; no spandex clothing; no down comforters (only comforters filled with polyester).

Of course, some of what was available to Sears' customers in 1975 is also quite noticeable to those of us looking back from 2006: typewriters, turntables for stereo systems, 8-track players, black-and-white television sets.  And lots and lots of clothing and bedding made from polyester.

The lowest-priced electronic calculator available in this catalog set the citizen of 1975 back $13.88 [in 2011 dollars, that's $56.91] – it had a whooping six digits of display and could add, subtract, multiply, and divide.

Also available were microwave ovens, ranging in price from $189.95 to $439.95.

Of course, there's been a good deal of dollar inflation since 1975. Judged by changes in the consumer-price index, what $100 bought in 1975 takes about $354 to buy today. So that six-digit calculator would today cost about $49. Sears lowest-priced microwave oven in 1975 would today set you back $672.

Here are some other 1975 products and their 1975 prices (along with their inflation-adjusted 2006 prices):

Sears Best kitchen range, $589.95 ($2,088).

Sears Best television, $749.95 ($2,655)

Sears Best black and white television, $137.95 ($488)

Sears Best typewriter, $278.99 ($988)

Sears Best motion-picture camera (no sound; but it did have 8X zoom!), $197.00 ($697)

Sears lowest-cost telephone answering machine, $99.50 ($352)

Sears highest-priced tent for four adults, $84.88 ($300)

But inflation is difficult to calculate. In a later post, I'll take a page from the work of Michael Cox and Richard Alm and ask: how many hours did the American production worker have to work in 1975 to buy things from the Sears catalog? And how many hours must the average production worker today work if he were to buy 2006 versions of these things?

And here's the second post:

I wish I had more time – or that my time weren't so valuable.  I would spend more time perusing my 1975 Fall/Winter Sears catalog.

I checked out a few items from that catalog that are reasonably – though hardly fully – comparable to similar items in 2006. Then, I divided the average hourly nominal earning of production workers in 1975 ($4.87 in December of that year) into the price of each of these (more or less) randomly selected items.  I did the same for 2006 items found (with exceptions noted below) at Sears.com, dividing these prices by the average hourly nominal earning of production workers in December 2005 ($16.34).  My data are found in at this BLS site.

My aim – copying the method used by Michael Cox and Richard Alm in part of their 1999 book Myths of Rich & Poor – is to see how many hours this average American production worker must work to purchase each of these items.

Here's what I found:

Sears' lowest-priced 10-inch table saw: 52.35 hours of work required in 1975; 7.34 hours of work required in 2006.

Sears' lowest-priced gasoline-powered lawn mower: 13.14 hours of work required in 1975 (to buy a lawn-mower that cuts a 20-inch swathe); 8.56 hours of work required in 2006 (to buy a lawn-mower that cuts a 22-inch swathe. Sears no longer sells a power mower that cuts a swathe smaller than 22 inches.)

Sears Best freezer: 79 hours of work required in 1975 (to buy a freezer with 22.3 cubic feet of storage capacity); 39.77 hours of work required in 2006 (to buy a freezer with 24.9 cubic feet of storage capacity; this size freezer is the closest size available today to that of Sears Best in 1975.)

Sears Best side-by-side fridge-freezer: 139.62 hours of work required in 1975 (to buy a fridge with 22.1 cubic feet of storage capacity); 79.56 hours of work required in 2006 (to buy a comparable fridge with 22.0 cubic feet of storage capacity.)

Sears' lowest-priced answering machine: 20.43 hours of work required in 1975; 1.1 hours of work required in 2006.

A ½-horsepower garbage disposer: 20.52 hours of work required in 1975; 4.59 hours of work required in 2006.

Sears lowest-priced garage-door opener: 20.1 hours of work required in 1975 (to buy a ¼-horsepower opener); 8.57 hours of work required in 2006 (to buy a ½-horsepower opener; Sears no longer sells garage-door openers with less than ½-horsepower.)

Sears highest-priced work boots: 11.49 hours of work required in 1975; 8.26 hours of work required in 2006.

One gallon of Sears Best interior latex paint: 2.4 hours of work required in 1975; 1.84 hours of work required in 2006. (Actually, Sears sells no paint on-line, so the price I got for a premium gallon of interior latex paint is from Restoration Hardware.)

