What’s the closest substitute for a firearm?

mdmakowskyLeave a comment

For those earnestly interested in addressing issues surrounding firearms in the United States (and not just aligning with a political coalition), this working paper from Moshary, Shapiro, and Drango (MSD from here on) is an absolute must read. The technical moves are an interesting overlap of industrial organization economics and marketing analytics, but the punchlines all hit on the same topic: how do current and possible future firearms owners respond to prices for different products? When MSD estimate the price elasticities for different firearms, they are in effect asking one of those deep questions in economics that is always lying below the surface: are these goods substitutes?

It’s uncanny how much of the disputes within economic policy and regulation come down to how one defines substitutes. Is Coca-Cola a monopoly? Well, that depends on whether or not you think Pepsi or water is a close enough substitute. Should vapes be banned? That depends on how much demand you think will shift over to traditional cigarrettes. No matter your thoughts on marijuana legalization, I promise you the marketing and lobbying wings of the largest alcohol distributors have invested a lot in determining if cannabis is a substitute for their products (spoiler: it is).

Should assault weapons be banned? I am on the record as saying they should be, but the results in MSD give me pause. The bulk of firearms deaths are from handguns, and the bulk of people in the market for an assault rifle point to a handgun as their next-best alternative if an assault rifle is not an option. Would an assault rifle ban have the unintended consequence of pulling more handguns into the market and, in turn, create more firearms deaths?

This is not an easy question to answer because we haven’t actually taken the time to define the good. And by define the good, I mean define the bundle of attributes actually being purchased. The most obvious attribute of a firearm is the ability to point it at a living creature and take away its entire future. That it is such a chilling capacity that we sometimes fail to fill in the rest of the ledger. Firearms are a source of personal security, no small detail for isolated individuals. They are a means of pest control, an absolute necessity for anyone farming or raising smaller livestock. They are a way of signaling your group identity to others. Of affirming your idependence and strength. They are collectable, both as historical vintages and customizable baubles. They are highly effective at hunting game. They are fun to shoot at targets.

All of that means that when we consider banning, regulating, or taxing a specific class of firearm, we have to think really hard about the bundle of attributes being purchased and consumed, and what the next best alternative is for each customer shifted to a different product on the margin. The outcomes are perhaps more unpredictable than is often considered. Who is the marginal customer and what exactly is it that they want?

Consider a ban on assault rifles. Some will shift their demand to the black market. Despite the obvious danger in a group of individuals who illegally purchase high power firearms, we can actually ignore them at this stage because there’s no option where they don’t acquire assault weapons. What about the rest? Some are desperate to protect their homes. Hopefully they will be easier to persuade now that a shotgun is their best option (pro tip: it always was). Some want to maximize their capacity to do harm: absent maximal power, they may now opt for concealability and mobility i.e. a handgun. This seems like a particularly viable story in states that allow for the carrying of concealed weapons in public with or without a license.

Some, however, might view their $1200-$3000 might be better spent putting a snorkel on their jeep engine ($700), a bowie knife on their hip ($250), and bottle of Michters Single Barrel Whiskey on their shelf ($500*). Maybe they’ll blow it all at once on a lift kit for their truck. We can rest assured that the marketplace will offer no shortage of goods that offer little value save for people to impress their friends with what they just bought, which is a blessing. Substitution to tactical sunglasses and raunchy mudflaps is unequivicably preferable to more Glock 19s.

What about a ban on handguns? Here MSD identifiy an important asymmtry: customers in the market for a handgun don’t consider long guns, while would be purchasers of long guns frequently explicitly consider a handgun on their 2nd choice. From the point of view of minimizing firearms deaths, a ban on handguns may be optimal, but it is hard to predict what the substitutes will be. Based on their measured elasticities of demand for different types of guns, MSD estimate that a 10% tax on all firearms would have the same net effect on total firearms in the market. Perhaps most importantly, it is highly unlikely to backfire into a shift in market composition towards assault weapons, something that can’t be ruled out by a handgun ban. Combined with current political realities, a tax on firearm would appear more feasible than any broad class bans.

