Drinking Alcohol More Makes You Richer (Or Does It)

Or not.

But I got your attention, didn't I?

I'll get to the drinking in a minute. Before that, more broadly in social sciences, we run into the problem that most things that humans do are caused by a multitude of things. So the things we observe are caused by a bunch of other things. We ought to try and measure or observe those as completely as possible.

But the problem is worse than that. In understanding the relationships between those variables, omitting relevant variables is a much bigger problem than including irrelevant variables. 

So something that should set off all of your mental alarms is an overly broad claim based on an overly narrow set of variables.

For example, claiming that a single thing like drinking alcohol causes one to be richer. That's crazy, right? But that's what you might readily conclude from this:

Hmmm. Three richer areas have more drinkers, and two poorer areas have less drinkers.

The message here is that when you see something like this, every instinct should be to add other variables to see if this relationship goes away. If it does, then there is no relationship. If it persists, there's never an end to the process, but the more things you try which, in spite of their presence or addition, the relationship remains ... the more confident you should be that you've found something important.

This infographic comes from Visual Capitalist, a site which is pretty good at producing catchy graphics. Your takeaway should be that maybe those graphics require deeper thought.

Regulatory Policy Is Currently Based on Feelings Not Data

Government policy on competition is a micro thing that has macro consequences, as far as it affects growth.

Regulation to (hopefully encourage) competition by discouraging the potential for increased market power that can come with increasing concentration of an industry in fewer firms — is a decidedly more popular in left of center political parties (like the Democrats in the U.S.).

Monopolies do their monopoly thingie by marking prices up over marginal costs more than other industrial structures. That shifts surplus from consumers to producers. The regulatory thinking is that all moves within an industry towards fewer firms make that behavior more likely. 

But that doesn't just happen by itself. No product can be marked up much if its demand is inelastic. Think about it: the price of Coke is never "jacked up" because you and others will just switch to Pepsi. In economic jargon, that's saying that your demand for Coke is elastic rather than inelastic. In the real world then, there's very little taking advantage of consumers if their demand is elastic, but certainly the potential for that if their demand is inelastic. Do note that every firm will try to mark up more when demand is inelastic, whether or not their industry is more concentrated or not.

So the economic argument for price regulation rests on two features: 1) demand must be inelastic, and 2) the industry must be concentrated enough to act on that. The position of left/liberal regulators in the U.S. and other countries is that both of those have gotten worse over the last generation or two.

There's new research on both.

***

In "Rising Markups and the Role of Consumer Preferences" the authors measure marginal costs, prices, increased markups, and customer preferences. What they find is that marginal costs have been dropping. That's good: firms are being more efficient. But prices have changed much less, so markups must be getting bigger. What's interesting is that their evidence on consumer preferences indicates that this is because you and I have gotten less price sensitive, while the evidence on marginal costs indicates that industries have gotten more rather than less competitive. In "Trends In Competition In the United States: What Does the Evidence Show?" the authors note that industries are concentrated, but both in places where concentration is more heavily and less heavily regulated (suggesting that such regulation is a waste). Further, that concentration seems to be driven by technological improvements that benefit consumers through lower marginal costs. 

It probably should be noted that one of the authors of the second study was the chief economist at the Federal Trade Commission. He resigned early in the Biden administration; suspicions are that this was because they were taking regulatory enforcement in a less fact-based direction.

What Makes People Happy?

What makes people happy is not central to macroeconomics. But a lot of people think it ought to be central to policies designed to affect macroeconomies.

For example, some claim that income distribution or environmental quality affects happiness. While they surely do, it's not clear if they are major or minor influences.

However, in another social science they're pretty sure they've pinned down what influences "life satisfaction".

Psychologists describe our personalities in terms of 5 (big) domains and many (smaller) nuances. For the most part, these are considered immutable within a person.

Life satisfaction is readily predicted by focusing on three of those domains: being extroverted, conscientious, and emotionally stable. At the nuance level, being unsatisfied is associated with "feeling misunderstood, unexcited, indecisive, envious, bored, used, unable, and unrewarded".

***

Fair enough. So here's the thing. Politicians talk a lot about policies to make peoples' lives better: higher tariffs to protect workers (Trump), containing rent inflation (Biden), and so on.

There are economic pros and cons to things like these. But do we envision them making people more ... conscientious, or less ... bored?  If not, maybe we're not helping people as much as we think we are. Just food for thought ...

G-7 vs G-20

Since 2005, the G-7 share of world GDP has declined, while the G-20 share has stayed about the same.

Most of that change is from growth of China (the largest economy in the G-20, but not the G-7). Those 13 "other" countries are currently about 1/3 of the global economy, and China is between 1/2 and 2/3 of that.

There's a few things to note. 

First, this does not reflect the G-7 countries doing badly (having said that, most of them haven't done that well over those 20 years). 

Second, it does reflect the other 13 countries doing well. This is good for humanity; most of these countries weren't doing that well before the 21st century.

Third, since this is about GDP, it doesn't tell us about richness or welfare. Just size.

Fourth, GDP growth comes from increases in labor, capital, and technology. There is no breakdown here, so it's possible that the increasing share is driven completely by an increasing share of population. It isn't ... but population growth rates tend to be higher in poorer countries, and that's going to tend to tilt the share of the G-7 downward.

Infographic published as part of the page entitled "Charted: The G7's Declining Share of Global GDP" from Visual Capitalist.

Hey, Remember Guyana?

I posted about Guyana's problems with Venezuela in Spring 2024. 

This is what happens when you 1) get a little ahead, and 2) live next to thugs.

Guyana, due to development of its oil deposits, has moved rapidly up to above the 90th percentile for real GDP per capita (according to the IMF).

Do note that inequality is always an issue. Having said that, there's no countries on that list that are known for their high proportion of poor people: high GDP per capita buys a lot of infrastructure that improves the lives of just about everyone.

How Many Countries Are There? It Depends

In macroeconomics, we're really only concerned about countries, in the sense of do they measure their economy, and do they have policies that might affect it.

But the sources for this information come mostly from the countries themselves. Or more correctly from the states that claim to run those countries (see Chapter VI in the Handbook for the distinction).

It's a bit disconcerting for some students to find out that there isn't an official list of official countries. This shows up in the Handbook, and the Wikipedia pages underlying it, where different international agencies that gather data report different numbers of countries.

It should also be a little disconcerting to everyone in the bigger context of things because the UN says every country gets 1 vote, and no one else gets to vote. This may substantially increase the international political and macroeconomic power of some pretty tiny places.†

Anyway, I found a cute video (12 minutes) that goes over all the different ways to count countries.

† Here's something to annoy you going forward in your life. At various times in the U.S., the party holding most of the power will complain about all the states getting 2 votes in the Senate and 2 additional electoral votes (currently it's the Democrats complaining about this, but give it time). I've noticed over the years that the same people who do complain about the equal votes in the Senate do not complain about equal votes in the U.N. To me this suggests that this an argument of convenience (formally called an appeal to consequences) that's only pulled out when you don't have many better ones. My personal advice is to get doubly-suspicious when you hear it used. ;-)