Income Inequality

I liked this article from the New York Times: Income Inequality: Too Big to Ignore

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

This part echoes what I've said here myself about the bar being raised for everyone when we're exposed to the spectacle of how the rich spend their ever-increasing wealth:

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

It's to everyone's benefit to have a healthy middle class:

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

Ultimately, the article concludes that increasing income inequality doesn't benefit anyone-- the rich people who benefit from it aren't really happier, and everyone below them on the ladder isn't happier, and the costs to society affect us all. This doesn't mean that "income equality" is the goal, as those paranoid about communism and socialism may fear-- there will always be rich people and poor people, but when the division between them grows too out of proportion, we all suffer.

If you want to read more about the negative effects of income inequality, I recommend the book The Spirit Level: Why Greater Equality Makes Societies Stronger.

Book Review: Free by Chris Anderson

I've been following all the hoopla about Chris Anderson's new book with much interest. I picked up a copy of Free: The Future of a Radical Price for free, appropriately enough, at a Book Expo panel where he spoke. And I have to say, I'm glad I didn't have to pay full price for the book, as $26.99 seemed pretty steep: it was a quick read, at 274 pages including the index and lots of sidebars.
But I did find it interesting. Anderson explores the way we've come to expect to get many things for free, and how businesses are using free stuff to make more money from other products or services. Much of this is not new or earth-shattering: give away a free razor to make people buy expensive replacement blades, give away a free newspaper to sell more expensive advertising, etc. The part of this that really has people riled up is relates to the latter-- free content, particularly journalism.
Personal finance blogs are a great example of this-- there are hundreds of us now, all spewing out various sorts of advice and stories and information that you would previously have had to buy a newspaper or magazine or book to obtain. (Or at least your local library would have had to buy it.) Of course, much of the content we spew out is inspired by or derived from content that traditional journalists and authors were paid to write. But if consumers are trained to expect all this for free, is it really a sustainable model? Only time will tell...
Some other things from the book that struck me:

• The free classified ad website Craigslist is estimated to have taken $30 billion out of the stock market valuation of America's newspaper companies in the 13 years since it was founded.
• An online game called RuneScape has about the same number of subscribers and annual revenue as the Wall Street Journal's paid online service. As Anderson puts it, "it appears that people would rather pay to cast pretend spells than to read Pulitzer Prize-winning news."
• Chapter 12 gets into an interesting discussion of Maslow's "pyramid of needs," and how a monetary economy can be supplanted by an "attention economy" and a "reputation economy."
• Brazil's government is trying to switch all their computer systems to free open-source software. According to the director of this initiative, "every license for Office plus Windows in Brazil-- a country in which 22 million people are starving-- means we have to export sixty sacks of soybeans."

Despite any controversies about passages lifted from Wikipedia, I did find the book thought provoking and worth a read.

You can also read some of the other reviews and criticism of the book at the links below:
Malcolm Gladwell review
Seth Godin response
PW article
Chronicle of Higher Education

Money Doesn't Motivate People to Lose Weight?

An interesting tidbit from the NY Times:

Behavior: Money Not a Motivator in Losing Weight

Researchers studied 2,407 overweight and obese people enrolled in weight-loss schemes at their jobs. Participants were divided into three groups. The first received $60 for keeping a 5 percent weight loss for a year. The second agreed to pay about $100; the money would be returned if they lost 5 percent of their weight, and they would get bonuses for losing more. The third, a control group, was offered only $20, a reward for staying in the program for a year.

The study, published by the National Bureau of Economic Research, found that money had very little effect. The group that was offered $60 lost an average of just 1.4 pounds, while the controls lost 1.8. Those who made the $100 deposit dropped an average of 1.9 pounds more than the controls, but, the authors write, people motivated enough to risk their own money would most likely have lost weight with any program.

The article points out that the study had some limitations that make it far from conclusive. First of all, the amounts of money in the study were quite small, probably not enough to seriously motivate anyone. But it's not exactly practical to try studying the effect of a million dollar bonus for dieting! Also, I believe there have been other studies that have shown that when you pay people to achieve something, it doesn't always help encourage that behavior-- it's as if it obscures the fact that the goal is worth striving for on its own merits.

But it's an interesting question-- losing weight is a very difficult thing for many people to do. I'd like to think I would have the discipline to achieve a goal like weight loss, or quitting smoking, etc. in order to win a large sum of money, but who knows, maybe I'd blow it! How about you? What amount of money would motivate you to stick with a diet and exercise plan and lose weight?