For a large, but not unanimous, share of social scientists studying firearms, the outcome desired is 1) a smaller fraction Americans with access to firearms, and 2) reduced capacity to commit large scale acts of violence with high powered firearms. Putting aside any disagreement on the desired outcomes, the policy steps forward still allow for meaningful uncertainty. Yes, I know that heavily restricting firearms in Australia has been wildly successful. It’s hard to argue with a total homicide rate roughly a tenth of the US rate. But we can only consider the policy options that are actually on the table and the voter status quo. Current options are likely limited to either a narrow ban on a subset firearms or a modest tax on them all. The status quo is one where a third of all Americans own a gun, 81% of whom feel safer because they have one.

Given these unavoidable constraints, good firearms policy (not optimal, merely good) requires knowing what it is that people are buying so we can tilt the playing field in the right way. We live in a world where politicians are sending AR-15 toting Christmas cards and pantomime tough guys are ordering their Subway Chicken Teriyakis while armed to the gills. There’s no policy prescription that’s going to magically create earnest politicians and emotionally secure men, but everyone responds to prices.

*I apologize to fans of Michters, I just don’t like their bourbon very much relative to the price. If you want to impress your friends, track down a bottle of William Larue Weller. It’s expensive, but it might be the best bourbon in the world, and that includes all of the Pappys.**

**Okay, its not as good as the Stitzel-Weller Pappy 20 I first tried in 2011. That’s still the greatest thing I’ve ever consumed. But that doesn’t exist anymore as far as I know or could hope to afford. My advice is to let it all go and just buy a bottle of Four Roses Single Barrel. Always less than $50, always fantastic.

Can anyone be an entrepreneur?

Joy BuchananLeave a comment

Hardly the most important thing going on this week, but Matt Yglesias said something I have some evidence against. Yglesias claimed that, “basically anyone could massively increase the value of a large plot of land in the United States if he were exempted from land use rules.”

What percent of people do you think could massively increase the value of a barren plot of land, even with no land use rules?

When I ran an experiment about intellectual property protection with Bart Wilson, we created a space for people to mine valuable “creative” goods, analogous to writing a hit song. The goods could be distributed to the rest of the subjects in the experiment to create a surplus for everyone.

This screenshot shows time spent in the “studio” for groups that did have intellectual property protection. Group 1 (IP1) spent less time in the studio even than any of the groups who were not offered intellectual property protection. We concluded that Group 1 did not have any people with entrepreneurial tendencies. We had not expected this to happen, so we highlighted the role of entrepreneurs in our conclusion from this experiment. Institutions interact with entrepreneurship. We found that more “entrepreneurship” emerged under the IP institution.

Is the repair revolution coming?

Joy Buchanan4 Comments

Every sentence in this article is fascinating, since I have been writing about fast fashion.* Anything I put in quote form comes from The Guardian.

The word “revolution” in the title of this article is minor clickbait. Perhaps it would be more accurate to say: “Clothes repaired in workshop, 19 people employed” That wouldn’t get any clicks. However, I am an idealist, and I am going to stay a bit on board with the revolution. I, too, have pondered and grieved over the amount of waste heading into landfills. There could be some kind of revolution ahead, whether it is of the repair type or not.

The communal garden and bespoke textile art lend a creative startup feel, and the slogan “repair is the new cool” appears everywhere. But what’s happening here is far from ordinary startup stuff. At United Repair Centre (URC), newcomers to the Netherlands from across the world, many of them former refugees, are using their tailoring skills to mend clothes on behalf of some of the world’s biggest brands. 

Immigrants are sewing, but no Dickensian horrors here. This place “has a laid-back Dutch vibe.”

Ambrose, who greets me, mans the front desk. He’s a 20-year-old Palestinian fashion fan, who was born in Syria and lived in Abu Dhabi before moving to the Netherlands in May; he is working in parallel with studying for a fashion and design diploma. Ambrose started at URC in May and loves it: the way he gets to work in collaboration with the tailors, giving advice and learning from their years of experience. “It’s really easy, fun, chill … “

The verdict is in. Work is fun.