Sears Best automobile tire (with specs 165/13, and a treadlife warranty of 40,000 miles: 8.37 hours of work required in 1975; 2.92 hours of work required in 2006 – although, the price here is of a Bridgestone tire that I found at another on-line merchant.  Judging from its website, Sears no longer sells tires with specs 165/13 and a 40,000 mile warranty.

I realize that you can accuse me of bias – perusing the 1975 catalog and choosing those goods whose real prices have fallen most dramatically over the past 30 years. Certainly, a catalog of 1,491 pages has too many goods (and services, such as appliance installation) to count.

I avoided clothing (which is the first half of the catalog) because most of the clothing Sears sold in 1975 was made of polyester, or polyester/cotton blends – stuff that few of us wear these days.

And some other goods are simply incomparable across this time span. Take mattresses: Sears does sell today some mattress and box-spring sets that today are comparable to the very best set that it sold in 1975, but Sears top-of-the-line mattresses today are not comparable to its top-of-the-line mattress in 1975.  Likewise with photography equipment and audio-visual equipment: how do you compare a 2006 CD player to a 1975 turntable?

A more fundamental objection to such a practice would go like this: "Sure, prices of things sold in department stores are today much more affordable than they were in 1975, but what about health-care, housing, and education? These things require more hours of work. What does your little catalog exercise really prove about Americans' overall standard of living?"

It's a good question – and I believe that I have an answer.  But that answer will await a later blog post (for, unlike Sears, I don't want anyone to say that this post "has everything!").

Using the Minnesota Fed's on-line inflation-adjuster, I just checked some of the price-adjustments (from 1975 to 2006) that I reported above: the 2006-equivalent prices that I report above appear to be underestimates.  For example, I wrote in 2006 that Sears Best television – which cost $749.95 in 1975 dollars – in 2006 dollars cost $2,655.  But doing the calculation today I find that the Minnesota Fed's calculator says that $749.95 in 1975 is the equivalent, in 2006 dollars, of $2,807.96.

Go figure.

I think I used the Minnesota Fed's on-line inflation adjuster back when I wrote those posts in 2006, but my memory might be faulty.  Whatever.  The point is that many goods for sale in the 1975 Sears catalog were wicked pricey by today's standards.

Or, Another Real-World Instance of Public-Choice in Action

Here's a short, entertaining video on how Uncle Sam uses Americans' tax dollars to pay hush money to parties who – for their own selfish reasons – actively seek to prevent Uncle Sam from wasting American taxpayer dollars and to stop Uncle Sam from harmfully intervening into the market for cotton.  (HT Frayda Levy)

(Extra-credit question: Is it appropriate to interpret the events summarized in this video as a real-world instance of the Coase Theorem in action?)

Open Letter to U.S. Senator Kay Hagan

Sen. Kay Hagan (D-NC)

United States Senate

Capitol Hill

Washington, DC

Dear Sen. Hagan:

You are leading a Congressional effort to renew the Trade Adjustment Assistance (TAA) program, under which Uncle Sam gives cash assistance to workers judged to lose their jobs whenever American consumers start buying more imports.  I have a few questions for you.

First, what's so special about job loss due to increased competition from imports?  Is a worker who loses his or her job to another American worker, or to advances in technology, any less unemployed or distressed than is an American worker who loses his or her job to a foreign worker?  If, for example, Americans follow Uncle Sam's advice to eat less salt, why not give adjustment assistance to the many workers at Frito-Lay and Nabisco (maker of Planters Peanuts) who will lose their jobs as a result of this change in the pattern of consumer spending?

Second, why not impose a Trade Adjustment Tax on workers who get jobs as a result of increased foreign demand for U.S. exports?  As the Democratic Leadership Council's own Edward Gresser wrote this past October, "Since World War II American exports have doubled about every 10 years, growing at about 8.3 percent each year."  If the premise of the TAA is valid – namely, that workers who lose their jobs to import competition are so wronged that they deserve taxpayer assistance – are not workers who GAIN jobs by supplying export markets unjustly benefitted by this change in consumer spending and patterns of production?  What right have Americans who work in export markets to the incomes they earn from jobs made possible only because, by importing more to America, foreigners are able to buy more from America?

Finally, one often-heard political justification for the TAA is that it dampens opposition to free trade.  Yet members of your party have been especially hostile to free trade.  You yourself have co-sponsored legislation to raise barriers to American imports of textiles.  If you succeed at extending the TAA program, will you pledge to oppose any and all attempts to prevent American consumers from buying from foreigners?  Will you pledge to support free trade without condition and unilaterally?

