How much refridgerator can you buy?, autonomy.

Sorry to be posting so much on this topic of inequality, but I’ve been meaning to do some thinking and writing on this and now seems an appropriate time.

Refridgerator Shopping

Karl Smith, at Modeled Behavior, in an excellent discussion of consumption inequality versus income inequality (my underline):

First, none of this undercuts the basic argument of Will’s paper which is that concentrating on income inequality is not particularly useful. It is entirely possible for someone to have high levels of income but moderate levels of consumption. Its not immediately clear that this is someone whose income it would be beneficial to redistribute.

Something is driving them to save so much. It could be paying off past debt. High earning professionals might have significant educational debt that they are paying off. It might be that this bit of income is transitory, a one year bonus. Or, it might be that they have really high risk aversion. This last point, I think, is key.

This is why I don’t always like looking at just consumption inequality because once you’ve started there you start to draw assumptions about everything else. Why should we assume that consumption inequality is low because people are saving so much? It could also be that it is too difficult to spend that level of money.

Thought exercise: The discussion started at refridgerators, so let’s stay there. As a useful measure of income inequality, let’s look at a worker-to-CEO ratio:

A CEO makes 260 times his worker. Now we started this discussion saying that the worker gets a perfectly fine IKEA refridgerator for $350. Now the CEO’s “budget” for refridgerators is 260 * $350 = $91,000. Here is a fun internet challenge – fine me a refridgerator that costs that much.

The most expensive refridgerator I could find is around $17,000: “European appliance maker Gorenje has unveiled the most expensive fridge in the world designed for those to whom money is no object…The £10,000 fridge-freezers, named ‘The Eye-Catchers’, of which there are 10 available, are studded with 7000 Swarovski crystals, to make the black surface glitter and sparkle like a starry night.” (If you can beat that, leave a comment. Searching for high-end refridgerators online is surprisingly engrossing.) Assuming our CEO has 5 houses, he could buy one for each (half the market!) for about $85K. He has spent the practical limit possible in refrigeration, but statistically consumption inequality is still less than income inequality.

I don’t mean that exercise to be glib, but I know many people in the medium range of financial analysts who don’t spend anywhere near as much money as they like because of limited time and bandwidth. There’s always a giant 3-month vacation they want to take, but there is always more work to be done. So the money goes to housing, which they enjoy in the offhours, but the rest is saved. There are plenty of people out there who want to help you spend your money, but inequality is at the point where there is simply a ton of money to spend and it isn’t effortless.

And just because the rich save more doesn’t necessarily mean they are more risk-adverse. There are a lot of middle-class people who save a little but put it straight into risk-free government bonds or their homes (until recently viewed as safe), and a lot of rich people who save a ton but give it all to high-risk high-fee hedge funds. There are many who’d rather “consume” the thought that their money is doing some beta-netural pair-trading backflips at a hedge fund shop rather than another expensive dinner. Back in grad school, I remember a friend telling me as a rule for investments and portfolio selection “People maximize utility, while the rich maximize wealth.” Sadly it is difficult to get reasonable estimates of that, and even the theory isn’t necessarily clear on what should happen.

Autonomy

Free Exchange asks: What good is money? I like Louis Menand’s quote here:

All rock stars want to make money, and for the same reasons everyone else in a liberal society wants to make money: more toys and more autonomy.

I like that because it is robust to both a practical sense of autonomy as well as a more philosophical one. You can do more things that are not simply consumption, like take a year off work or not worry about insurance if you want to leave your spouse, and the capacity for self-governance, a central building block for classical liberals, is deeper and more robust.

I think we are doing fine by the toys/consumption issue; the autonomy issue worries me. Keeping my comparative advantage in stochastic risk management instead of philosophy, one thing I think of when it comes to autonomy is the ability to exert control over one’s life course and insure against risks. At this point in the game I think that has seriously unwound. I think there’s an argument that inequality is effecting fixed costs like housing and education, and the way the unraveling of a social contract involves transferring risks back to individuals increases inequality. I’m of the belief that our capability to instill a governmentality of individualized self-governance is impossible without a project of broad risk-sharing, and that it’s time to re-engineer a new social contract capable of pulling that off. Without it what we are left with the worst of both worlds – completely atomized and highly insecure.

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18 Responses to How much refridgerator can you buy?, autonomy.