Repair might be cool, but is it new? Consider Jo March from “Little Women” who was an American bouncing around between rich and poor status in the 1860s. American GPD per capita in 1860s was less than $3,000. That would be considered very poor today. Since manufactured goods were expensive and Jo March had a low opportunity cost of time, she spent lots of time mending clothes. Her passion was writing but she had no choice – that was how she contributed to her household production. Very few families at that time, even in the upper class, could afford to regularly buy new clothes from a shop.

Don Boudreaux explained that even modern rich people “recycle” clothes when it’s in one’s selfish interest. Washing and “re-use” of clothes, typically, is beneficial enough to outweigh the cost of maintaining and storing them. Sometimes we go above and beyond by donating them or maintaining them specifically because we are trying not to “waste” something, but that comes at an individual cost to us.

The author of the article writes:

I take a taxi from the station to URC because I’m running late, but I’m taken aback when en route the driver points out the many conveniently located stations and tram stops I could use for my return journey.

This is a perfect encapsulation of why rich people do not repair clothes. They are zipping around to high-productivity work meetings. The opportunity cost of time has gone up. Taking the bus is costly in terms of time, the scarcest resource of the rich.

Where I see hope for the repair “revolution” is in artificial intelligence (AI). AI can make up for our scarce time and attention. If AI can make repairs less costly in terms of time, then rich people might do it. If it doesn’t make economic sense, then it won’t scale the way the author is hoping.

Currently, the “revolution” is employing 19 people full-time. By the year 2027, all they are hoping for is to expand to 140 tailors. Hardly a revolution on the jobs front. But that’s the hopeful scenario. If it’s labor-intensive, then it won’t work. (See my ADAMSMITHWORKS post on cloth production and labor.)

Is repair reaching a tipping point?

There’s one unlikely scenario in which expensive repairs will get paid for. What rich people resoundingly want is kitchen renovations and new clothes, partly because it confers status. Could it become cool to live with those outdated cabinets and wear that repaired Patagonia vest for the next two decades? … could it? Vision: “Wow. I see that you guys have outdated ugly countertops. Nice. You resisted the desire to renovate your kitchen even though it’s within your budget.”

Even changing status markers are unlikely to tip the scale in the case of broken equipment or torn clothes. AI might allow us to repair a refrigerator instead of trash it.

URC tracks repairs using software initially developed by Patagonia, which it has built on and uses for the other brands involved.

There it is. Software makes the dream work.

Shein and the like are out there, churning out, in dizzying volumes, fast fashion that can’t be repaired.

In my conversations with Americans, many do not know what “fast fashion” is. That’s fast fashion. The 19-140 tailors are currently no match for Shein.

There isn’t always much common language – operational manager Hans says they resort to Google Translate quite a bit – but there’s plenty of laughter.

The AI, again! We are living in the globalized AI-powered future.

Lastly, the article was brought to my attention on Twitter (X) by Bronwyn Williams and Anna Gat.

* I’m going to have a fashion article coming soon in this series: https://www.cato.org/defending-globalization

The Goldin Nobel

James BaileyLeave a comment

This week the Nobel Foundation recognized Claudia Goldin “for having advanced our understanding of women’s labour market outcomes”. If you follow our blog you probably already know that each year Marginal Revolution quickly puts up a great explanation of the work that won the economics Prize. This year they kept things brief with a sort of victory lap pointing to their previous posts on Goldin and the videos and podcast they had recorded with her, along with a pointer to her latest paper. You might also remember our own review of her latest book, Career and Family.

But you may not know that Kevin Bryan at A Fine Theorem does a more thorough, and typically more theory-based explanation of the Nobel work most years; here is his main take from this year’s post on Goldin:

Goldin’s work helps us understand whose wages will rise, will fall, will equalize going forward. Not entirely unfairly, she will be described in much of today’s coverage as an economist who studies the gender gap. This description misses two critical pieces. The question of female wages is a direct implication of her earlier work on the return to different skills as the structure of the economy changes, and that structure is the subject of her earliest work on the development of the American economy. Further, her diagnosis of the gender gap is much more optimistic, and more subtle, than the majority of popular discourse on the topic.