I look forward to your response.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA 22030

….

Cato's Sallie James has more.

'Snow Different?

Here's a letter to the New York Times:

The headline to your report today on January's disappointing jobs report reads "Weather a Factor in Slow U.S. Job Growth."

Please keep this headline in mind the next time one of your writers submits a report about how the need to rebuild after a destructive hurricane or tornado will "stimulate the economy."

Sincerely,

Donald J. Boudreaux

Or Perhaps Sen. Sessions Really Is Worried About the Threat to America Posed by Foreign-made Sleeping Bags….

From an editorial in today's New York Times:

Senator Jeff Sessions of Alabama blocked the extension of the G.S.P. [Generalized System of trade Preferences] altogether because he couldn't get sleeping bags removed from the program. He was acting on behalf of Exxel Outdoors, a sleeping-bag maker from Haleyville, Ala., that competes against sleeping bags imported duty-free from Bangladesh by CellCorp of Bowling Green, Ky. The Republican leader, Mitch McConnell of Kentucky, was pushing to pass the G.S.P. in its entirety, so Mr. Sessions put a hold on the bill.

Public-choice theory might not explain everything that happens in politics, but it explains a great deal – I would say most – of what goes on in legislatures.

Maximize Trade Agreements

Rep. Dave Camp (R-MI), Chairman

Committee on Ways and Means

United States House of Representatives

Dear Mr. Camp:

Good luck with the hearings your committee will hold on February 9 on trade agreements between the U.S. government and other governments.  Any and all reductions of trade barriers are economically beneficial and morally justified.

I ask you and your Congressional colleagues, however, to keep in mind the following fact: successful and productive trade negotiations occur millions of times daily, without any government involvement.  American companies daily negotiate with foreign input-suppliers; they trade whenever the terms are mutually agreeable and don't trade when the terms aren't.  American consumers daily negotiate with foreign consumer-goods suppliers; they trade whenever the terms are mutually agreeable and don't trade when the terms are not.

These trade negotiations are identical to the millions of other trade negotiations that take place daily between American companies and American input suppliers, and between American consumers and American consumer-goods suppliers.  In every instance, every party to these trades is made better off as each person judges for himself or herself at the times each of these countless trade agreements are struck.  The fact that some of these negotiations and agreements are with people living in different political jurisdictions is utterly economically irrelevant.

Each of us is capable of negotiating our own personal trade agreements – we do so successfully every day – and are harmfully obstructed in our negotiations by Uncle Sam's tariffs and other trade barriers, some of which will be the subject of your Feb. 9 hearings.

Sincerely,

Donald J. Boudreaux

Using PayPal to contribute to the rap video

If you prefer to use PayPal, you can send an email to Mercatus@gmu.edu with a note in the email notification that the donation is for EconStories.

Infinite National Park photos

Crowd-sourced beauty from National Geographic:

Zoom in on a spectacular national park photo to reveal hundreds more photos making up the original. Then zoom again at each level for an endless array of images, each submitted by users to My Shot.

Go here.

Median income over time is tricky

I had a dinner party the other night–the guests were the starting five of the Boston Celtics. I know that averages give a lot of weight to outliers, so I used the median to measure the height of the dinner party. My wife and I have four children, three boys and a girl, so the tallest member of my family–my oldest son–became the median height of the people in my house–5 foot 9 inches. After the Celtics left, the median height of the people in my house became the median height of my family, my middle son who is 5 foot 4 inches. Did eating dinner with the Celtics cause my family to get shorter?

Robert Samuelson misunderstands

Writing in The Wilson Quarterly, Samuelson weighs the left and the right's explanations of the crisis and finds them both wanting. Here is his summary of the left's argument:

From the Left, the explanation is greed, deregulation, misaligned pay incentives, and a mindless devotion to "free markets" and "efficient markets" theory. The result, it's said, was an orgy of risk taking, unrestrained either by self-imposed prudence or sensible government oversight.

