March 26, 2018

GOROKH | Where is Our Pie?

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Economists often talk of the metaphorical pie that keeps growing with every passing year. Economy has been in fact steadily multiplying for more than a century now: for example, our GDP per capita now is 5 times what it has been in the 1950s; we  are collectively producing 5 times more stuff per person.

But, when I take a look around, I do not see people kicking back to enjoy the prosperity our ancestors couldn’t have imagined. Even in the somewhat elitist bubble I inhabit people worry an awful lot about the money and the jobs. This mismatch between the numbers and felt reality puzzles me a great deal, in a way that an NFL star is puzzled when he discovers the millions he earned through sweat and trauma have somehow vaporized between the lines of contracts and the fees of lawyers.

Some, given this premise, would turn to Marxism, proclaiming that the exploiting 1% is sucking up all the benefits of the improved economy, leaving everyone else stuck in the conditions of the past. This claim certainly has some truth to it, but the economic weight of the wealthiest is sometimes overestimated. Let me illustrate.

Imagine (and you really need to strain your creative muscles for this one) America elects a socialist — scratch that — communist president who manages to pass a law that distributes all income equally. Using either magic or hypnosis she then manages to convince everyone to  show up for their jobs the next day as if nothing happened to the underlying incentives. Economy still outputs the same amount of stuff, and every family of three is making $73,000 (the average household income as of now).

What strikes me about this number is just how low it is. Such an income doesn’t make you poor (unless we’re talking San Francisco), but not particularly affluent either. It’s only about 15k more than what most people live on right now (median income is 60k). Take this number and subtract taxes, housing, insurance, car maintenance, groceries, babycare and you’re barely left with anything. Having fulfilled the communist ambition in the wealthiest of states, we are left with everyone still absorbed in the material concerns. At the same time we are purportedly producing 5 times more value than back in the Eisenhower days, so what is going on?

The first explanation that comes to mind is the inefficiency accumulated in the system. We waste resource on stuff we don’t really need. US is spending half a trillion dollars on military (more than it did in the midst of Cold War, inflation adjusted!) and the medical system is spending a trillion dollars on people who are going to die within 2 months. Higher education cost has increased more than tenfold in its cost in the last 40 years without any apparent improvement its quality, and don’t get me started on lawyers.

It’s a very eye-opening experience to look at the employment statistics and see just how few people are involved in actually producing anything of value. This is a personal experience as well: many of my friends and acquaintances, that is the ones who knew better than to apply to grad school, are busy doing things associated with sales, finance and bureaucracy. They are dealing in and being paid for handling abstractions built upon abstractions. Others are working on making Uber rides arrive a few seconds earlier, or personal assistants for plants. Meanwhile, housing and food and all other basics are still expensive enough to absorb most of our income.

Or, maybe, the life a family can buy for $73,000 is plentiful enough and it’s our conception of what is enough that is broken. Aside from certain inadequacies mentioned above, the prices of most consumer goods are in fact going down. We did learn to make most things better and more efficiently. Cars, clothes, electronics and books cost much less than they used to while having better quality. Maybe, if we were to teleport a person from the 1950s into nowadays America she would  be ecstatic with the buying power $73,000 gives you and genuinely puzzled as to why would some find such a sum insufficient (she would then, of course, collapse after seeing the bill from the doctor’s office).

What consistently happens whenever something becomes cheaper is, instead of saving money, or, alternatively, getting by just as well while working less, we start to consume more of this good or some other good. We choose to have more comfortable cars and wider tvs while still spending most of our time laboring at a job we find utterly meaningless.

What exacerbates or maybe even drives this issue are the social dynamics behind it. Clothes aren’t garments, they’re status. Jobs aren’t income, they’re status. Education is unadulterated status. When economy makes things cheap, what used to be normal becomes low-status. Like having few clothes and fixing them up when they tear. Like using public transportation. The most sane thing to do in an efficient economy — spend less money and less time earning money — is low status and, moreover, borderline impossible for most occupations.

One of the first things you learn in a microeconomics class is the concept of revealed preferences — the preferences that best fit the choices made. The history of 20th century seems to tell us that a nearly universal revealed preference of humans is to spend most of their time working at a job they hate to have more shoes, bigger phones and a few bonus years of life expectancy; to choose that over working 3 hours a day like John Keynes predicted we would.

But humans are confusing creatures only vaguely reminiscent of the rational agents that populate the tales of economists. Slaves to ourselves we often choose things we do not wish and fail to pursue the ambitions our mind harbors. Maybe that’s just it and growing the pie further is going to be no remedy, or maybe I’m wrong and one day we will wake up in a world of plenty. I don’t know.

Artur Gorokh is a graduate student studying applied mathematics at Cornell University. He can be reached at agorokh@cornellsun.com. Radically Moderate appears alternate Tuesdays this semester.