Marginal Tax Rates

Consumerism Commentary has a helpful summary of the 2009 tax brackets. As Flexo points out, the way tax brackets work is often misunderstood, and people often just think their income is all taxed at a higher amount than it really is. I decided to put together a tax chart that shows how the actual tax amounts break down, in this case for a single individual like me.

Here's how the rates are explained:

Unmarried individuals (other than surviving spouses and heads of households):

If Taxable Income Is:	The Tax Is:
Not over $8,350	10% of the taxable income
Over $8,350 but not over $33,950	$835 plus 15% of the excess over $8,350
Over $33,950 but not over $82,250	$4,675 plus 25% of the excess over $33,950
Over $82,250 but not over $171,550	$16,750 plus 28% of the excess over $82,250
Over $171,550 but not over $372,950	$41,754 plus 33% of the excess over $171,550
Over $372,950	$108,216 plus 35% of the excess over $372,950

Here's my spreadsheet of how it works out for income at each of those breaks, plus some higher levels (click for larger image):


As is often pointed out, the highest marginal rates used to be much higher a few decades ago, and now people at the highest income rates pay quite a bit less than they used to. What if we added some higher brackets? Here's one scenario of how that might work, with the blue showing what would change and who would be affected:


My estimates for the percentage of the population affected were based on Wikipedia's stats on household income in the USA. A lot of households in the higher income ranges actually have two income earners, so this is far from precise. I'm not sure what percentage of taxpayers are single earners as opposed to married filing jointly or head of household, etc.

There are a lot of other variables to consider-- this is based on taxable income, and people at higher income levels are more likely to itemize and have more deductions to reduce their taxable earnings. It also doesn't take into account other forms of income such as capital gains, which is taxed at lower rates-- at the higher levels of wealth, much more income is likely to come from investment gains than a salary. And of course any state and local taxes would be in addition to these rates.

Regardless of all the subtleties, though, it's important to understand the basic concept! As Flexo points out, sometimes people "mistakenly believe that earning $1 over the barrier into the next tax level would result in a significantly higher tax bill because all income would be taxed at a higher rate, but that’s not true." And someone with a salary of $100,000 might think they're "in the 25% tax bracket," but even that level of taxable income only results in about 22% going to federal tax, and of course if your gross salary is $100,000, your actual taxable income will be far less if you factor in deductions and 401k contributions.

Keep all that in mind, though I doubt it will make you that much happier the next time April 15 rolls around!

Going Dutch

I'm a little late to the party in commenting on it, but this article in last Sunday's New York Times Magazine is worth reading, for a fascinating and detailed look at what it's like to live in the Netherlands and participate in a high-tax, welfare state economy. The Dutch system is an interesting mix of public and private elements, and it has its good and bad points, but for many people, particularly families, it sounds like you get your money's worth! It's hard to sum up the article in a quick quote, as the whole point is that the usual stereotypes don't apply and the system is full of surprising contradictions:

American perceptions of European-style social welfare are seriously skewed. The system in which I have embedded myself has its faults, some of them lampoonable. But does the cartoon image of it — encapsulated in the dread slur “socialism,” which is being lobbed in American political circles like a bomb — match reality? Is there, maybe, a significant upside that is worth exploring?

Let's focus first on the slur. I spent my initial months in Amsterdam under the impression that I was living in a quasi-socialistic system, built upon ideas that originated in the brains of Marx and Engels. This was one of the puzzling features of the Netherlands. It is and has long been a highly capitalistic country — the Dutch pioneered the multinational corporation and advanced the concept of shares of stock, and last year the country was the third-largest investor in U.S. businesses — and yet it has what I had been led to believe was a vast, socialistic welfare state. How can these polar-opposite value systems coexist?

Read the rest of "Going Dutch" to find out!

Is the Credit Crunch Affecting Prosper?

See Mapgirl's post about a delinquent loan and how she's not planning to lend out any more money in the near future. Big or small, lending just isn't that popular an activity lately!

Scary Housing Price Chart

Yikes, here's a scary chart, courtesy of The Big Picture:


You can always say that history does not predict future results, etc, but I find it very interesting when two things relate to each other at an almost constant ratio for decades and then it just suddenly goes haywire! In this case, we're looking at household disposable income vs. home prices. What will it take to get that red line back to normal? Either housing prices have to fall a lot more, or income has to rise. Hmm, which do you think is more likely to happen soon?

