The Consumption Trap

The received economic wisdom is that a recession is a bad time to save money. As the economist John Maynard Keynes argued, thrift is no virtue in a recession.

Edward Glaeser makes this point in a New York Times Economix blog post, which is all well and good. It’s the points he makes immediately thereafter that aren’t good. At all.

“Encourage your wealthy neighbors to buy new Cadillacs. Each car they buy will mean a little less bailout money that we’ll have to come up with.”

A Cadillac is a GODAWFUL CARBON SPUME (to the tune of about 15,600 lbs per year if driven 15,000 miles) … almost 3 times worse than a Prius.

The 1908 Ford Model T got 25 miles per gallon. The average I calculated of six Cadillac models is 15 city/22 hwy. The Cadillac doesn’t even do as well on the highway as a car from 100 years ago!

Encourage people to buy a Cadillac?  No. No no no no. 15,600 times no.

Glaeser also suggests “a good round of Easter and Passover presents.”

I counter-suggest that Glaeser take a look at The Story of Stuff. Or, just skip to some of the handy facts from it, like this one: In the past three decades, one-third of the planet’s natural resources base have been consumed.

Or the estimate that it would take 3 to 5 planets to sustain the current U.S. way of life and consumption. I wonder: does macroeconomics have models for acquiring other planets?

Got money? Buy a bicycle. Weatherize your house. Buy a compost bin and start using it. Most of these support local economies and are better in the long run than Cadillacs, holiday gift schlock, and similarly harebrained “spur the economy” ideas.

The Poor, Poor Rich

Today is Blog Action Day, and the theme is poverty. Considering the meltdown of the US financial system, it’s a really timely topic.

Both the New York Times the Wall St. Journal have been hard at work covering how the souring economy is having an effect on the rich.

On Oct. 3, the Times ran “They’re Pinching Hundred-Dollar Bills,” noting that the number of private jets for sale is up 31 percent, that champagne sales have softened (“but sparkling wine has gone up”), and that some of the super-rich are downsizing from three multimillion dollar homes to two.

“The superwealthy in America are in a state of shock,” said Ronald Winston, honorary chairman of Harry Winston, the jeweler. “They are not rushing out to buy expensive diamonds. The psychological mind-set of the nation is keyed to the stock market, and in a downturn everybody is psychologically affected.”

The next day, the Times ran this:

This was further navel-gazing: a yacht broker noted, “The yacht is probably the first thing to go,” the bar and bat mitzvah market is soft, more luxury homes are on the market, etc. etc.

Then, this:

DESPITE these gains in the middle class, though, the truly wealthy have pulled away from the pack. Not since the late 1920s, just before the 1929 market crash, has there been such a concentration of income among individuals and families in very upper reaches of the income spectrum, according to researchers at the University of California, Berkeley, and the Paris School of Economics.

Some say that anger over the yawning wealth divide found traction in the highly charged and polarizing debate in Congress over the bailout bill.

Which is somewhat shocking, since it’s true, but off-topic. Isn’t the point of these articles to let us know about how the rich behave so we can emulate them?

Today in the Wall St. Journal, “The Billion-Dollar Question: Is Bling Over? How Luxury Executives Are Handing the Financial Crisis; Selling the Yacht.”

It’s about as nauseating as you’d expect. Sure, there’s a tinge of schadenfreude in reading that the pampered rich have to cut back, but selling one house is infinitely less painful than being foreclosed out of your only one.

Bad as that is, it’s nothing compared to real poverty. It just so happens that I was researching refugee camps recently, and read an article in the Guardian about the Dadaab settlement, which is the world’s largest refugee camp:

An increasingly violent insurgency in Somalia is fuelling a fresh refugee crisis with nearly 40,000 people arriving at a desert camp in north-eastern Kenya this year despite the border being closed.

The Dadaab settlement now hosts more than 210,000 people, making it the world’s biggest refugee camp. With at least 200 new arrivals every day, aid workers are struggling to cope.

“We are already at bursting point,” said Maeve Murphy, field officer with the UN Refugee Agency in Dadaab, 60 miles south of the border with Somalia. “And more refugees are on their way.”

The temperatures reach 104F (40C). “The newcomers’ shelters are desert igloos; bent branches covered with plastic sheeting and blankets.” Rapes and violence are common. Another story notes that “Life in the refugee camps is harsh. The refugees have no legal status and cannot move beyond the camps without permission.”

Joseph Stalin was reputed to have said, “The death of one man is a tragedy, the death of millions is a statistic.”

It’s not worth thinking about the rich and their millions. It’s a statistic. And it’s too hard to think of 210,000 displaced, suffering people, since that’s a statistic too. But it’s worth thinking of that child in that photo. I was looking at a clothing catalog last night, and realized that boy needs my money more than I need that sweater.

It doesn’t matter that Ralph Lauren upped the ante on its notoriously expensive Ricky bag, that it’s now available in 20 shades of alligator skin, including platinum, “vibrant cherry” or cobalt, that it’s priced from $12,995 to $28,995, or that the company is confident that it’s well-positioned with its customers. No matter what the Wall St. Journal writes, that’s all bullshit.

