Many times on Twitter I have revealed that I am a huge fan of Mr. Money Mustache, profiled here and a million other places. For the unfamiliar, MMM is part of a movement ("early retirement extreme," or ERE) that basically says: most people in developed countries are rich by any reasonable standard; we can live a materially abundant, happy life on a tiny portion of what we are actually spending; as a result, it's possible to retire after only a few years of full-time work (depending on your wage, of course). Keynes was right, or at least he should have been: we can do the 15-hour work week but choose not to. A lot of people on the internet hate this movement because it runs counter to some popular political and economic talking points. My assessment of the debate is that MMM is winning handily, but that's not what this post is about.
I was reminded of this recently when Josh Brown tweeted about it ("Not sure how it's a badge of honor to substitute shampoo with baking soda so you can retire at 30. What are we trying to win here?"). I think Brown is missing the point. One need not make such substitutions to live a life that approximates what MMM has pulled off. Most of us are spending far more than necessary on cars, housing, restaurants, cable TV, the latest gadgets, clothes, and so on. We're riding the hedonic treadmill; MMM gets a lot of flack for suggesting that we might be just as happy--and far wealthier--if we step off of it. Learning to distinguish between wants and needs can be extremely valuable, even if you are happy with working until 60 or 70 or 80. But more generally, the MMM people aren't trying to "win" anything. Apparently Brown values the time he spends at work more than he would value more leisure, so clearly ERE isn't relevant for him. That's fine. MMM is just pointing out that some people have a different preference, and the growth of developed economies over the last century or so has allowed those people to get the leisure time they really want.
Price and quality dispersion
Following the ERE movement has made me think a lot about the relationship between price dispersion and quality dispersion. Here's Steve Jobs:
This is a concept I think about a lot. I think Jobs is right; but the prices of various goods might suggest otherwise. Call it the Camry Concept. You can buy a car for $200,000, but in automobile functionality terms there is no way it is 10 times as good as a $20,000 Toyota. In my utility function, there is no car worth $200,000; once a car gets me from A to B safely, comfortably, and reasonably quickly, additional improvements to the machine won't be worth a lot of money to me, even though I would find them enjoyable. Watches are even more striking. You can buy a watch for $500,000. It will basically do the same things that a $50 watch does. The extra $499,950 is the price of prestige or some other benefit that is largely orthogonal to the ostensible function of the watch.
I don't judge preferences--all of this price dispersion is fine. I get utility from lots of things that others would find pointless. But one of the things ERE people do is focus relentlessly on functionality. This is not a lifestyle for the type of person who gets a lot of utility from high price/quality ratios. The concept can be generalized some. Does a $75 cable TV package provide fives times better entertainment than getting subscriptions to Netflix and Hulu Plus? Maybe, if you watch sports. Otherwise, probably not. The ERE people ditch the cable.
The "retirement crisis"
The ERE people have basically shown that a large portion of Americans should have no problem being ready for retirement. We can all think of obvious exceptions--things happen. But MMM has shown that a 30-year working life should be plenty of time to accumulate a lot of savings, even on below-median incomes. ERE is the solution to the retirement crisis, the student loan crisis, and probably a bunch of other crises--at least at the individual level. It's the Garett Jones approach to inequality:
This approach might not be of much help to policymakers, but it's a pretty good solution at the individual level. It might prevent some of this sort of thing.
What if everybody did it?
A popular rebuttal to the ERE arguments is something like this: That's fine for you, but if everyone did it, the economy would collapse since nobody is buying anything. One of the founders of the movement (he goes by Jacob) has a note in response:
I don't have a problem with the ERE people responding to the consumption question in this way. There is no economic law saying that two thirds of output must be spent on consumption (though some of the secular stagnationists seem to agree with the ERE critics...). But they're ignoring other important channels. ERE isn't just about less consumption; it's about less labor. Labor is a production input! Less labor means capital is less productive in the short run; in the long run, this means less capital as well.
When we do economic analysis of big economic changes, we have to think carefully about feedback mechanisms. We can sometimes leave everything constant when we ask what happens if a few people change their lifestyle preferences. We don't have that luxury when we want everyone to change. A useful way to think this question through is to use a model in which the relevant prices and quantities are allowed to adjust.