Greenspan: "I made a mistake"

Wow:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

New York Times article

More Recent News: Cost of Prison, Expensive Placebos, and Payments for Good Grades

More recent news items of interest, all from the New York Times:

1 in 100 U.S. Adults Behind Bars, New Study Says

Nationwide, the prison population grew by 25,000 last year, bringing it to almost 1.6 million. Another 723,000 people are in local jails. The number of American adults is about 230 million, meaning that one in every 99.1 adults is behind bars.
....

Now, with fewer resources available, the report said, “prison costs are blowing a hole in state budgets.” On average, states spend almost 7 percent on their budgets on corrections, trailing only healthcare, education and transportation.

In 2007, according to the National Association of State Budgeting Officers, states spent $44 billion in tax dollars on corrections. That is up from $10.6 billion in 1987, a 127 increase once adjusted for inflation. With money from bonds and the federal government included, total state spending on corrections last year was $49 billion. By 2011, the report said, states are on track to spend an additional $25 billion.

It cost an average of $23,876 dollars to imprison someone in 2005, the most recent year for which data were available. But state spending varies widely, from $45,000 a year in Rhode Island to $13,000 in Louisiana.

The cost of medical care is growing by 10 percent annually, the report said, and will accelerate as the prison population ages.

More Expensive Placebos Bring More Relief

The investigators had 82 men and women rate the pain caused by electric shocks applied to their wrist, before and after taking a pill. Half the participants had read that the pill, described as a newly approved prescription pain reliever, was regularly priced at $2.50 per dose. The other half read that it had been discounted to 10 cents. In fact, both were dummy pills.

The pills had a strong placebo effect in both groups. But 85 percent of those using the expensive pills reported significant pain relief, compared with 61 percent on the cheaper pills. The investigators corrected for each person’s individual level of pain tolerance.

“It’s a great finding,” said Guy H. Montgomery, an associate professor of cancer prevention at the Mount Sinai School of Medicine who was not involved in the research. “Their manipulation of price affected expectancies of drug benefit, and pain is the ultimate mind-body phenomenon.”

Next Question: Can Students Be Paid to Excel?

The fourth graders squirmed in their seats, waiting for their prizes. In a few minutes, they would learn how much money they had earned for their scores on recent reading and math exams. Some would receive nearly $50 for acing the standardized tests, a small fortune for many at this school, P.S. 188 on the Lower East Side of Manhattan.

At Junior High School 123 in the Bronx, Jerome Johnson, a seventh-grade math student, also received cash awards.

When the rewards were handed out, Jazmin Roman was eager to celebrate her $39.72. She whispered to her friend Abigail Ortega, “How much did you get?” Abigail mouthed a barely audible answer: $36.87. Edgar Berlanga pumped his fist in the air to celebrate his $34.50.

The children were unaware that their teacher, Ruth Lopez, also stood to gain financially from their achievement. If students show marked improvement on state tests during the school year, each teacher at Public School 188 could receive a bonus of as much as $3,000.

School districts nationwide have seized on the idea that a key to improving schools is to pay for performance, whether through bonuses for teachers and principals, or rewards like cash prizes for students. New York City, with the largest public school system in the country, is in the forefront of this movement, with more than 200 schools experimenting with one incentive or another. In more than a dozen schools, students, teachers and principals are all eligible for extra money, based on students’ performance on standardized tests.

Losing a Job, Moving in with Mom

Here's a sad article from the Times: Blue-Collar Jobs Disappear, Taking Families’ Way of Life Along

After 30 years at a factory making truck parts, Jeffrey Evans was earning $14.55 an hour in what he called “one of the better-paying jobs in the area.”

Wearing a Harley-Davidson cap, a bittersweet reminder of crushed dreams, he recently described how astonished and betrayed he felt when the plant was shut down in August after a labor dispute. Despite sporadic construction work, Mr. Evans has seen his income reduced by half.

So he was astonished yet again to find himself, at age 49, selling off his cherished Harley and most of his apartment furniture and moving in with his mother.

Middle-aged men moving in with parents, wives taking two jobs, veteran workers taking overnight shifts at half their former pay, families moving West — these are signs of the turmoil and stresses emerging in the little towns and backwoods mobile homes of southeast Ohio, where dozens of factories and several coal mines have closed over the last decade, and small businesses are giving way to big-box retailers and fast-food outlets.