What matters is stepping away from the American consumer trap (and the American media that perpetuates it), and realizing that you have all you need — in fact, you have more than you need. You were incredibly lucky not to have been born in Somalia, or in about half the world, where people live on less than $2.50 a day. You were lucky not to be one of the 26,500-30,000 children who die each day due to poverty.

Christmas is coming. If you’re going to spend money, here are five places guaranteed to put your money to better use than Ralph Lauren or a yacht broker.

  • Mercy Corps -works with countries recovering from disaster, conflict, or economic collapse
  • UNICEF -The UN Children’s Fund provides long-term humanitarian and developmental assistance to children and mothers in developing countries
  • ninemillion.org -created by the UN refugee agency to give children better access to education, sport and technology
  • Right to Play -uses sport and play to improve children’s health, life skills, and foster peace in disadvantaged countries
  • Kiva – the world’s first person-to-person micro-lending website

The Sub-Prime Crisis — A Laff Riot!

First there was Clarke and Dawe, from the Australian Broadcasting Corporation, explaining the sub-prime crisis. (Don’t be deceived by the photo of John Clarke — he’s not an economist, he just plays one on TV.)

My favorite bit:

- If the property prices did go down, the sub-prime lenders would lose money, wouldn’t they?

- Only if they still held the loans, Brian.

- Well where have the loans gone?

- Well let’s say they sold them off.

- Well how do you sell loans that aren’t worth anything? They’re just rubbish, aren’t they?

- Well they’re gift-wrapped, Brian, they’re rather beautifully presented, a sort of vellum cover.  You get your name embossed on the front of it. They make a bit of fuss of you.

Then today, a Powerpoint SubPrime Primer … I know, you’d sooner count sheets of toilet paper, but think of it as if South Park explained the sub-prime mess, making it very understandable by using a lot of swear words:

John McCain blamed the meltdown on “unbridled corruption and greed,” and called for a commission to find out what happened and propose solutions. A commission?! Hell, I think this video and powerpoint explain it about as clearly as can be. And as for solutions, may I humbly suggest not letting the inmates run the asylum?

The Consequences of Being Green

That’s the title of a guest post on the Freakonomics blog by Daniel Hamermesh, an economics professor at the University of Texas.

The Freakonomics blog is usually interesting, quirky, thought-provoking … all that good stuff. Unfortunately, Hamermesh’s post is poorly thought out and poorly argued exception. Here’s most of it:

The actor Ed Begley Jr. has a widely-circulated OpEd piece touting his eco-friendly activities, featuring a proud announcement that his exercise on his stationary bicycle generates the electricity he uses to toast two pieces of bread.

Now those two pieces give him 200 calories, but he burns at least 100 calories on the bike. So half of his eco-friendly exercise is lost because he needs to obtain additional food from elsewhere to maintain his weight — food whose growth and distribution have environmental consequences too, as does the manufacture of his bicycle.

This illustrates the general equilibrium difficulties of so many pro-environmental activities about which the rich and famous boast.

There should be a rule: before helping the environment in one market, we should be required to think through the impacts on other markets.

Hamermesh is attempting to pick on the extra food Begley needs if he exercises, and the environmental consequences of the manufacture of his exercise bike.

Here’s why that’s a bad idea:

1) Begley is going to exercise anyway. Only a fool would argue that we shouldn’t exercise because it has “environmental consequences.” Thus, the extra bread is a non-issue. And from my admitted environmental perspective, bread isn’t a bad thing to eat, compared to, say, the carbon footprint of hamburgers. Or for that matter, how many volatile organic compounds are emitted to cook them at a fast-food restaurant.

2) The environmental consequences of the manufacture of his exercise bike? Is he smoking crack? By hooking up his exerbike to make toast, he’s taking something used for one purpose (exercise) and making it twice as efficient (exercise + electricity generation).

3) If you’re going to count the environmental costs of manufacturing a bike, let’s note that you can make 100 bikes with the same amount of energy needed to make just one car. Also, if you’re going to count the bike’s “costs” as an energy-generation tool, it’s only fair to compare it to the way that energy currently is generated: think of all the energy and emissions resulting from the mining, transport and burning of coal … and then transmitting it through the nation’s power grid, where 66% of the energy is lost! (Speaking of poorly thought out, there’s a perfect example, non?)

4) Hamermesh: “There should be a rule: before helping the environment in one market, we should be required to think through the impacts on other markets.”

Before helping the environment, we should think through a decision’s market impacts? The environment has always been an economic externality, the part not factored into the equation while CEOs, presidents and economists have been unthinking slaves to Economic Growth. And now we’re seeing that come back to haunt us. So Mr. Hamermesh is flat-out wrong here. Putting the market first is what got us into this mess; we can hardly expect that same thinking to get us out of it.

Yes, we should think through the environmental consequences, and the economic ones. But we should do so by first taking economics and markets out of its privileged place at the top of the decision-making pecking order. Think of it this way:

“Market change” doesn’t threaten the lives of billions of beings on the earth. But that’s exactly what climate change does.

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