He described my favorite Goldin paper, which calculates gender wage gaps by industry and shows that pharmacists moved from having one of the highest gaps to one of the lowest as one key feature of the job changed:

Alongside Larry Katz, Goldin gives the canonical example of the pharmacist, whose gender gap is smaller than almost every other high-wage profession. Why? Wages are largely “linear in hours”. Today, though not historically, pharmacists generally work in teams at offices where they can substitute for each other. No one is always “on call”. Hence a pharmacist who wants to work late nights while young, then shorter hours with a young kid at home, then a longer worker day when older can do so. If pharmacies were structured as independent contractors working for themselves, as they were historically, the marginal productivity of a worker who wanted this type of flexibility would be lower. The structure of the profession affects marginal productivity, hence wages and the gender gap, particularly given the different demand for steady and shorter hours among women. Now, not all jobs can be turned from ones with convex wages for long and unsteady hours to ones with linear wages, but as Goldin points out, it’s not at all obvious that academia or law or other high-wage professions can’t make this shift. Where these changes can be made, we all benefit from high-skilled women remaining in high-productivity jobs: Goldin calls this “the last chapter” of gender convergence.

Source: A Grand Gender Convergence: Its Last Chapter

There is much more to the post, particularly on economic history; it concludes:

When evaluating her work, I can think of no stronger commendation than that I have no idea what Goldin will show me when I begin reading a paper; rather, she is always thoughtful, follows the data, rectifies what she finds with theory, and feels no compunction about sacrificing some golden goose – again, the legacy of 1970s Chicago rears its head. Especially on a topic as politically loaded as gender, this intellectual honesty is the source of her influence and a delight to the reader trying to understand such an important topic.

This year also saw a great summary from Alice Evans, who to my eyes (admittedly as someone who doesn’t work in the subfield) seems like the next Claudia Goldin, the one taking her work worldwide:

That is the story of “Why Women Won”.

Claudia Goldin has now done it all. With empirical rigor, she has theorised every major change in American women’s lives over the twentieth century. These dynamics are not necessarily true worldwide, but Goldin has provided the foundations.

I’ve seen two lines of criticism for this prize. One is the usual critique, generally from the left, that the Econ Nobel shouldn’t exist (or doesn’t exist), to which I say:

The critique from the right is that Goldin studied unimportant subjects and only got the prize because they were politically fashionable. But labor markets make up most of GDP, and women now make up almost half the labor force; this seems obviously important to me. Goldin has clearly been the dominant researcher on the topic, being recognized as a citation laureate in 2020 (i.e. someone likely to win a Nobel because of their citations). At most politics could explain why this was a solo prize (the first in Econ since Thaler in 2017), but even here this seems about as reasonable as the last few solo prizes. David Henderson writes a longer argument in the Wall Street Journal for why Claudia Goldin Deserves that Nobel Prize.

Best of all, Goldin maintains a page to share datasets she helped create here.

Is the Job Growth Driven by Part-Time Workers?

Jeremy Horpedahl1 Comment

A few weeks ago I wrote about several measures of the labor market, and whether the labor market was actually doing well. It’s a good idea to look beyond the headline unemployment rate, but even looking at alternative unemployment rates, labor force participation, employment rates, and unemployment insurance claims, I concluded in that post that the labor market is still looking healthy.

Lately I have heard another objection to the job growth numbers: part-time employment. I’ve seen this pop-up a few times on Twitter lately and just yesterday my co-blogger Scott Buchanan (in a post primarily about excess savings) stated that “much of the jobs creation this year has been in the part-time category.”

So is the jobs recovery mostly about part-time jobs? What is going on?

First things first: most of the data on part-time employment is from the household survey. There’s already a lot of noise in the household survey, due to the sample size, and part-time workers are a small share of the workforce, so expect it to be even noisier. In short, don’t trust one-month fluctuations too much. Furthermore, most of the data folks look at is seasonally adjusted. That’s generally good practice! But again, for a small number in a small sample, the seasonal adjustment factors won’t be perfect. Don’t read too much into one or a few months of data.

