Inflation

Inflation is a wonderful thing, isn't it? Of course, technically it doesn't matter, what with us all not suffering from money illusion like good little imps, but, even without getting onto a Keynesian sticky prices and wages argument, it still pays an important role in political economics.

Q1: Why did the Weimar republic fail?

A: Because of hyperinflation, of course.

Really? According to "Introductory Economics" (By Professor Kerry Patterson of the University of Reading), despite the hyperinflation present during the period of the ill-fated republic, the standard of living, economically, did not deteriorate a great deal; Wages and Price level appear cointegrated, leading us to the assumption that real wages (how much your pay-packet is actually worth in stuff terms), was not effected by the hyperinflation; in keeping with the classical dichotomy and the later teachings of Professor Milton Friedman.

Q2: Is the increasing gap between poor people and rich people cause for concern?

A: Yes, because it means it is impossible to escape the 'poverty trap'

Again though, it becomes necessary to ask if this is true; we measure the incomes of the two groups by cumulative frequency, and we can see that the top 10% has become a lot more affluent than it used to be, and the bottom ten percent are more affluent, but less so. And so we feel compelled to cry into our pints.

But, as Professor Friedman is likely to point out to us (were he still alive, god rest him), we are looking at nominal and not real wages here. What horror! But we're all educated folks here, and we know that inflation is calculated by the change in prices of a basket of goods over a period of time; typically a year. You also know, therefore, that if I divide the wages of rich people by a number and the wages of poor people by that same number, the proportional difference between the two will be unchanged, and you'd be absolutely correct.

But is it acceptable to divide these two groups by the same number? The basket if goods used is average for the economy, and therefore for national accounting terms, or looking at median consumers/firms, it is exceptionally useful, but is it right in this instance?

The answer, predictably, is no.

If you're reading this, there exists a reasonable chance that you know the author, or have linked through to it from Reading Online News; this makes you a student. In an average week, how much do you spend on Bang and Olufsen products? 

Exactly.

The rich buy different product sets from the poor, and therefore it becomes grossly inaccurate to use the same figures. But that is all that is available, I hear you cry!

And yet, no. A study by Christian Broda and John Romalis (found thanks to Professor Mankiw, that ever present saviour of the lazy economist), looking at the effects of Chinese imports on the poor, draws up different baskets of goods for different income brackets, and finds that "much of the rise of income inequality has been offset by a relative decline in the price index of the poor". Obviously this is an empirical study, and I haven't got anywhere near the level of experience needed to accurately assess the connotations of this research, but it does seems as though a few little messages can be drawn from this:

1. Inflation can hide the truth in interesting ways.
2. The income divide may not be what you think it is, and, most importantly:
3. An understanding of economics is a vital prerequisite to being allowed to comment on the world. (Or, in less vague terms, "sit down and shut up")

'tis better to have loved and lost...

Today on the "solving optimisations for no good reason" show, we have the ever exciting topic of poems.

Now, I assume that the original author didn't consider the consequences of what he was writing, or the potential outcomes for all of human society in an age dominated by cliche of the words:

"Tis better to have loved and lost, than never to have loved at all."

Which goes on my list of things which don't make any sense; or rather, don't necessarily make any sense. The problem here is best analysed through some basic game-theory; convenient, really, as I don't know any other kind of game theory.



Assumptions:
Life is a two period model
There is one agent in the economy, entitled, "the love-struck fool" or, for simplicity, L.
All agents in the economy are rational.
In period one, the agent is in love.
In period two, the agent has 'lost'.

We expect our hero, L, to attempt to maximise his lifetime utility; that is, he wants the sum of his utilities to be as great as possible.

In period one, he has a utility function which can be derived from his level of consumption, his return on any capital invested previously, disutility from working and so on, and, of course, the utility associated with love (UL).

In period two, he has the same level of utility for working, capital income, and consumption. But whilst beforehand he was in the dizzy heights of love, he has now come to taste the bitter lows of a solitary existence, and so suffers from some disutility of (UM).

These functions can be normalised fairly easily, and I choose to assume that the two time periods are given equal weight by our maximising agent, so, in order for our condition that 'loving and losing is better than not loving at all', in our normalised equation;

UL - UM > 0
UL > UM

This seems not entirely unreasonable; the misery associated with a thing ending cannot possibly trump the thing existing in the first place...or can it?

First, there is a problem that the world is not a two period model. After whirlwind holiday romance, lasting, say, 2 week, L must return to his dreary job as a janitor (or whatever), knowing that he has lost his love;how long does it take for him to recover from this? 2 weeks certainly doesn't seem long enough, so perhaps there's a term of UM that lasts for a while, so that;

UM(t+1) = aUM(t) + e
(values in brackets denote subscripts here)

Obviously, this little model of mine lacks micro-foundations, but perhaps you could, given enough opportunity and evidence, calculate the exact nature of all of these things, at least on average?