Things like this just kill me. People need jobs. It doesn't matter what kind of work you do-- as long as you can support your basic needs on the wages, you have some dignity. I know people say our economy is transitioning from being based on manufacturing to service industry jobs, but I suspect that really doesn't work for a lot of people... not that I personally know what to do about it...

S&P 500 Trends

I was looking at how my investments were doing the other day, and found myself curious about what some historical trend graphs might look like. I found this chart of the S&P 500 via the NY Times website:

The numbers and red line are my own additions:
1- Data starts in 1971
2- I started working and putting money into 401k plans around here, but I don't remember if I even knew what I was doing enough to pick out stock-based mutual funds. Probably not.
3- After a few years of working and investing more aggressively in 401k funds, around here is when I started putting some of my other savings into mutual funds via E*Trade. I lost a little money at first during that slide into the low point around 2001, but I've had some good gains ever since.
I added the red line just to show a sort of trend-- it's interesting how the 90's seem like kind of an anomaly compared to an otherwise more gradual upward slope without major fluctuations. Also, ever since the 90s, the market seems to fluctuate more year to year-- back in the 70s the line was a sort of smoother upward trend overall, but more recently there are a lot of jagged ups and downs during the larger up-trends and down-trends.

Sometimes people talk about the market as if it is some kind of living creature, or something that has to follow certain rules. It does seem to follow certain patterns sometimes. We are always reminded, past performance is no guarantee of future results, but can past performance suggest that future results will follow similar patterns? I wonder what the shape of this graph will look like 20 years from now...

Income Gap in New York City

From yesterday's NY Times:
New York’s Gap Between Rich and Poor Is Nation’s Widest, Census Says

Surprise, surprise: New York has the widest gap between the rich and poor of any major metropolitan area.

In Manhattan, the disparity was especially wide. The wealthiest 20 percent of Manhattanites made nearly 40 times more than the poorest 20 percent — $351,333, on average, compared with $8,855, a bigger gap than in any other county.

Over all, the poverty rate in the city was 19.1 percent, about where it had been for the previous six years, which meant that about one in five New Yorkers lived below the official poverty line, defined by the federal government as $20,650 for a family of four.

Median income in the city barely budged, to $46,480 in 2006, statistically only slightly higher than the adjusted $44,835 recorded the year before.

I suppose you could try to look at the bright side of this: New York is an incredibly diverse place-- unlike some suburban areas where the population and income level are very homogeneous, there are places here where you can have millionaires living next door to people who are at the poverty line. Though chances are they aren't inviting each other over for dinner.

Is it a Good Time to Sell?

This article and graphic from yesterday's NY Times kind of scared me... based on long -term P/E ratios, stocks seem to be overvalued vs. historical standards. They're not as high as they were in the 1990s, but they're still at a point equaled only in the 1920s just before the big crash that led to the Great Depression. So is there nowhere to go but down? Or is there something fundamentally different about today's economy that means P/E ratios will stay higher?

David Brooks' Complicating Facts About Income Inequality

From David Brooks' column in today's New York Times, titled A Reality-Based Economy:

If you’ve paid attention to the presidential campaign, you’ve heard the neopopulist story line. C.E.O.’s are seeing their incomes skyrocket while the middle class gets squeezed. The tides of globalization work against average Americans while most of the benefits go to the top 1 percent.

This story is not entirely wrong, but it is incredibly simple-minded. To believe it, you have to suppress a whole string of complicating facts.

Brooks goes on to enumerate 9 of these complicating facts, as he sees them. I had some doubts about some of his reasoning, but here's the bit that really stopped me:

Sixth, inequality is also rising in part because people up the income scale work longer hours. In 1965, less educated Americans and more educated Americans worked the same number of hours a week. But today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week.

It may be true that highly educated people work like dogs, but is it directly increasing their income? Most highly educated people are probably paid on a salaried basis, not by an hourly wage. Their earnings do not necessarily increase with longer hours. Even for those who own small businesses, etc., aren't those longer hours often just a sign of the struggle to merely bake the cake, rather than piling on the icing?
And if lower income people, who are more likely to be paid on an hourly basis, have seen their "leisure time" increase drastically, might that be because they are not being given the full-time hours they might prefer? WalMart is one example of an employer that has been said to deliberately staff their stores with workers who don't get full-time hours so they can avoid giving them benefits.

