Category - Consumption

[Disclosure: I have been trying to sell my own house for ten months]

Kudos to Andrew Leonard at Salon for his insight into many economists’ delusions of perception (see No one wants to buy a home. Whose fault is it?)! He correctly points out that many so-called experts have a skewed view of when human psychology comes into play in their market decisions. So potential homebuyers are now fearful about what the housing market will do in the future (continue to crash, perhaps even burn? Or turn around?). No arguments there, just rueful agreement (in my case; see disclosure, above). But what about when gloom and doom forecasts are not heard far and wide? Well, it turns out people might be just as whacky during the boom as they are during the bust. Feel free to gasp now.

Two weeks ago, after complaining to my daughter about how much I would dislike it, I bought Bill McKibben’s Deep Economy (New York, Henry Holt: 2007) from my local Amherst book store. Already familiar with his ideas from his various other writings (including The End of Nature; Staying Human in an Engineered Age; and various New Yorker articles), I suspected that his new book would be well written, an effective attack on much that ails us as a society, and would miss the point. It is this last that led me to threaten to throw the book against the wall in frustration. And that frustration led me to write this note. (Actually, it was my wife who wanted me to write this so that I would stop ranting to her.)

What could be wrong with a book that criticizes the Bush Administration, big oil, Cargill, Monsanto, and the Economics profession (among many many other villains)? Especially when the author has such good heroes: including farmers’ markets, urban gardens, organic farmers, Heifer International, and the Indian state of Kerala. Among economists, environmentalists like Herman Daly and Bob Costanza get most of the Kudos but a few, like Amartya Sen, make friendly cameo appearances. Individualism is bad; society is productive; and I agree that would all be better off, and the world a lot better off, if we listened to Bill McKibben.

The problem I have is that McKibben not only reads orthodox economists but believes them.

The CBC reports

Alberta carbon dioxide pipeline could cost $5B
Last Updated: Thursday, March 15, 2007 | 12:19 PM MT
CBC News

A plan to pipe carbon dioxide from Alberta’s oilsands and store it underground could cost as much as $5 billion, says Alberta’s environment minister.

The province wants to capture carbon dioxide and send it through a 400-kilometre pipeline. Intergovernmental Affairs Minister Guy Boutilier said earlier this month that the pipeline would cost $1.5 billion and the carbon dioxide would be used to help get more oil out of low-producing wells.

He was pushing for the federal government and industry to split the cost of the project.

But Environment Minister Rob Renner suggested Wednesday it could cost much more.

“The number of $1.5 billion has been floated,” Renner said. “I suspect that the number — all costs included — will be significantly higher than that.

“I’ve seen estimates as high as $5 billion by the time it has taken into account the cost to industry to implement the [carbon] capture facilities.”

[cont’d]

Wow. Just a thought here, and ignoring that the carbon dioxide would be sequestered (for how long and how securely?) in an effort to bring yet more fossil fuel to the surface so it can be burned and converted to carbon dioxide, most of which won’t be captured but will add to the greenhouse mix; so my thought is, just how much energy conservation technology could be implemented with $5 billion (even if it is Canadian dollars), or even the lower estimate of $1.5 billion? I’d definitely bet a dollar that it’d be enough to cancel out way more CO2 emissions than the pipeline would help sequester (and I repeat, for how long, and how securely?).

By Heidi Garrett-Peltier, CPE Staff Economist

You are what you eat. And according to Michael Pollan, author of The Omnivore’s Dilemma, that means we’re corn. Corn has now made its way into our diet in the form of fillers, sweeteners, oils, alcohols, pills, and breakfast cereals, not to mention of course the indirect path it takes through animal feed. Why should we care? Because cheap corn has been linked to obesity, and obesity will soon overtake tobacco as the leading cause of preventable death.

