From: Worthwhile Canadian Initiative
Frances Woolley is a very incisive economist.
Posted by Frances Woolley on January 02, 2015 @ Worthwhile Canadian Initiative
The economics of stuff
Some simple observations:
1. Economies grow when people buy stuff.
2. Over time, people accumulate more and more stuff.
3. People can only handle so much stuff. Sock drawers get full of socks. Cupboards get full of cups. Bookshelves get full of books.
4. It's hard to get rid of stuff. Economic models typically assume disposing of unwanted things costs nothing. But life isn't like that. Sorting out stuff that can be tossed from stuff that is worth keeping takes time and effort.
5. People are "loss averse". Throwing things away - clothes that don't fit, vinyl LPs - hurts psychologically.
6. There's no need to replace perfectly good stuff. True some stuff, like mobile phones, only lasts a year or three. But other stuff, like cast-iron frying pans, lasts for decades.
Taken together, observations 2 through 6 imply that, as people get older, they buy less and less stuff. Combined with observation 1, these observations explain why countries with aging populations experience lower rates of economic growth.
1. Economies grow when people buy stuff.
2. Over time, people accumulate more and more stuff.
3. People can only handle so much stuff. Sock drawers get full of socks. Cupboards get full of cups. Bookshelves get full of books.
4. It's hard to get rid of stuff. Economic models typically assume disposing of unwanted things costs nothing. But life isn't like that. Sorting out stuff that can be tossed from stuff that is worth keeping takes time and effort.
5. People are "loss averse". Throwing things away - clothes that don't fit, vinyl LPs - hurts psychologically.
6. There's no need to replace perfectly good stuff. True some stuff, like mobile phones, only lasts a year or three. But other stuff, like cast-iron frying pans, lasts for decades.
Taken together, observations 2 through 6 imply that, as people get older, they buy less and less stuff. Combined with observation 1, these observations explain why countries with aging populations experience lower rates of economic growth.
This post could have been called, "Secular Stagnation and Cast-Iron
Frying Pans". Secular stagnation is sometimes thought to be caused by
an imbalance between savings and business investment. The economics of stuff explains secular stagnation in terms of household investment, that is, investment in consumer durables.
Buying cast-iron frying pans is a form of investment - one that pays dividends for decades in the form of excellent grilled cheese sandwiches. But I already own three cast-iron frying pans - I'm not planning on buying any more for the foreseeable future.
The economics of stuff suggests secular stagnation is due to deficient population growth, as well as population aging. It doesn't matter how many old people there are, as long as the population is growing, young people will come along who will need to buy stuff. But if there is no net population growth - or if the number of old people exceeds the number of young people - the young no longer need to buy stuff. They can get all the cast-iron frying pans (and furniture and wine glasses and vinyl LPs) they need from old people, who are happy to get rid of it.
All of what I've written here is basically common sense, but it points to two limitations in the micro-foundations of other explanations of secular stagnation. First, because other explanations fail to take into account the limitations of people's capacity to store stuff, and people's (irrational) aversion to getting rid of stuff, they fail to predict the extent to which people's demand for new stuff falls over time. Second, they treat "consumption" as something that lasts one period and then disappears. That's wrong.
Stuff is messy and hard to deal with. But that's not an excuse for tossing it out of economic analysis. (Emphasis mine. L.S.)
Buying cast-iron frying pans is a form of investment - one that pays dividends for decades in the form of excellent grilled cheese sandwiches. But I already own three cast-iron frying pans - I'm not planning on buying any more for the foreseeable future.
The economics of stuff suggests secular stagnation is due to deficient population growth, as well as population aging. It doesn't matter how many old people there are, as long as the population is growing, young people will come along who will need to buy stuff. But if there is no net population growth - or if the number of old people exceeds the number of young people - the young no longer need to buy stuff. They can get all the cast-iron frying pans (and furniture and wine glasses and vinyl LPs) they need from old people, who are happy to get rid of it.
All of what I've written here is basically common sense, but it points to two limitations in the micro-foundations of other explanations of secular stagnation. First, because other explanations fail to take into account the limitations of people's capacity to store stuff, and people's (irrational) aversion to getting rid of stuff, they fail to predict the extent to which people's demand for new stuff falls over time. Second, they treat "consumption" as something that lasts one period and then disappears. That's wrong.
Stuff is messy and hard to deal with. But that's not an excuse for tossing it out of economic analysis. (Emphasis mine. L.S.)
Most household spending is not on durable goods but on services. Moreover, drivers of growth in consumer spending include those sectors servicing senior citizens, such as drugs, nursing homes, and hospitals.
ReplyDeleteThe Bureau of Economic Analysis reports Americans spent $11.5 billion in 2013. Of that, just 11% was on durable goods - the kind that last. Household appliances, utensils, tableware, and glassware combined accounted for less than 1% of spending.
Non-durable goods accounted for 23% of spending. Non-durables consist primarily of food, clothing, and fuel. The next largest sub-category of non-durables is medical products (eg. pharmaceuticals).
Services accounted for 66% of spending. Housing and utilities is the largest sub-category, accounting for 18% of total spending, followed by healthcare services, accounting for 17% of total spending.
Over the past five years, spending grew by 15%. Spending on durable goods grew 13%, with spending on household appliances, utensils, etc. growing 8%.
Spending on nondurable goods grew 14%, with spending on medical products growing 27%.
Spending on services grew 15%, with spending on healthcare services growing 23%.
Slack consumer demand in the first world isn't related to aging so much as it is to weak household financials.