The scary thought is, what happens if you are unable to reject the hypothesis on testing that a = 1 (or, more likely, that g=0, such that g = a-1); then misery becomes a random walk, and any shocks to your mood will be felt forever.

Anyway, have a nice day.

Plastic Bags.

Reading through the Harvard Crimson this morning, I stumbled upon a strange but interesting fact, that seems strangely pertinent to our everyday lives, here in the UK (why I was reading the student newspaper of a University on a different continent is of rather little importance).

Juliet S. Samuel of the aforementioned publication, reports on San Francisco's ban on plastic bags, which celebrated its one year anniversary this march: much the same thing is happening here in the UK, with Alistair Darling threatening to impose a tax on plastic bags, and Marks & Spencer, amongst others, beginning to charge for them. This all seems jolly sensible, plastic is made from oil, which is, as we all know, not a renewable resource (well it is, it just takes a long time to renew), and so, in the interests of cutting down our dependence on the black stuff, we should cut down our consumption.

Or should we? Let's look at the arguments, shall we?

1. Plastic isn't recyclable.

2. Plastic is made from oil, and therefore is bad for the environment, particularly compared with the alternatives.

3. People don't recycle plastic, but have been seen to recycle the alternatives.

Okay, the answer to 1. is simple; plastic is recyclable; even if it isn't put in a recycling bin, I'd say the majority of plastic bags probably get used again for some other task within the house. The second argument is the strongest, I believe; yes, the bags are made from oil, but not a lot of it; in the United States their 100 Billion bags equate to 0.15% of their oil usage per year; hardly a huge chunk. In San-Francisco, the alternative favoured by stores has been paper bags, a very archetypal American thing, to be sure, but we could easily see their rise in the UK before too long, given that everyone is unlikely to be keen on purchasing an infinite quantity of Bags For Life. The problem with paper bags is that although their materials are renewable (plant another tree, get more bags, see?), their production uses more energy (and hence more carbon) than the plastic bags. Obviously canvas bags are better, so I'm happy to continue encouraging their use, but perhaps plastic bags are not anathema to common sense.

The third argument is based on the assumption that people are more keen to recycle paper bags (perhaps understanding that they can be recycled) than plastic ones; an assumption borne out by figure suggesting that 20% of paper bags, compared to 1% of plastic bags, are recycled. Even ignoring the fact that paper bags are heavier and larger, and therefore require more petrol to transport around and are inherently weaker than plastic bags, there is another issue with this argument.

Do you recycle all of your paper, but none of your plastic? And if yes, why do you make that choice? I won't bother waiting for an answer on the latter, I'm going to assume that you either recycle both or none, because if not, you're clearly not paying attention and don't deserve the food that would be otherwise transported within those bags. And that's exactly the problem; it appears as though people who use paper bags now are the people who will recycle, whereas everyone else just uses plastic bags, and it happens that they don't recycle as much, for whatever reason. The percentage figures I gave you there are misleading, as well; 1% of 100 billion bags is 1 billion bags, while 20% of the US' 7 Billion Bags is 1.4 Billion; the real values are not so clear-cut.

So what should we do about this whole problem of ours? Given the increasing likelihood of us running out of oil, and hence all dying of cold, or burning the oil so that the planet explodes and we all die of heat (paraphrasing, here), something clearly needs to be done, and plastic bags are as good a place as any to start. Instead of a ban, I would rather favour a tax. The last time I checked, the going rate for carbon scrubbing of 1 tonne of carbon was about £65. According to an Oil industry conversion site, consumption of 1 barrel of oil a day amounts to 50 tonnes of oil consumed a year. A barrel can therefore be said, making a liberal estimate through assumption that you only use oil on weekdays, to weight approximately one fifth of a tonne.

Excellent, so how does this help; well, the aforementioned Crimson article states that 12,000,000 barrels of oil a year are used for plastic bag production. Again, let's be liberal and assume that this figure is off by around 8 million barrels. We therefore have 20 million barrels of oil, each weighing 0.2 tonnes, making the total tonnage of oil consumed by the bag industry in the United States some 4 million tonnes. Scrubbing this would cost £260 million (in case we have any US readers today, this is $519 million). Based on our figure of 100 billion plastic bags, it would take a tax of, I think, around 0.3 pence to pay for all of the carbon scrubbing. Obviously the stores won't charge a customer 0.3 pence per bag, so let's assume they charge a whole penny in a grossly profiteering move.

By taxing the bags, the externalities of their use get sorted out quite easily; either the bags themselves are used less, or the revenue we generate from them for the exchequer can be used to exactly offset the carbon outlay (here I'd recommend imposing a US Style On-Budget Off-Budget system for environmental taxes).

And then, of course, we can start working on a road pricing system.