Sunday, December 04, 2005

Comparative advantage and Americans' wealth

This AP article "Americans Let Contractors Do Decorating" is a beautiful example of comparative advantage:
PORTLAND, Maine - The last thing John Gendron wants to do during the holidays is climb high on his steep-pitched roof to hang a wreath from his chimney. These days, he doesn't have to. Instead, he hires a contractor to put one wreath on his chimney and two others high on the house, and to hang Christmas lights on his home and in the crabapple trees in his front yard.

Tens of thousands of Americans this year will do the same.

Short on time, leery of ladders and lacking expertise for sometimes-elaborate lighting displays, homeowners are opening their wallets and hiring others do the work....

"These people are professionals at what they do, much like we're professionals at what we do," said Gendron, who owns a commercial real estate firm. "We're not able to do what they do as well as they can do it." ...

Customers include working couples who have little spare time and older folks who don't want to climb ladders, said Chuck Cotton of Lucas Tree. Others don't have the skills or the equipment needed to put up intricate displays.

"It's more a convenience than anything," he said. "They don't have the time or the ability to do some of the things that we can do." ...

Hiring people to hang lights was once considered something only the wealthy could afford.

But with the cost of lights going down and companies able to install them in an efficient manner, the jobs are no longer reserved just for the rich, said Virginia Postrel, author of "The Substance of Style," a book that examines the link between aesthetic pleasures and American commerce and culture.

Many people who hire contractors to install Christmas decorations could be described as upper-middle class who simply want nice-looking holiday displays, she said.

"Their time is worth more than their money," Postrel said. "And if you don't have a giant mansion, it's not that expensive of a job." ...

"They don't mow their lawn, they don't do their landscaping, they don't paint their houses," he said of the typical customers. "And they don't put up Christmas lights."

Besides giving homeowners a way to brighten up their homes, the Christmas decoration industry gives local seasonal businesses such as landscapers and tree trimmers a way to make a few extra bucks during a slow time of the year.

"Once the growing season ends, business drops off," said Cotton, of Lucas Tree. "This picks us up during the holiday season."

As the companies become more efficient in installing lights and decorations, prices will continue to come down so that even more people can afford the luxury, Postrel said....
What a wonderful illustration of a concept that affects every person's life. Comparative advantage is not just about hiring someone who can do something better than you can. It's about hiring someone to free up your time so you can perform another task of greater value, even if you could do something better than someone else. I'll refer again to the Bob Villa example that my undergradate microeconomics professor Dr. Ikeda still uses: Bob Villa can probably retile his roof better than anyone he hires, but if he does it himself, he won't be able to write another book and make another million dollars.

Ms. Postrel no doubt had a good economics teacher once upon a time. What she said fits perfectly with what I wrote yesterday on capitalism, the wealth it propagates, and how even the poor eventually have things that were once considered just for "the rich." I additionally emphasized the importance of new entrants into that particular market:
But it is never government that promotes real technological advancement, no matter how much it pours into subsidies. It is capitalism, the wealth it created, and the further increases in wealth that a capitalist economy promoted. There is much technology that, when new, was so expensive that only "the rich" could afford it at first. Once upon a time, any indoor plumbing was a luxury, let alone the ability to choose between hot and cold water. The high prices worked as they should have, encouraging others to supply such goods. As new market entrants sought to compete, the successful ones improved the technology of production by making it cheaper and more efficient, driving down the prices for the consumer.
Isn't it a wonderful country that not just the wealthy, but even some of the middle class, are wealthy enough, and have jobs of such economic value, that they can hire people to decorate their homes? Similarly, I have come to give thanks that modern America is so wealthy and produces so much food, not always of the best nutrition but certainly high in caloric energy, that we actually worry now about some of our poor being overweight -- and contrary to what the Larouchers claim, the U.S. is the world's largest exporter of food, and hardly a net importer.

But if you listen to people like John Frank, "the wealthy" should be taxed heavily so they cannot "overconsume." And just who is "wealthy"? With the Federal Reserve engineering inflation year after year, set-in-stone definitions of "wealthy" like the Alternative Minimum Tax fall increasingly upon the middle class. Moreover, people like Frank don't want you to have the freedom to choose. They want higher taxes on "the rich" supposedly for "public investment" so you don't have to choose what goods and services to produce for others, and what goods and services to buy. When will we learn from the last several decades that the myriad forms of "public investment," i.e. government spending on social programs, is inherently wasteful?

The reality of taxes is that they discourage everyone from producing more, even if they fall primarily on the rich: the rich because they're taxed, and everyone else because they can expect the state to redistribute wealth. Oh yes, everyone will be more "equal," but also more poor than before. In John Frank and Paul Krugman's conception of socialist Utopia (a somewhat redundant coupling there), there would be no "rich" to hire people, using the article's example, to decorate their houses for Christmas. That necessarily means no one would supply that service, and in turn the light bulbs and plastic components to make the lights. Hiring Christmas decorators would always be something only "the rich" could afford, if they could afford it at all, and assuming people bothered to supply it (since non-"rich" could expect the state to play Robin Hood). Worse, there would be no wealth from "the rich" that, in a free market society, does indeed "trickle down" to everyone else.

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