Wednesday, August 29, 2007

How Are We Paying For All Of This Stuff???!!!

Through all of the economics courses I took, there have been a set of first principles that have never exactly sat well with me - maybe because I just didn't get them or maybe because they aren't taught well because they are fundamentally impractical questions. Generally, these questions occupy the outer bounds of economic questions - extremely microeconomic questions, like how assumptions about rational actors could really be used when considering, you know, humans, to macroeconomic questions, like how is wealth created, how do you value good & services that aren't financially accounted for, or whose value must be factored over long periods of time, or what happens when societies fundamentally consume more than they produce over long periods of time.

These abstract economic questions take on puzzling forms in my day to day life. For example, commuting on the subway in Manhattan, it's apparent that everybody, everybody - ghetto kids, grandparents on social services, day laborers, NYU students with no jobs and lots of debt, teachers! - have upwards of $500 dollars worth of products on them at any moment, every day. Cell phones, iPods, shoes, handbags, designer clothes, digital cameras. It's crazy. Where is all the money coming from to buy all of this? To wit, Harvard magazine has an interesting article tying our macroeconomic troubles, in terms of foreign accounts balances and national debt, with our individual consumption habits:
“When a country gets a capital inflow [such as the United States has now], generally speaking things are pretty good,” observes Jeffry Frieden, Stanfield professor of international peace. “It allows you to invest more than you save, and consume more than you produce. There is nothing necessarily wrong with that,” he notes. Firms do it all the time, and so do households. They borrow on the expectation that they will be more productive and better able to pay the money back in the future. The United States, for example, was “the world’s biggest debtor for a hundred years,” Frieden notes, “but the money was used to build the railroads and the canals and the factories and to improve the ports and to build our cities. It was used productively, and it worked. The question to ask now is not, ‘Is the country living beyond its means?’ The question is, ‘Is the money going to increase the productive capacity of the economy?’ Because if it just goes to getting everybody another iPod,” he warns, “then unless iPods make people more productive, there is going to be trouble down the road when the debt has to be serviced.”
Well worth the read.

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