Let’s get the big picture first. How much of the labor force in the US is usually working part-time (defined in most data as less than 35 hours per week)? As usual FRED is the best place to go for graphing BLS data:

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Pandemic Excess Savings Still Powering the Hot Economy

Scott Buchanan2 Comments

Well, the great “Recession Starting Next Quarter” that has been predicted for nearly two years is nowhere in sight. In fact, the Bureau of Labor Statistics just last week posted an absolute blowout jobs number:

The U.S. economy churned out a blockbuster 336,000 jobs in September, smashing economists’ expectations and heightening the risk that policymakers will have to push even harder to slow down the economy. The data released Friday by the Bureau of Labor Statistics offered yet another snapshot of the job market’s remarkable strength, with the unemployment rate holding at 3.8 percent and wage growth outpacing inflation in a boost to workers. But it was also the latest example of an economy that simply refuses to slow down, despite the Federal Reserve’s aggressive attempts to get prices and hiring closer to normal levels…The September report, which showed the largest number of gains since January, had been expected to indicate continued moderation in the labor market, with forecasts of around 170,000 jobs created. Instead, it came in at nearly twice that amount. (Lauren Kaori Gurley and Rachel Siegel , Washington Post)

Before we get too excited, let’s note that the BLS numbers have a strong component of BS: nearly every jobs number they put out is quickly, quietly revised downward by 20% or so. Also, much of the jobs creation this year has been in the part-time category (so employers don’t have to pay health benefits). That said, it is indisputable that despite ferocious interest rate hikes, the economy continues to hum along, much more robustly that nearly anyone predicted six or twelve months ago. Why?

I suggest that we follow the time-tested approach of investigative reporters, which is to follow the money. We have noted earlier that since 2020 a key factor in consumer spending, which constitutes about 70% of the economy, has been the ginormous windfall of free money, over $4 trillion, that was put into the economy via various pandemic-related programs (enhanced unemployment benefits, direct stimmie payments, etc.). The story of the recent strong jobs market is largely the story of spending down that windfall.

When we were locked down in late 2020-early 2021, we consoled ourselves with ordering tons of goods on Amazon. While this generated some jobs for longshoremen and UPS and Amazon drivers, it was mainly Chinese workers who benefited from this phase. But for the past year and a half, we are out there in planes, trains, automobiles, and cruise ships, spending for services and restaurant food at a brisk pace. This has buoyed up the domestic economy, which in turn is keeping inflation far above the Fed’s 2% target.

Part of the incoming-recession story has been that the COVID windfall money is about to run out. For instance, here is a June, 2023 chart from Fed authors de Soyres, et al.  showing that in the U.S. (black curve below) this money has already been exhausted:

A different set of Fed authors (Abdelrahman and Oliveira of the San Francisco Fed) wrote, also in June, that there remained a smidge of excess savings, but that “would likely be depleted in the third quarter of 2023.”

However,  the Bureau of Economic Analysis (BEA) recently completed an update of national economic data that lowered the savings rate prior to the pandemic and increased it in 2020 and 2021. This basically reflected a change in the way the BEA accounts for income from mutual funds and REITS. The bottom line is that it has forced Wall Street economists to increase their excess savings projections to date by as much as $600 billion to $1 trillion, depending on the economics team. This in turn leads them to delay forecasts of recession by yet another 6-12 months.

For instance, James Knightley of ING Global Markets Research writes that there are still plenty of excess savings around; recent revisions in their numbers show the remaining hoard is even larger than they originally thought:

They did not break down this excess saving by income group, so it is possible that much of it remains with the upper 10-20% who may hoard/invest it, versus the bottom quartiles who have been spending it all into economy and now may be tapped out. We shall see how this continues to play out.

Video for new ChatGPT users

Joy BuchananLeave a comment

Have you not gotten around to trying ChatGPT for yourself yet?

Ethan and Lilach Mollick have released a series of YouTube videos that encapsulate some current insights, aimed at beginners, posted on Aug. 1, 2023. It covers ChatGPT, Bing, and Bard. Everyday free users are using these tools.