I'm sure there might be other factors I'm not thinking of... what do you think?

What the World Eats

A reader emailed me a link to a fascinating photo-essay called "What the World Eats," in which 16 families from around the world are shown at home with a week's worth of food, and the amount of money they spent on it. Take a look!
You might be surprised at some of the photos, which were taken from a book called Hungry Planet. People in Western Europe tend to spend the most, with a German family at the top of the heap, at about US$500 per week for a family of four:


They seem to drink a lot of beer! Ok, so that is not the surprising part of the series. What surprised me was that families in a lot of countries seemed to be spending between US$150-200 a week, in the U.S., Poland, and even in Mexico and China. Of course, what we don't know is how each family compares to the median income in that country. Most of the families in the photos would probably look more or less "middle class" to American eyes, but some are probably quite wealthy compared to others in their countries.
What I also found interesting was the different kinds of food each family ate. The Mexican family apparently drinks about a dozen two-liter bottles of Coke in a week. But they eat loads of fruits and vegetables. The Americans and Brits, on the other hand, have a much lower proportion of fresh produce, and more meat and carbs. In all but the poorest countries, there is at least some evidence of Coke, McDonald's, KFC, or Burger King within the week's eating.
Who were those poorest countries? Bhutan at about $5 a week and Chad at $1.23 were the bottom of the list. The difference in money spent is not nearly as striking as that in the actual volume of food when you look at the photos.
I will certainly look at my kitchen a bit differently when I go in there to cook dinner after finishing this post. I have spent an average of about $131 per week on food year to date, but aside from my mother's 3-week visit when I was doing a lot of entertaining, that was all pretty much for one person. And I think I spend less than most people at my income level in this city. I'd love to see a version of this photo essay comparing a variety of New Yorkers... but it would be harder to photograph them with their groceries, since people here eat in restaurants so much!

Thanks again to Katrina for sharing the link!

We Want to Be Alone

I was thinking about how much our economy and technological development seems to be driven by the desire not to physically interact with other people. Think about it: we have gone from being entertained by plays and movies in theaters, to having TV sets in our living rooms, to watching video iPods. And with music: from concerts, to radios and stereos in the home, to Walkmans to iPods. Telephones used to have party lines, and there used to be more phone booths-- now we have cell phones. Now the internet gives us so many reasons to do things from the comfort and privacy of our own homes rather than among other people: shopping, dating, education...
Of course cars are a big one-- we've developed this American dream of having your own car, not taking public transportation. And the wealthier people get, the more they isolate themselves: owning yachts instead of going on cruise lines, taking private jets instead of flying commercial, building houses with pools and fitness rooms so they don't have to go to a gym.

Sometimes I feel pretty anti-social myself. Now that I have bought this apartment with outdoor space, I find myself wanting to stay home and enjoy it. I'm also keenly aware of needing to stay on my budget. So every weekend, I have this little inner debate: should I go out to a café for breakfast, or should I stay in and make my own coffee to save a few dollars? But even when I do go out to the café, it's not all that interactive, or even particularly interesting just for people-watching: everyone's just sitting there hunched over their laptops, with iPods on!

How I Spent [Money During] My Spring Vacation, Part 3

Ok, let's wrap this up, since I've been back for well over a week now!
First, a few more pix:

A lot of my "freaky clouds" photos didn't come out well, but I like this one:


Lake Wanaka:


The hotel room view at Mt.Cook:


Yes, these are icebergs:



