In economics, does the concept of a "
representative firm" in competitive market equilibrium make sense? It's easy to draw up on the chalkboard, but in a world of identical firms and full information, thinking of all the price-taking firms as identical provides the class wiseacre with the opportunity to ask questions such as "in the case of a permanent adverse demand shock, which firm quits first?" Thus, to the extent people teach the dynamics of competitive markets in any extended way, the idea of an "equilibrium firm," meaning one that under current conditions of supply and demand is indifferent between participating and not participating. That leads to another set of opportunities for wiseacres,
e.g. "why do the inframarginal firms have lower costs than the equilibrium firm, and what prevents the equilibrium firm from being more like an inframarginal firm?" Good times.
There's an even more neglected actor in economics, namely the equilibrium consumer. If we speak of
an equilibrium of supply and demand, doesn't that suggest there is an equilibrium consumer, one who is, at the margin, indifferent between buying a little more of that good or not buying it? We get so soon old and so late smart,
the implications of being the equilibrium consumer dawned on me only after I took my pension. "[Consider] a world that feels very much out of equilibrium, or one in which it appears that the equilibrium, thanks to returns to human capital and to smart machinery, feels more like Marx or Dickens than like the Treaty of Detroit." And yes, academic economics has considered the way in which making decisions at the margin to do without present themselves. I recall a line from one of my price theory texts in the Chicago or U.C.L.A. (motto: On! Wisconsin) tradition that goes something like "My wife says we need something and I respond 'Of course we need it. What do we want to do without?'" Yeah, that's likely to get you hauled before Student Affairs for some sæcular sin. Or, less controversially, how many readers, particularly those of the Baby Boom era, recall asking for something only to hear Mom or Dad say "we can't afford that." It's easier to instill the notion that stuff is expensive in youngsters than to get into a discourse about optimizing along margins and thinking through what, exactly, the kiddos would be willing to give up to have that Next Big Thing (which in the American High, involved more real dollars for fewer features than most of what's at Target or Best Buy these days).
All of that by way of a long prologue to a recent discussion, I think originating with Michael Green's "
My Life Is a Lie," characterizing the national government's "poverty line" as "a broken benchmark" that "broke America."
This week, while trying to understand why the American middle class feels poorer each year despite healthy GDP growth and low unemployment, I came across a sentence buried in a research paper:
“The U.S. poverty line is calculated as three times the cost of a minimum food diet in 1963, adjusted for inflation.”
I read it again. Three times the minimum food budget.
That calculation seemed logical in 1963, when Henry Aaron was a rising star with the Milwaukee Braves.
The formula was developed by Mollie Orshansky, an economist at the Social Security Administration. In 1963, she observed that families spent roughly one-third of their income on groceries. Since pricing data was hard to come by for many items, e.g. housing, if you could calculate a minimum adequate food budget at the grocery store, you could multiply by three and establish a poverty line.
Orshansky was careful about what she was measuring. In her January 1965 article, she presented the poverty thresholds as a measure of income inadequacy, not income adequacy—”if it is not possible to state unequivocally ‘how much is enough,’ it should be possible to assert with confidence how much, on average, is too little.”
She was drawing a floor. A line below which families were clearly in crisis.
For 1963, that floor made sense. Housing was relatively cheap. A family could rent a decent apartment or buy a home on a single income, as we’ve discussed. Healthcare was provided by employers and cost relatively little (Blue Cross coverage averaged $10/month). Childcare didn’t really exist as a market—mothers stayed home, family helped, or neighbors (who likely had someone home) watched each other’s kids. Cars were affordable, if prone to breakdowns. With few luxury frills, the neighborhood kids in vo-tech could fix most problems when they did. College tuition could be covered with a summer job. Retirement meant a pension income, not a pile of 401(k) assets you had to fund yourself.
There's all kinds of Cold Spring Shops material in that excerpt:
restrictive zoning,
increased labor force participation by
married women,
Medicare and Medicaid, student loans,
frugal Depression babies, including those parents of Baby Boomers saying "we can't afford it."