Practical AI for Instructors and Students Part 2: Large Language Models (LLMs)

If you are already using ChatGPT, then this video will probably feel too slow. However, they do have some tips that amateurs could learn from even if they have already experimented. E. Mollick says of LLMs “they are not sentient,” but it might be helpful to treat them as if they are. He also recommends thinking of ChatGPT like an “intern” which is also how Mike formulated his suggestion back in April.

  • I used GPT-3.5 a few times this week for routine work tasks. I am not a heavy user, but if any of our readers are still on the fence, I’d encourage you to watch this video and give it a try. Be a “complement” to ChatGPT.
  • I’ll be posting new updates about my own ChatGPT research soon – the errors paper and also a new survey on trust in AI.
  • I hear regular complaints from my colleagues all over the country about poor attempts by college students to get GPT to do their course work. The experiment is being run.
  • Ethan Mollick has been a good Twitter(X) follow for the past year, if you want to keep up with the evolution and study of Large Language Models. https://twitter.com/emollick/status/1709379365883019525
  • Scott wrote this great recent tutorial on the theory behind the tools: Generative AI Nano-Tutorial
  • It was only back in December 2023 that I did a live ChatGPT demonstration in class, and figured that I was giving my students there first ever look at LLMs. Today, I’d assume that all my students have tried it for themselves.
  • In my paper on who will train for tech jobs, I conclude that the labor supply of programmers would increase if more people enjoyed the work. LLMs might make tech jobs less tedious and therefore more fun. If labor supply shifts out, then quantity should increase and wages should fall – good news for innovative businesses.

The Vicinity of Celebrity Obscenity

Zachary BartschLeave a comment

I don’t like when celebrities are ‘caught’ saying deplorable things in a heated moment. Sometimes they say really awful things, specifically about observables such as race, weight, sex, nationality, odor, etc. Plenty of people have done it. I won’t mention the names or link to any particulars here.

My problem isn’t that I wish celebrities had better behavior – although I do. My problem is with the entire fallout of how we’re all supposed to take the celebrity seriously when they were enraged. When people get angry they say things that are designed to hurt others.   People will say things that they don’t mean or wouldn’t normally say. And it’s not like they are betraying some unspoken belief that they’ve hidden. Angry people often say wicked things for the sole purpose of hurting someone else’s feelings. In the moment, the offender tries hard to communicate disrespect – not due to a lack of respect – but due to how it will make the other person feel.

I find the entire circumstance weird. If someone is boiling over and saying patently ridiculous things to me and calling me names, then I have a very hard time taking them seriously. All the same, context matters and words can hurt. It’s weird that we know that people can say untrue things in order to hurt us, and then it actually hurts us. Strange.

Continue reading →

Monetary and Fiscal Policy Is Still Easy

James Bailey4 Comments

The last post where I attempted a macro prescription was in April 2022, when I said the Fed was still under-reacting to inflation. That turned out right; since then the Fed has raised rates a full 500 basis points (5 percentage points) to fight inflation. So I’ll try my luck again here.

Headline annual CPI inflation has fallen from its high of 9% at the peak last year to 3.7% today. Core PCE, the measure more closely watched by the Fed, is at a similar 3.9%. Way better than last year, but still well above the Fed’s target of 2%. Are these set to fall to 2% on the current policy path, or does the Fed still need to do more?

The Fed’s own projections suggest one more rate hike this year, followed by cuts next year. They expect inflation to remain a bit elevated next year (2.5%), and that it will take until 2026 to get all the way back to 2.0%. They expect steady GDP growth with no recession.

What do market-based indicators say? The yield curve is still inverted (usually a signal of recession), though long rates are rising rapidly. The TIPS spread suggests an average inflation rate of 2.18% of the next 5 years, indicating a belief the Fed will get inflation under control fairly quickly. Markets suggest the Fed might not raise rates any more this year, and that if they do it will only be once. All this suggests that the Fed is doing fine, and that a potential recession is a bigger worry than inflation.