The thing I'd love to post photos of is my friend Wanda's flat, but that would be too much of an invasion of privacy. As I mentioned last time, part of the reason I've visited New Zealand twice now is that I have friends who live there. One of them is Wanda, who was featured in this post about her purchase of a $150 belt. Wanda has gone through some financial ups and downs over the last few years. She's an artist, and not an overwhelmingly successful one, so her ups are never all that up, but for a long time, she did have a stable day job 4 days a week and managed to save some money. Then she decided to move back to the small town in New Zealand where she's from, after many years of living in other countries.
As an aside on that, I'll just note that New Zealanders are really big on their O.E.-- overseas experience. I don't know what percentage of the population has lived and worked abroad at some point in their lives, but I think it must be huge, much larger than the percentage of Americans who have even taken a vacation in another country. And when you figure that the currency and comparative cost of living has often made it really expensive for kiwis to come to the UK, Europe, America, etc., it's even more impressive.
Anyway, to get back to Wanda, thanks to her, and her brother, who is also a friend of mine, I've had a chance to see more of how people live in NZ. Through them and other friends of theirs, I've stayed in private homes in Auckland, Napier, and the town in the South Island where they're from. I'd name it, but it's too small a world down there and I'd be afraid someone could identify them even from what little I'm writing here!
In general, all the people I've stayed with have been pretty middle-class. As far as I can judge, I think their situations would be comparable to people I know in the States. And in many ways, they live very much the way people I know here do, which isn't surprising. But in other ways, things are a bit different. They definitely tend to drive smaller cars, due to higher gas prices I'm sure. And in other ways, they just don't seem to have as much STUFF, or as much emphasis on brands and materialism. Some of this may be more about the individuals themselves, and about my perspective as someone who spends way too much time in New York City, where you sometimes discover you've just walked through a fashion photo shoot without realizing it, because everyone just kind of blended in. But I do think there is some part of it that has to do with a certain national attitude.
In the case of Wanda herself, as I got to know her, I learned to stop being surprised at her ability to live in dire conditions just because they were cheap. One of her homes that I visited was a tiny room in a house full of alcoholic middle-aged men, where the bathrooms and kitchen were shared. Then she moved to a much nicer flat that had been recently built-- it was lovely in many ways, but the only closet in the whole place was not a real closet but rather this strange thing known as an "airing cupboard." As I said to Wanda, "let me get this straight-- in order to dry your damp clothes, you fold them and put them on the shelf in a closet??" Mystifying. She has one again now in New Zealand-- and that segues into another general observation I have: people there seem much more inclined to hang their laundry in the yard to dry it, even if they own a dryer.
At Wanda's current flat, the washer and dryer are in a sort of shed outside the actual house. At first I thought that meant that Wanda didn't have to pay for the electricity to run them, but it turns out that each flat has a numbered outlet, and the tenants are expected to plug the machines into the right one whenever they're doing laundry. This may sound a little old fashioned, but it's actually one of the more modern features of the house.
The place was built in the 1920s or 30s, I think, and when I walked in, I almost felt like I was in a time warp. It was once probably a kind of Arts and Crafts-style bungalow, and a lot of the original woodwork has been preserved. The kitchen has a nice fireplace, and a built-in china cupboard. The bathroom was obviously an afterthought, built onto the outside of the house at some point, with only a shower stall. The kitchen stove and fridge probably date to the 70s. No dishwasher, needless to say. Then there's Wanda's living room, which is also her bedroom. And here the timewarp impression really struck me, as there's another lovely fireplace, and all her furniture is 2nd hand or stuff she's found on the street-- if you took a black and white photo, you'd have to look closely to see anything that would put you anywhere near the 21st century. Wanda also has another large room, but she mainly uses it for storage. Why? Because it's another room added on to the outside of the original house, and it has no fireplace. And no fireplace means no heat.
When Wanda told me her apartment was unheated, I couldn't believe it. The South Island of NZ has real winters, it's not like it's tropical. But apparently it's quite common for homes there to have no central heating. Wanda has an electric heater, but she doesn't like to use it much because it's so expensive. She also has a portable gas heater, but doesn't like that much either. So she mainly uses the two fireplaces for heat. Her brother helps her out by bringing her wood scraps from construction sites, and she also collects pine cones to burn. And then she buys coal. Lumps of coal! I didn't even know you could just buy coal nowadays-- I thought it was only for industrial uses, and frowned on even for that, given how bad it is for the environment. This really seemed weird-- and to anyone out there who doesn't understand my reaction, it's not just me. I told someone else this story, and when I mentioned the coal, she said "you mean like for a barbecue?" No, not charcoal briquettes! We're talking coal, real coal, anthracite, the other black gold, not to mention black lung...
Most people in NZ probably don't use an open hearth as their main source of heat. Wanda's brother, who I'll call Bud, is more typical in using a modern woodstove, which is rigged up to a duct that is supposed to push warm air into other parts of the house. But even with that, he has to put a space heater in the kids' room sometimes. Bud works in construction and said that he thinks New Zealand is "behind the rest of the world" in terms of heating technology. (Bud has also done his O.E. and worked in other countries for a few years.) But both he and Wanda also believe that there is a certain pride in being rugged and just "getting on with it" that makes kiwis less concerned about details like room temperature. Wanda "gets on with it" by wearing several layers of clothes, including gloves and a ski mask, to bed on the coldest nights of the year.
Over dinner one night, we also talked about lifestyles in general. New Zealand has also had a big real estate boom, and people are over-borrowing, though not to the extent they are here. Interest rates are much higher in NZ-- I saw a CD advertised with a rate of over 9% for a pretty short term. Houses tend to be much smaller-- that is changing but their new McMansions are still smaller than ours. Wanda and Bud are my age and a little older, and they agreed that the expected standard of living is evolving quite a bit in recent years. Until fairly recently, the New Zealand dream for families like theirs, they said, was to buy a house and a car, and maybe have a bach somewhere. A bach is a house for weekends and vacations-- traditionally it might have been not much more than a small, rustic cabin, without indoor plumbing or electricity, but now people are building more and more elaborate ones. And now, the car is more often an SUV, and the next thing you have to get is a motorboat.
Wanda sees Bud as being a bit caught up in this himself-- he has a house, just upgraded to a new SUV, and bought a camper that stays by a lake all summer as the family's weekend retreat. So far his only boat is a kayak. Meanwhile Wanda is struggling to get work and keeps watching the value of her savings erode as NZ's currency strengthens, since she left some money in an overseas account, thinking its value would go up rather than down. She has gotten a small government grant for her art, but it's not enough to live on. And she doesn't have too many other options, as most of the jobs in her area are agricultural or in things like meat-packing plants. If she moved to Auckland or Wellington, she might have more opportunties for arts-related jobs, or anything else that would use her office skills as opposed to manual labor-- but the cost of living is much higher there, so she's a bit stuck.

