This is your scarcity on price-gouging....

I did like the old "this is your brain on drugs" commercials.  Made me stop drinking coffee, and taking aspirin, out of fear.  OK, no it didn't.

Now, a lot of folks are showing how important it is to have thought about economics for more than 30 seconds before commenting on public policy.

Examples:

1.  This guy is mad that prices at hotels and resorts are higher when school is not in session.  Wow.  It seems he would prefer a price of infinity (all the rooms sold out, years in advance) to being able to rent a room at the beach.  The reason that hotels raise their rates is to ration the scarce resource.  There are not enough rooms when school is out, and there are too many rooms when school is in session.  You can't change that by regulating the price.  And if you try to force the price to be "fair," you will make the problem much worse.

2.  Had lunch with my friend and Duke colleague Timur Kuran yesterday.  He pointed out this little gem of a story.  There is a housing shortage in the area.  There are rent controls, or the prices would be much higher.  The solution to shortage is therefore...even tighter rent controls!  Wait....no.

3.  Most remarkably of all, it appears that some people want to apply anti-gouging laws to ice.  No, not the cold stuff I wrote about, which is at least necessary after a hurricane.  I mean "ice" in the colloquial sense, like when J-Lo said, "You think you gotta keep me iced; you don't!"  Jewelry price-gouging!  Thanks to Tofe for pointing out this "gem."  (See what I did there?  I may charge extra now...)

Euvoluntary Frugality

Exchanges are euvoluntary if they meet the six conditions. But what of the failure to exchange? Can frugality be euvoluntary?

There are trivial examples where failure to exchange could be tinged with regret or could amplify externalities. If I don't buy a crash helmet and I end up skidding on a patch of wet asphalt after a surprise downpour, my earlier decision to save a few bucks could end up costing me my ability to speak. If I scrimp on waste reclamation technology in my tannery, I might end up dumping toxic waste into the local watershed. That's not quite what I'm talking about though. I mean just ordinary spending. Is it euvoluntary to stay at home and eat a microwave burrito instead of patronizing Carlos and his taco truck even when you can clearly afford it?

There's a sort of theory in economics called the paradox of thrift. The way I understand it is like this: it might be individually wise to save for the future, but if everyone does it, it's contractionary, since consumer spending is such a large component of GDP. I say that it's "sort of" a theory, since it's predicated on the tendentious grounds that GDP is both a welfare metric and a policy end. Still, if it's right, it suggests that higher discount rates are normatively good, as reflected in growth statistics.

Then again, every dollar I spend on extra guacamole is possibly a dollar taken out of my daughter's college fund. Or out of my retirement plan. Are these any less euvoluntary than that burrito? Bounce savings decisions against the EE conditions. I can't easily pick out a violation. This suggests to me that most folks also don't sense a moral conflict.

So why do we have interest rate manipulation by central bankers?

Wait, what? What's the connection?

Okay, one way to think about interest rates is that they're prices. Specifically, the price of delaying consumption, or the price of borrowing. The price of waiting if you will. Low interest rates means that it's cheaper to borrow, more expensive to save. QE policies, whether through liquidity arguments or through interest rate arguments, are meant to tickle the here-and-now, to boost today's GDP figures. They suggest, if not outright declare that voluntary savings aren't truly voluntary. They aren't euvoluntary.

Are they right? Why or why not?

GDP vs. EE Round 2: Papola's Socks

The sage and puissant Russ Roberts and his accomplice John Papola recently appeared on Stossel discussing "austerity" (a heartbreakingly awful term) and the role of fiscal policy. I don't know how to embed the video, but this link is here. Keen-eyed observers will identify an error made by Mr. Papola when discussing measured prosperity. He says that he could sell his sock to Stossel, who could just turn around and sell it back to him, lather, rinse, repeat and that counts as prosperity to the state accountancy.

While technically wrong, Papola hits on (or at least hints at) an ecstatic truth squirreled away in how GDP is actually reckoned.

You may have already read some of my comments on the shortcomings of GDP here. Recall that the kernel of my argument is that welfare economists use GDP as a metric for prosperity and that the negative sign on imports implies that goods purchased from foreigners make Americans worse off. This is patently and obviously false. What Papola's comment reveals is interesting for the virtue of being factually incorrect.

The error is not obvious to the casual observer, so let me remind you how GDP is approximated.

Y = C+I+G+(X-M)

Output (Y) is the sum of private consumption (C), investment (I), government expenditure (G) and net exports (X-M).

I've already griped about the last term, so let's now gripe about the key differences between the first and the third. To wit, it's only the purchase of final, new goods that count in C. Flea markets need not apply, neither do intermediate goods like bulk paper sold by a mill to a printing press. John's socks got counted as part of GDP when he bought them from Brooks Brothers, but no subsequent sales count towards our official prosperity measure.

Unless of course they're bought by Uncle Sam. All 'G' counts. Every joint strike fighter, every pension check, [edit] every Congressional toilet seat, every button on every uniform paid for out of the Treasury gets added up and rolled into GDP, but nada, zilch, zero, bupkis from the high school kid getting her first used VW from the local dealership.

Curious that, eh? I think most folks would agree that secondary market sales are indeed welfare-enhancing, particularly if they help encode structural changes that reduce recycling costs. Yet the great productive strides made possible by Craigslist and the like are studiously ignored by national income accounting, while any and all government spending plugs right straight into the identity.

How about that.

Status vs. Status Goods

Relative status is a fixed-pie, zero-sum game. If there are ten people in my toy society, there will be no more than ten rank-order positions to fill. You can't create more relative status than exist agents.

Status goods have no such restriction. Like any other kind of goods, production and trade are positive-sum. Moreover, relative status using positional goods is multi-dimensional. I can be the flashiest trout fisherman on the lake in my decked-out gig bob with the flames and the lightning bolts airbrushed onto the gunwales, but the second I pilot that demonbane sucker up to the yacht club, I'm about as posh as grey dishwater. Diverse status goods allow folks to participate in more and varied status contests.

Or to refrain from participating whatsoever.

That's one of the great things about a thick economy. We're free to select the subculture in which we are most comfortable participating. Tyler Cowen notes in Create Your Own Economy that it's easier than ever to fashion the tapestry of your consumption. Some of that will be purely utilitarian, some will be for signaling, and some will be experimentation. Some will be an admixture of all three.

The alternative, the BATNA if you will, is rank ordering based on something else. You can't simply wish away the desire to obtain relative status. If not on personal possessions, then on what shall rank-ordering be based? My research on PNG cultures suggests violence as a likely candidate.

No thanks. I think it's more euvoluntary to have many leather-bound books and my apartment smells of rich mahogany.

Exchange is Creation

Over at Meteuphoric, the ever-insightful Katja Grace makes some interesting points about subjective value and the role of moral intuitions when applied to a misbegotten assumption of objective value.

Now, I don't know about the rest of you fine economics educators out there in the audience, but to me, teaching subjective value is like voting in Russia: do it early and do it often. If Katja is right (and my priors are pretty strong that she is), the (dreadfully wrong) view of objective value is widespread in the public. Indeed, it is enshrined in land valuation done by the BLM. Overcoming this fallacy is one peg in the Big Top Revival Tent of Euvoluntary Exchange*.



*Reformed People's Front (splitters!)