  1. crack says:

    Back when you brought up the 401k as a financial innovation you mentioned that it shifted risk to the individual. I’d always assumes that as well, but after reading it I came to the sudden realization that it didn’t. I don’t know why I hadn’t noticed it before, especially since I live in Detroit, but the risk is always still with the individual. Pension plans are nothing more than elaborate ways to reduce compensation while gaining tax advantaged returns in good years. It’s about the same as investing all your money in the stock of the company you work for. The PBGC doesn’t pay out at near the rate the pension was ostensibly guaranteed at. SocSec is the closest thing to a guaranteed pension as exists for the American worker. C levels may have their bankruptcy protected deferred comp, but the rank and file have nothing of the sort.

  2. Jonathan says:

    Great post, and I especially appreciate the remarks on autonomy. One suggestion – instead of calling it “autonomy”, call the phenomenon you refer to “economic freedom.”

    Politically speaking (rather than philosophically speaking) it is high time to reclaim the phrase “economic freedom” from Milton Freedman´s rendition of the term. Freedman would define economic freedom as the ability to make economic choices without government interference.

    Lets redefine the phrase to mean “freedom from the economic constraints on our lives.” Under this definition, the only people who are truly economicly free are those who have the autonomy, as you say, to take a year off from work. One of the goals of society should be to increase the economic freedom of the population by, for example, removing the work requirement in order to receive health care.

    • zenb says:

      “Freedom from the economic constraints on our lives” is a void concept unless your demand for goods and services is exactly zero (i.e. at which point you are dead), so I do not believe this makes a good substitute for Friedman’s definition.

  3. kyle thompson says:

    i think your analogy works beautifully… unless, of course, rich people are buying their refrigerators at charity auctions at massively inflated prices.

    http://www.gorenjegroup.com/en/news?aid=927

    100 limited editions of the Gorenje fridge you mentioned were produced, with even more crystals! At auction, one “was purchased for a record-breaking 110 thousand American dollars by the Russian magnate Rustam Tariko, who now owns – apart from other exquisite objects – what is probably the most expensive refrigerator in the world.”

    Which suggests a solution to this quandary – let’s force the superrich to purchase all their consumption goods at charity auctions!

  4. Taunter says:

    I’m not sure I buy the Brewster’s Millions argument.

    There are plenty of ways to spend 260 times as much on a refrigerator – put it in an expensively-designed spot in the kitchen, cover it with custom cladding, buy three of them per kitchen because you want one set at 2C, one at 4C, and one at 6C, pay the interior decorator who selected the products and designed the setting, etc.

    And that’s just an example of a mass-produced consumer product. Your CEO’s Gulfstream or yacht may cost dramatically more than 260x your middle class employee’s occasional coach plane tickets or FJ.

    I think the better question is whether it matters at all for society that a few people have enormous resources. Isn’t the bigger issue what has happened to the purchasing power of the middle class employee?

    http://tauntermedia.com/2009/07/26/inequality/

  5. Mike,

    An excellent book on the great rise in atomization and insecurity from a generation of Republican dominance is, “The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream”, revised and update 2008 edition, by Yale political scientist Jacob Hacker.

  6. Aaron Davies says:

    “refrigerator” does not have a “d” in it

  7. According to the book Pay without Performance, by Lucian Bebchuck and Jesse Fried, the average large company CEO now makes 500 times the salary of the average worker. Now THAT’s a fridge we can all aspire to own one day!

    To be honest, this whole conversation about “consumption inequality” as the gauge to measure the stratification of our society (or lack of class division within our society, depending on your viewpoint) – the idea that because we all get three square meals a day and a fridge to store the food in means we’re all more equal than our income would imply – strikes me as a huge crock of BS used to justify the extreme rise in income disparity that we’ve seen since Reagan between the top 1 percent and the rest of us.

  8. Larisa says:

    I think I prefer “autonomy” to “economic freedom” because the term more clearly evokes concepts like dignity and lack of oppression. I understand the desire to focus attention on the economic aspects of freedom, but I’m afraid the phrase will collapse back into the narrow definition of ‘economic concerns” that are currently dominant..

    I was just thinking about this because I have had 3 different conversations with different friends who are hostages to their jobs because of health care – one faces constant sexual harassment but cannot leave or fight back and risk repercussions because she needs the health plan (having gotten sick while on the job she now has a pre-existing condition for any other health plan).