Anyway, that is my long meditation on other lives, other places. You've probably learned more about my background and prejudices than you have about New Zealand, though I really don't mean to sound like a snooty New Yorker who thinks other countries are primitive, and I swear I'm not Zsa Zsa Gabor doing Green Acres! In many ways, New Zealand feels more like the US than any other country I've been to except Canada, and I could happily live there if it wasn't so far away from everything else that is important to me.

In closing, one last money fact about New Zealand: don't forget the departure fee when you leave! At the airport, you have to pay NZ$25 before you're allowed to leave the country. Last time I was there, I'm pretty sure you had to pay in cash, as I seem to remember being really annoyed that I had to take out more cash, after so carefully planning to minimize what I'd have leftover. But now they have a lot of little credit card machines where you can pay the fee, as long as you have a PIN for your credit card. I find that departure fee so ironic-- it's as if leaving is this highly desireable thing that they make you pay for... but all I wanted to do was stay...

Total cost of my trip (at least the parts I personally paid for):
Transportation (to and from airport and taxes/fees/seat upgrade on frequent flier free ticket. Does not include car and gas): $264
Lodging: $376
Meals, gifts and miscellaneous: $519 (I didn't keep close track of my cash spending, so I don't have a more detailed breakdown.)
TOTAL: $1159
Memories, of course, priceless.

A mOOm with a View: Guest Post from a Real Economist!

Today I present a special treat-- the very first guest post to appear on My Open Wallet! For those of you who aren't familiar with him, let me introduce mOOm, a frequent commenter on this blog, and writer of Moomin Valley: Personal Finance, Investing and Trading. He is also a professor of economics and an active investor and trader-- exactly the areas of finance I know the least about. So when he alluded to doing an economic analysis based on one of my posts, I jumped at the opportunity, i.e. begged him to write me a guest post. So here it is, folks-- I learned a lot from reading it, and I'm sure you will too-- and his conclusions may surprise you.

What Would Happen in the Labor Market if Everyone Knew Everyone Else’s Salary?

In her post: “Greetings from Davos: Global PF Blogging” Madame X asked lots of really interesting questions about what would happen if everyone fully disclosed everything about their finances to the world. In this post, I’m going to tackle just one of those: “What would happen in if everyone knew everyone else’s salary? Would salaries start climbing due to the openness? Would that lead to inflation? Or would the effect be the opposite?”

The post is pretty long winded – it’s just a kind of stream of consciousness thing - and maybe everything I cover isn’t really necessary to understanding and quite likely makes my point harder to understand. The bottom-line is that employment would fall, low paid workers might see their wages rise but average wages would fall and become more equal.