Suppose I take a little economic model off the shelf (for those who care, this is from page 40 of the McCandless RBC book, see description here; set depreciation=0 and set theta=0.33). This isn't the right model for the job, but I think it will illustrate the point. We produce stuff with capital (machines, buildings, whatever) and labor. We get utility (happiness) from consumption and leisure time. Think of two ways we can model the shift to ERE: people become more patient, or people increase their preference for leisure. Each concept maps directly to a parameter of the model (beta and B, respectively. Higher beta means more patient; higher B means more leisure preference).
Let's look at model steady state (long-run) outcomes for various levels of impatience and leisure preference. In the figure below, the X axis shows time spent working. The Y axis measures GDP. I plot lines for several different levels of patience, with higher beta meaning more patient (click for a larger image).
First, let's suppose the shift to ERE is all about an increase in patience. Then things look pretty good: increasing beta means more output for a given amount of labor. But ERE isn't about patience. It is explicitly about leisure time. We want to move along a given curve in the graph, not shift between curves.
Focus first on the black line. Reducing labor time from about one quarter to one tenth reduces GDP by about 60 percent (note: in this setup, all GDP is consumption in the steady state). We can even be generous: suppose we reduce labor to 10 percent while also raising beta to 0.99. GDP still falls by about 14 percent. That might be fine: in this model, all outcomes are optimal given households' preferences, so a change in output caused by a change in leisure taste doesn't bother anyone. But reason beyond the model a bit. Here's Jacob:
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I was reminded of this recently when Josh Brown tweeted about it ("Not sure how it's a badge of honor to substitute shampoo with baking soda so you can retire at 30. What are we trying to win here?"). I think Brown is missing the point. One need not make such substitutions to live a life that approximates what MMM has pulled off. Most of us are spending far more than necessary on cars, housing, restaurants, cable TV, the latest gadgets, clothes, and so on. We're riding the hedonic treadmill; MMM gets a lot of flack for suggesting that we might be just as happy--and far wealthier--if we step off of it. Learning to distinguish between wants and needs can be extremely valuable, even if you are happy with working until 60 or 70 or 80. But more generally, the MMM people aren't trying to "win" anything. Apparently Brown values the time he spends at work more than he would value more leisure, so clearly ERE isn't relevant for him. That's fine. MMM is just pointing out that some people have a different preference, and the growth of developed economies over the last century or so has allowed those people to get the leisure time they really want.
Price and quality dispersion
Following the ERE movement has made me think a lot about the relationship between price dispersion and quality dispersion. Here's Steve Jobs:
Most things in life, the dynamic range between average and the best is at most 2:1. If you go to New York City and you get an average taxi cab driver versus the best taxi cab driver, you’ll probably get to your destination with the best taxi cab maybe 30 percent faster. And an automobile; what’s the difference between an average and the best? Maybe 20 percent? The best CD player and an average CD player? I don't know, 20 percent? So 2:1 is a big, big dynamic range in most of life.*
This is a concept I think about a lot. I think Jobs is right; but the prices of various goods might suggest otherwise. Call it the Camry Concept. You can buy a car for $200,000, but in automobile functionality terms there is no way it is 10 times as good as a $20,000 Toyota. In my utility function, there is no car worth $200,000; once a car gets me from A to B safely, comfortably, and reasonably quickly, additional improvements to the machine won't be worth a lot of money to me, even though I would find them enjoyable. Watches are even more striking. You can buy a watch for $500,000. It will basically do the same things that a $50 watch does. The extra $499,950 is the price of prestige or some other benefit that is largely orthogonal to the ostensible function of the watch.
I don't judge preferences--all of this price dispersion is fine. I get utility from lots of things that others would find pointless. But one of the things ERE people do is focus relentlessly on functionality. This is not a lifestyle for the type of person who gets a lot of utility from high price/quality ratios. The concept can be generalized some. Does a $75 cable TV package provide fives times better entertainment than getting subscriptions to Netflix and Hulu Plus? Maybe, if you watch sports. Otherwise, probably not. The ERE people ditch the cable.
The "retirement crisis"
The ERE people have basically shown that a large portion of Americans should have no problem being ready for retirement. We can all think of obvious exceptions--things happen. But MMM has shown that a 30-year working life should be plenty of time to accumulate a lot of savings, even on below-median incomes. ERE is the solution to the retirement crisis, the student loan crisis, and probably a bunch of other crises--at least at the individual level. It's the Garett Jones approach to inequality:
So let's start training ourselves and our children to delay gratification, to forego that great sound system on the new car, to eat at home a little more often.