  9. Crayfish says:

    I am not sure what ths issue here is. There are zillions of reasons why people consume (cpnsciously, obsessively, well-informed or the opposite, on things widely considered useful or redundanmt, in accordance with acquired or innate social norms etc) or why they save, or even burn money. Is the issue a matter of morality (the morality of income/wage differences) or welfare economics? The former is a problematic topic and the latter pretty well researched, though not necessarily realistically in the behavioral sense.

    However, I like research in the matter to what extent proportional propensities to save or consume are individually stable (probably not) and if not, how they behave. E.g. what will the 50 year old senior civil servant in the nation’s ministry of finance, who hitherto led a highly disciplined life with moderate, but satisfying consumption, steady building of a nest egg in addition to the civil service pension and prudent investment of that nest egg, do when his 75 year old alcoholic, widowed father, living in a neighbouring country wins 50 million in the lottery and dies instantly after that, leaving everything to his only natural heir. Will the civil servant change his behaviour structurally or (after a an extra glass of wine to mourn and another one to celebrate), stay as moderate and frugal as ever, despite his increased autonomy and his professional knowledge that his large gain, if saved, may raise the nation;s savings ratio to unhealthy levels, resulting (in an open economy) in upward pressure on the local currency and widespread bankruptcies among the counytry’s export industries, etc, etc on . What would make him change or stay the same? And what would the 21 year old ungifted and financially struggling college student, son of an equally struggling Army major, do if his grandfather overcame the same sequence of events (i e won the lottery and died, leaving no other heirs)..

  10. Chris says:

    I think another question worth looking at is how *little* refrigerator can you buy. If the rich are the ones most free of economic constraints, shouldn’t their behavior most directly reflect their preferences?

    Maybe the poor want to save more, but they just don’t have any money to divert from their other needs.

    Suppose the CEO is actually fine with one Eye-Catcher at $17k. Since his choices are less constrained, we’ll assume his fridge budget reflects the “natural” fraction of income people want to spend on fridges. Dividing that through by inequality, his worker now has a fridge budget of $17k/260 = $65. Something’s gotta give, and it seems reasonably likely to be the money the worker would have preferred to put toward savings, except he doesn’t want his food to spoil. (Food is another area where trying to get by on 1/260th what the CEO freely chooses to spend seems unlikely to work, but having no working fridge sure isn’t going to help.)

    The same applies to buying 1/260th of a Porsche, and even more strongly to filling it up with 1/260th of the gas used by the CEO’s Porsche. Etc.

    If you assume the CEO’s relative spending reflects what he wants to spend his money on, and then scale it down, then the factory worker *can’t* spend his money the way he wants to because he would fail to meet several necessities of life.

  11. Doug says:

    My intuition is that the highest priced refrigerators will not be advertised anywhere on the internet, at least not with prices. (If you gotta ask, you can’t afford it…)

    Here is one advertised on sale for $16,000, with an alleged regular price of $38,000. Plus built-in and custom walk-in fridges could probably run you even more.

    http://www.kitchengadgetry.com/kitchen/gadgets/victory-reachin-blast-chiller-capacity-100-lbs-vbc100-p-4975.html?sc=gbase

  12. Mike says:

    Chris,

    That’s a fantastic point that didn’t even occur to me. But yes, it works in both directions.

    Doug,

    Good calls. I had a strong debate writing this as to whether or not commercial refrigeration products should be included, and I didn’t include them. I assume if you are buying refrigeration of the kind used by the meat-processing industry (there’s a temperature setting on the second fridge called “sterilizing”!!!), then you could spend a pretty large penny. But that doesn’t go in a kitchen.

    If you feel you’ve hit the high end to the point where CEO’s are having their income/consumption of fridges met, remember that CEOs are underpaid compared to their friends on Wall Street.

  13. Tracy W says:

    Why refrigerators? Why not analyse the budget more generally, as tasty, non-spoiled, nicely-cooled food and drinks? So hire a chef and a butler (to fetch your nice cold lemonade) and you can easily spend more than 260 times as much as the worker.

  14. q says:

    the $100k refrigerators are VERY energy efficient, so you get your money back over time.

  15. Pingback: Stagnant Wages and the Financial Bubble « Rortybomb

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