Some of my other favorite indicators muddy this picture. The NGDP gap suggests things are running way too hot:

M2 shrank in the last month of data, but has mostly leveled off since May, whereas a year ago it seemed like it could be in for a major drop. I wonder if the Fed’s intervention to stop a banking crisis in the Spring caused this. Judging by the Fed’s balance sheet, their buying in March undid 6 months of tightening, and I think that underestimates its impact (banks will behave more aggressively knowing they could bring their long term Treasuries to the Fed at par, but for the most part they won’t have to actually take the Fed up on the offer).

The level of M2 is still well above its pre-Covid trend:

Before I started looking at all this data, I was getting worried about a recession. Financial markets are down, high rates might start causing more things to break, the UAW strike drags on, student loan repayments are starting, one government shutdown was averted but another one in November seems likely. After looking at the data though, I think inflation is still the bigger worry. People think that monetary policy is tight because interest rates have risen rapidly, but interest rates alone don’t tell you the stance of policy.

I’ll repeat the exercise with the Bernanke version of the Taylor Rule I did in April 2022. Back then, the Fed Funds rate was under 0.5% when the Taylor Rule suggested it should be at 9%- so policy was way too loose. Today, the Taylor Rule (using core PCE and the Fed’s estimate of the output gap) suggests:

3.9% + 0.5*(2.1%-1.8%) + 0.5%*(3.9%-2%) + 2% = 7%

This suggests the Fed is still over 1.5% below where they need to be. Much better than being 9% below like last April, but not good. The Taylor rule isn’t perfect- among other issues it is backward-looking- but it tends to be at least directionally right and I think that’s the case here. Monetary policy is still too easy. Fiscal policy is still way too easy. If current policy continues and we don’t get huge supply shocks, I think a mild “inflationary boom” is more likely than either stagflation or a deflationary recession.

Pinball Prices (Not Adjusted for Inflation)

Jeremy HorpedahlLeave a comment

Last weekend I had the opportunity to visit an arcade, but not one of those modern fancy arcades with virtual reality, laser tag, etc. This arcade specializes in having old-school games, primarily pinball, but also early video arcade games. You pay a cover charge ($5 for kids, $10 for adults), and then you use quarters to play the games. But here’s the cool part: the price of the games is the same as it was when the games were first released.

As an economist, of course, I was very interested in the prices.

They had pinball machines that dated back the 1960s, and video games from the late 1970s. Most video arcade games were around 50 cents for the early games (late 1970s and early 1980s). But the pinball machines started out at 25 cents, with the earliest game they had being a Bally Blue Ribbon machine, manufactured in 1965 (interestingly, some of the earlier machines had slots for both dimes and quarters — I assume the price was adjustable mechanically). Notably, you also got to play 5 balls for this price (3 balls seems to be standard later on).

How should we think about that 25 cents? A standard reaction is to adjust the number for inflation. Using the CPI-U as the inflation index, that means the 25 cents from 1965 is “worth” about $2.40 now. That’s interesting, but I don’t think it really provides the relevance that we want today.

An alternative is to calculate the “time price” of playing the game. Using the average hourly wage of $2.67 in December 1965, we can calculate that it would take about 5.5 minutes of work to pay for that game — a game which probably only lasts about 5.5 minutes, unless you are really good at it!

Another comparison we could do is with the cost of video games today compared with wages today. But that’s not really a fair comparison — video games are much more advanced today. We would need to do some sort of quality adjustment, which is overly complicated.

But, at least in my case, there is no need to do the quality adjustment — I can play the exact same game as 1965. In fact, I did (several times). There was also that $10 cover charge that I mentioned, and if I spread that fixed cost over 40 games, it cost me about 50 cents per play (including the 25 cents to start the machine) to play the 1965 Bally’s Blue Ribbon Pinball machine. At the average wage today of $29 per hour, it takes about 1 minute to afford a play of that same game. In other words, my Blue-Ribbon-Pinball standard of living is about 5.5 times greater than in 1965.

Now this isn’t to say we are 5.5 times better off overall than 1965. Prices don’t stay constant for most goods! But hopefully it is a useful way to think about that 25 cent price tag from the past, and how to compare it to today.