This approach might not be of much help to policymakers, but it's a pretty good solution at the individual level. It might prevent some of this sort of thing.
What if everybody did it?
A popular rebuttal to the ERE arguments is something like this: That's fine for you, but if everyone did it, the economy would collapse since nobody is buying anything. One of the founders of the movement (he goes by Jacob) has a note in response:
It is important to realize that a consumer economy in which people go to work in order to buy stuff is not the only form of economy. It is just the current one.
Money can also be spent on productive assets, art, preserving nature, space exploration, eliminating hunger, maybe even eliminating war. It’s just that we've collectively chosen to spend it on cell phone upgrades, furniture replacements, fashionable vehicles, shoe collections, throwaway electronics, and so on.
I don't have a problem with the ERE people responding to the consumption question in this way. There is no economic law saying that two thirds of output must be spent on consumption (though some of the secular stagnationists seem to agree with the ERE critics...). But they're ignoring other important channels. ERE isn't just about less consumption; it's about less labor. Labor is a production input! Less labor means capital is less productive in the short run; in the long run, this means less capital as well.
When we do economic analysis of big economic changes, we have to think carefully about feedback mechanisms. We can sometimes leave everything constant when we ask what happens if a few people change their lifestyle preferences. We don't have that luxury when we want everyone to change. A useful way to think this question through is to use a model in which the relevant prices and quantities are allowed to adjust.
Suppose I take a little economic model off the shelf (for those who care, this is from page 40 of the McCandless RBC book, see description here; set depreciation=0 and set theta=0.33). This isn't the right model for the job, but I think it will illustrate the point. We produce stuff with capital (machines, buildings, whatever) and labor. We get utility (happiness) from consumption and leisure time. Think of two ways we can model the shift to ERE: people become more patient, or people increase their preference for leisure. Each concept maps directly to a parameter of the model (beta and B, respectively. Higher beta means more patient; higher B means more leisure preference).
Let's look at model steady state (long-run) outcomes for various levels of impatience and leisure preference. In the figure below, the X axis shows time spent working. The Y axis measures GDP. I plot lines for several different levels of patience, with higher beta meaning more patient (click for a larger image).
 |
Focus first on the black line. Reducing labor time from about one quarter to one tenth reduces GDP by about 60 percent (note: in this setup, all GDP is consumption in the steady state). We can even be generous: suppose we reduce labor to 10 percent while also raising beta to 0.99. GDP still falls by about 14 percent. That might be fine: in this model, all outcomes are optimal given households' preferences, so a change in output caused by a change in leisure taste doesn't bother anyone. But reason beyond the model a bit. Here's Jacob:
Money can also be spent on productive assets, art, preserving nature, space exploration, eliminating hunger, maybe even eliminating war.
The space exploration and hunger elimination, at least, will require output. The chart shows a pretty reliable tradeoff between labor time and output--after allowing the economy to adjust thoroughly. We can somewhat mitigate the output loss through increased patience. But to keep output high, we need a really big increase in patience and/or a smaller reduction in labor supply. This is just a simple model, and the specific numbers aren't that important. What's important is that the ERE world is a world where a key input to production--labor--is supplied in lower quantities. The ERE strategy is to own productive assets--but those assets are less productive without workers, and in the long run that means fewer productive assets.
ERE works great in partial equilibrium. Mr. Money Mustache is very enthusiastic about how technology and general wealth have made his lifestyle possible. But if everyone did it, who would build the gadgets? Who would build and operate the machines that build the gadgets? Who would work for the companies in which MMM owns stock? The key point is this: the ERE world isn't just about people saving more. It's about people working less, and that's what kills it.
ERE works great in partial equilibrium. Mr. Money Mustache is very enthusiastic about how technology and general wealth have made his lifestyle possible. But if everyone did it, who would build the gadgets? Who would build and operate the machines that build the gadgets? Who would work for the companies in which MMM owns stock? The key point is this: the ERE world isn't just about people saving more. It's about people working less, and that's what kills it.
ERE works if we're willing to accept lower aggregate output than the counterfactual. I don't get the impression that the ERE people accept that. The robots can make it possible. Until then, it's not in the feasible set.
But that doesn't matter! Because not everyone is trying to do it. You and I can still do it, or at least get as close to it as we want.
UPDATE: Here is a model description
But that doesn't matter! Because not everyone is trying to do it. You and I can still do it, or at least get as close to it as we want.
UPDATE: Here is a model description