Then the right's explanation:

The Right's critique blames the crisis mainly on government, which, it is alleged, encouraged risk taking in two ways. First, through a series of interventions in financial markets, it seemed to protect large investors against losses. Portfolio managers and lenders were conditioned to expect bailouts. Profits were privatized, it said, and losses socialized. In 1984, government bailed out Continental Illinois National Bank and Trust Company, then the nation's seventh-largest bank. In the early 1990s, the Treasury rescued Mexico, thus protecting private creditors who had invested in short-term Mexican government securities. The protection continued with the bailout of the hedge fund Long-Term Capital Management in 1998. After the tech bubble burst in 2000, the Federal Reserve again rescued investors by lowering interest rates.

The second part of the Right's argument is that government directly inflated the bubble by keeping interest rates too low (the Federal Reserve's key rate fell to one percent in 2003) and subsidizing housing. In particular, Fannie Mae and Freddie Mac—government-created and -subsidized institutions—underwrote large parts of the mortgage market, including subprime mortgages.

After explaining why the left's explanation is weak, he writes:

If anything, the Right's critique—Wall Street became incautious because government conditioned it to be incautious—is weaker. It's the textbook "moral hazard" argument: If you protect people against the consequences of their bad behavior, you will incite bad behavior. But this explanation simply doesn't fit the facts. Investors usually weren't shielded from their mistakes, and even when they were, it was not possible to know in advance who would and wouldn't be helped.

Samuelson is right–equity holders weren't bailed out in the past or in the current crisis. It was creditors and bondholders who were bailed out, typically 100 cents on the dollar. Equity holders were almost always completely wiped out and received pennies or less than pennies on the dollar.

But Samuelson misunderstands the important difference between creditors and equity holders. Creditors–lenders and bondholders–only care about one thing–that the firm survives. They don't care about the upside because they don't get any of it. If they don't think the firm will survive, they stop lending it money and buying its bonds. This is the natural deterrent to successive leverage. But if lenders and bondholders think the government will backstop them, or if they think there is some probability that that will happen, then they may continue to lend money.

Creditors police recklessness and imprudence. Cushion the fall for creditors and you get more recklessness.

What about equity holders? They don't want to be wiped out, but they enjoy the upside. They're willing to take on some risk of being wiped out if the potential upside is high enough. They don't police imprudence. They add it to their portfolio and if enough of those survive and pay off they get a nice return. So if you held Bear Stearns stock or Goldman Sachs, you were playing with fire. But if you got out in time, you made a killing on Bear Stearns before it died. And if you diversified with enough Goldman, you still might have made out OK.

And what about the execs who held so much stock and got totally wiped out? Surely they had an incentive to avoid bankruptcy. Well they didn't want to get wiped out, but they also made an enormous amount of money on the way. Jimmy Cayne and Richard Fuld, the heads of Bear Stearns and Lehman Brothers, each lost over a billion dollars when their firms died. But as I point out in this essay, the worst-case scenario was still pretty rosey:

The worst that could happen to Cayne in the collapse of Bear Stearns, his downside risk, was a stock wipeout, which would leave him with a mere half a billion dollars gained from his prudent selling of shares of Bear Stearns and the judicious investment of the cash part of his compensation. Not surprisingly, Cayne didn't put all his eggs in one basket. He left himself a healthy nest egg outside of Bear Stearns.

Fuld did the same thing. He lost a billion dollars of paper wealth, but he retained over $500 million, the value of the Lehman stock he sold between 2003 and 2008. Like Cayne, he surely would have preferred to be worth $1.5 billion instead of a mere half a billion, but his downside risk was still small.

When we look at Cayne and Fuld, it is easy to focus on the lost billions and overlook the hundreds of millions they kept. It is also easy to forget that the outcome was not preordained. They didn't plan on destroying their firms. They didn't intend to. They took a chance. Maybe housing prices plateau instead of plummet. Then you get your $1.5 billion. It was a roll of the dice. They lost.

When Cayne and Fuld were playing with other people's money, they doubled down, the ultimate gamblers. When they were playing with their own money, they were prudent. They acted like bankers. (Or the way bankers once acted when their own money or the money of their partnership was at stake.) They held significant amounts of personal funds outside of their own companies' stock, making their downside risks much smaller than they appeared. They each had a big cushion to land on when their companies went over the cliff. Those cushions were made from other people's money, the money that was borrowed, the money that let them make high rates of return while the good times rolled and justified their big compensation packages until things fell apart.

Rescuing creditors 100 cents on the dollar creates the most moral hazard. Wiping out equity holders gives the illusion of punishing risk-takers. It's an illusion. The creditors are the key.