By Helen Scharber, CPE Staff Economist

When your child’s doctor gives you advice, you’re probably inclined to take it. And if 60,000 doctors gave you advice, ignoring it would be even more difficult to justify. Last month, the American Academy of Pediatrics (AAP) issued a policy statement advising us to limit advertising to children, citing its adverse effects on health. Yes, banning toy commercials might result in fewer headaches for parents (“Please, please, pleeeeeeease, can I have this new video game I just saw 10 commercials for????”), but the AAP is more concerned with other health issues, such as childhood obesity. Advertising in general – and to children specifically – has reached astonishingly high levels, and as a country, we’d be wise to take the doctors’ orders.

By Helen Scharber, CPE Staff Economist
Dec. 20, 2006

Ahh, the holidays. So full of joy, laughter, good cheer… and contradictions. The holidays are all about spending time with loved ones. Or are they all about finding the perfect gift? They are a time of relaxation and spirituality. Or perhaps a time of stress and consumerism? According to a 2005 poll by the Center for a New American Dream, more than three in four Americans (78%) wished that holidays were less materialistic, yet shoppers around the country planned to spend an average of $907 on gifts this holiday season. Sixty percent of people polled anticipated spending less this year than last, but according to the National Retail Federation, holiday retail sales were forecasted to rise five percent to $457.4 billion. As Howard Dvorkin, founder of Consolidated Credit Counseling Services, Inc. (CCCS), observes, “It seems that consumers are trying to be more conservative with spending this year over last, but many of the best laid plans fall through when the pressures of advertisers and unrealistic holiday expectations hit a fever pitch of season overload.” The fast pace and high cost of the holidays can seem to be out of our control, but there are a number of good reasons to take the reindeer by the antlers and reign in holiday consumption.

By Michael Ash, CPE Staff Economist

A recent finding from two researchers at the Federal Reserve Board implies that rich people did all of the extra consuming during the 1990s “boom.”

They reached their conclusion by looking at savings, the flip side of consuming. While the historic pattern has been that the rich save and the poor eat hand-to-mouth, the pattern of savings stratified by income class reversed over the past decade. The savings rate of high-income households declined very sharply, and the increased savings of the poor partly paid for the upper-class consumption spree.

The overall savings rate (savings as a percent of income) fell from 5.9 to 1.3 percent over the 1990s. Table 1 shows savings stratified by income class.

By Jonathan Teller-Elsberg, CPE Staff Economist

In the U.S., talk of tax reform usually means debates about taxes on income and wealth. A little less common are discussions of flat taxes and a shift from payroll, income, investment, or property taxes to consumption taxes—that is, a federal sales tax.

We’ve seen the miserable results of lowering taxes on the rich, and we’ll be dealing with the massive government debts for decades to come. Flat taxes are simply another way to lower taxes on the rich, under the guise of simplifying the tax system. (To be sure, simplifying taxes is not exactly something to dismiss out of hand—the system is far more intimidating than it should be.) The supposed advantage of a shift to consumption taxes is that the shift away from payroll and/or other taxes should lead to more jobs. This is because a payroll tax makes it “expensive” for a business to have an employee. If the payroll tax is reduced or eliminated, the business will have more money available to hire additional workers. The problem with consumption taxes is that they tend to be regressive—meaning that they fall hardest on lower-income members of society.

Another type of tax reform that deserves more attention is the environmental tax shift (ETS), also known as the green or ecological tax shift. The idea here is to increase taxes on activities that result in environmental damage and use the money generated to reduce other taxes by the same amount. As with the consumption tax idea, most proposals center around reducing payroll taxes.

By Heidi Garrett-Peltier, CPE Staff Economist

In 1810, 84 percent of the U.S. workforce was employed in agriculture. Today, it’s down to two percent. Thanks to dramatic increases in productivity resulting from advances in technology and the mechanization of agriculture, we can produce a great deal more food with far fewer people than we could 200 years ago. But does this progress come at a cost?