Like all good economists I’m going to start with an assumption - that all workers are of equal skill and ability. The only point of the assumption is to make the basic idea easier to understand. Once we’ve got that, I’ll relax the assumption. I’ll also assume that there are no unions and that firms bargain with workers by raising their wage offer until a potential worker agrees to accept.

Many of you are probably familiar with the supply and demand model of perfect competition – the best-known model in economics. If this was the way that the labor market worked then all workers at all firms would receive the same salary. Textbook perfect competition is rare, though, in the economic world. One of the few industries that gets anywhere near it is mainstream agriculture where millions of farmers producing standardized crops sell these crops at prices determined on commodity exchanges plus/minus transport costs etc. Anyone can go online and find out what the price of corn is on the Chicago Board of Trade futures market. That’s what a perfectly competitive market looks like. In a perfectly competitive labor market each firm could hire as many workers as it liked at the going market rate without pushing up the market wage rate.

But in the labor market even workers at the same firm don’t know what their colleagues are paid. So clearly the labor market is not perfectly competitive. Instead we have to use a model called “monopsonistic competition”. This is what economists call a situation when there are many (but not too many) employers each of which has some market power in the labor market.
This situation is very similar to industries like retail stores where there are many stores each of which has a little local market power. You as a consumer are not going to go to a store in another city or another state. Even a store in a neighboring suburb is less convenient to go to than one that is closer to you. This allows each store to charge a little extra to its clients than would be the case if they could go to any similar store anywhere in the world. But if they try to charge too much you will desert them for a store in a nearby town even though that is less convenient. Stores and restaurants also differentiate themselves on the basis of products stocked or menu and ambience. These help them develop loyal clienteles that they can then charge more to. Economists call this “monopolistic competition”.

Monopsonistic competitors are buying labor rather than selling meals or groceries. But each develops some market power over the workers who are most enthusiastic about working for them. This allows them to pay a little less than they would have to if workers didn’t care at all where they worked even if it meant a hundred mile commute.

But as long as all salary information is out there in the open they have to pay each worker the same salary. Now what happens when they want to hire extra workers? They have to attract those workers from other firms or pull them away from college or from looking after their children or even retirement. To do that they are going to have to raise the wage they pay. But not only do they have to pay that wage to the new workers they hire, they will also have to raise the wage they pay to their existing workers just like a store that cuts prices to attract more customers has to give those lower prices to its existing loyal customers too. This raises the cost of hiring extra workers above the actual wage paid to those workers. This means that in monopsonistic competition not only do firms pay workers less than they would under perfect competition but they are also more reluctant to hire extra workers and therefore, both wages and employment are lower.

Now what happens when firms can keep the wages they pay each worker secret? They can pay those new workers more than their existing workers – or in general pay workers who are less enthusiastic to work for them (will only come to work there for a higher wage) more and pay workers who are more enthusiastic to work for them less. This makes hiring additional workers
cheaper as the employer doesn’t have to raise the wage of existing workers if they can keep the new hires wages secret. Employment is higher under this “wage discrimination” model. In fact if they could pay each worker an individualized wage they might be able to reach the level of employment that occurs under perfect competition… but earn much higher profits!

This is similar to HSBC’s latest deal to pay 6% only to new deposits from outside the bank on its Online Savings Accounts. Or a pharmaceutical company charging less to the Canadian government than to a US HMO. These are cases of “price discrimination”. They increase profits but get the product to more customers than if they had to charge everyone the same price. Economists say this is more “efficient” than a firm with monopoly power that serves fewer customers at a fixed price.

So, what would happen if everyone, knew everyone else’s salary? Employment would fall as unenthusiastic workers who demand high salaries wouldn’t be hired. Currently low paid workers would see a pay rise. The lower level of employment probably implies that average wages in the economy would be lower. If we add unions or other forms of bargaining to the mix though
things get real complicated…

We can easily model different skill levels by assuming that employers hire units of skill (human capital) rather than hours of work. Then under perfect competition there would be a single national rate for one standardized skill unit. Some workers have more units of skill and get more money than others even without employers having market power. By creating different ranks for different skill levels employers could pay different amounts even if everyone knew everyone else’s salary. But they’d have to pay the same per unit of skill. Under monopsonistic competition and/or wage discrimination different people would receive different amounts for the skill they provide rather than for just the hours provide.