Large-scale corporate farms are able to out-compete small-scale (often family-owned) farms and drive them out of business. Economies of scale (the competitive edge gained by being bigger) enable large corporate farms to produce more cheaply than smaller farms. These large farms are able to invest in expensive machinery and buy their inputs (fertilizer, seed, etc.) more cheaply than small farms, which in turn makes it difficult for small farms to compete. One might think that corporate farming is better for the consumer – large farms, producing more efficiently, can offer products at lower prices. In addition, the vast network of global agriculture allows consumers access to many varieties of foods throughout the year that can not be produced locally.

By Helen Scharber, CPE Staff Economist

The new national bankruptcy laws that went into effect in late 2005 prompted a big stir, not to mention a record-setting level of bankruptcy filings just before the laws changed. What is it about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that caused so much controversy? Like its Orwellian cousins the Clear Skies and Healthy Forest Initiatives, this act—whose very title suggests it will enhance consumer protections—does anything but. Indeed, the problems with this new law have much to do with what it does not include.

By Michael Ash, CPE Staff Economist

A recent finding from two researchers at the Federal Reserve Board implies that rich people did all of the extra consuming during the 1990s “boom.”

They reached their conclusion by looking at savings, the flip side of consuming. While the historic pattern has been that the rich save and the poor eat hand-to-mouth, the pattern of savings stratified by income class reversed over the past decade. The savings rate of high-income households declined very sharply, and the increased savings of the poor partly paid for the upper-class consumption spree.

The overall savings rate (savings as a percent of income) fell from 5.9 to 1.3 percent over the 1990s. Table 1 shows savings stratified by income class.

Table 1. Savings rate by income class

Income class	Savings Rate
	1992	2000
Highest quintile	8.5	-2.1
Fourth quintile	4.7	2.6
Middle quintile	2.7	2.9
Second quintile	4.2	7.4
Lowest quintile	3.8	7.1

While in 1992 the richest Americans used to save $8.50 for every $100 of income, their savings rate of –2.1 percent by the end of the 1990s means that they were spending more than $102 for every $100 of income. Meanwhile, the poorest fifth of Americans nearly doubled their savings rate, from $3.80 per $100 earned to $7.10 per $100 earned. Because servicing debt counts as “savings,” we can speculate that the poor spent the 1990s digging out from under the accumulated debts of the previous recession.

Yet the thriftiness of the poor could not offset the profligacy of the rich. So high are the incomes of the richest Americans, that when they spend a lot rather than save a lot, the economy booms—at least for them. The authors calculate that the rich switched $240 billion per year from savings to consumption while the poor switched $40 billion from consumption to savings, for a net contribution of $200 billion to aggregate consumption from changed savings rates.

The authors rebut the view that “it would take implausibly large increases in spending by the richest Americans to generate the rapid growth rates observed in the aggregate expenditure data from 1994 to 2000. To the contrary, our direct investigation of saving rates across the income and education distributions…demonstrates that all of the consumption boom really can be attributed to the richest groups of households.”

So the rest of us will just have to wait for the next boom to enjoy implausibly large increases in our spending.

Sources:

There is a brief description of the Federal Reserve report by Maki and Palumbo at www.businessweek.com/magazine/content/01_23/c3735031.htm and the full text is available from www.federalreserve.gov/pubs/feds/2001/200121/200121pap.pdf.

© 2002 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Liz Stanton, CPE Staff Economist

1. You’ve Been Psychologically Conditioned To Want a Diamond. The diamond engagement ring is a 63-year-old invention of N.W.Ayer advertising agency. The De Beers diamond cartel contracted N.W.Ayer to create a demand for what are, essentially, useless hunks of rock.
2. Diamonds are Priced Well Above Their Value. The De Beers cartel has systematically held diamond prices at levels far greater than their abundance would generate under anything even remotely resembling perfect competition. All diamonds not already under its control are bought by the cartel, and then the De Beers cartel carefully managed world diamond supply in order to keep prices steadily high.