Smoothing consumption

Evolving pf recently had a post on smoothing consumption over time, and how she thinks that advice from Chicago-school economists (not to mention Suze Orman) to take out loans to buy stuff when you’re young and poor because you’ll be making a ton of money later is silly advice.  This is pretty standard Econ 101 or 102 stuff– why suffer now when you can borrow against your future?

(Note, this argument is about CONSUMPTION, not about INVESTMENT.  It is still generally wise to take out loans for things that will pay off later, like schooling, or reasonable transportation etc.  When you invest, you’re spending money now to make the money pie bigger.)

In the comments she asks why economists would think such a silly thing to begin with.  If you’re happier with constant consumption, why not make the consumption constant at a low rate so you never go into debt?

Here’s my reply:

Because of diminishing marginal utility. (See graph: )

You don’t just want any constant/fixed consumption– you want a constant utility that is going to be as high as possible given your total lifetime earnings. That’s going to give you the biggest bang for your utility buck.

That’s because you’re happier with two years consuming say 30K, than you would be consuming 0K one year and 60K the next year. (You’d also be dead if you did that.) The amount that 60K makes you happier than 30K is smaller than the amount 0K makes you sadder than 30K. (You can see that on the diminishing marginal utility curve– going down is steeper than going up. Each additional dollar provides less additional happiness, each dollar lost provides more additional grief.) Depending on interest rates etc., there’s going to be some optimal consumption level given your permanent income and the rate of return of your savings/cost of debt. And that’s going to be flat. (You can use a 2 period-model with interest rates to model this stuff. If you allow bequests you end up with an OLG model!)

So that’s the standard reasoning behind why we want to smooth consumption over our lifetimes– why if we had perfect foresight about our earning power it might make sense to take the average (adjusting for interest rates etc.) over time.

However, I have always thought that the idea of consumption smoothing over time is silly. 1. We don’t have perfect information, and we don’t know what negative (or positive) shocks we’re going to get. We don’t have perfect insurance, so we have to self-insure to guard against negative shocks that could cause low consumption. 2. People like having increasing consumption over time, not flat consumption. It is much more fun to increase your quality of life as you get older rather than having to cut it back. (Some of this may be because of how we view time horizons. It’s neat how psychologists and behavioral economists are really getting into these black boxes.) We get used to higher levels of spending and they don’t make us as much happier, so it’s good to stay at lower levels while they’re still not so painful. Also, as she notes, having a big savings cushion provides freedom to make choices that might maximize happiness even if they don’t maximize income.

Additionally, there’s another set of theories dealing with the lifecycle hypothesis that suggests that people consume in a hump shape– ramping up through middle age and then down again once the kids are gone, and some beliefs that people prefer that.   And that’s not even getting into how bad many of us are at forecasting our future earnings– college students tend to overestimate by wide margins what their starting salaries are going to be.

How about you, what are your thoughts on smoothing your consumption over time?  Do you think it’s worth going into debt to buy luxuries when you’re young because you’re going to pay them off when you’re older?  Did you when you were young?


Gimme gimme link love

Another frantic week.  Post tenure is just more work than pre tenure.  *sigh*  (#2 doesn’t think so but has not been post-tenure as long as #1 has.)

This graphic from Rachel Maddow is just astonishing.  Even ignoring the political score-keeping, look at the demands they were asking for.  They must hate people!

Mother Jones with a list of 8 inventions that women made but are generally credited with men.  I remember when I read the Double Helix how, even from the unreliable narrator of Watson, I could tell that they had totally ripped Rosalind Franklin off, without shame, because they didn’t thinks she deserved credit, and not only that, they sexually harassed her at every turn.  It’s there in the pages that Watson wrote himself.  What assholes.

Ada Lovelace through the centuries.

Reassigned time explains why the government roll-out of the ACA is similar to university software roll-outs.

Fact checking Fox News on obamacare.

Niels Lohman explains why he and the USA are never, ever, ever getting back together.

Medium discusses the insidious power of harassment.

A summary of standing with DNLee.  Also this.  And this.

Let me fix that for you from the journal of are you f*ing kidding me.  And another.

Why home ec should be mandatory from mother jones.

All about work explains why it’s good to be bad at something.  Also I’m bummed because we can’t trust Malcolm Gladwell– that 10K hour thing is based on not much.  :(

Need a t-shirt?

If you think you don’t need to know about the Dunning-Kruger effect, then you’re exactly the kind of person who does.

Because you need more anxiety cat memes.

This is so interesting, because the author thinks it’s a failure, yet I think it’s so completely fascinating.  I want to read a book of this!

Soliciting more Ask the grumpies questions!

Yes folks, it’s that time again.  We even answered the hard economicsy ones and we’re out of Ask the Grumpies questions.

We do have a few that Debbie M. offered up the other week when she was feeling sorry for us for only having tough questions left, but we’re counting that as part of this round’s solicitation.

So, what questions do you have for us?  What can we bring clarity or further confusion to?  What can the grumpy nation ponder and discuss on your behalf?  Ask in the comments below or email us at grumpyrumblings at gmail dot com.

Sometimes people listen even if they pretend not to

Or pretend to disagree.

Or pretend to be upset that you had the temerity of bringing forward disagreement.

Sometimes they say one thing and you feel like you were punished for complaining, but their actions are affected by your complaint.

Sometimes you get the opposite, where the person is like yeah yeah, totally… and then nothing happens.

I’d rather have the no no, how dare you complain, followed by positive action on the problem.

It’s taught me that I should complain anyway.

Why are you in my major?

#1:  Dear students, YOUR ANSWER MAKES NO SENSE! Love and late drops, Dr. #1.
If you don’ t know the answer, you can at least follow the part of the instructions that says “Use complete sentences”.
#2:  reading is hard
#1:  I guess so

godDAMN people.
word to all you people in lecture who were like “yeah yea we got this”: you don’t got it.
maybe y’all wanna get a little less sleepy in lecture from now on, eh?

…and if I worried that I didn’t change the exam enough for the course repeaters? They’re doing JUST as badly as before. No worries.

#2:  I remember in my one [high school] class the teacher gave the SAME exam complete with same multiple choice questions and same question order etc.
I got 100%…

#1:  yeah, you’d be surprised how many people STILL tank it

#2:  the second time and the THIRD time…
#1:  it’s like they don’t have basic skills to be in college!  </sarcastic voice>
#2:  and yet, the average was still like a C or a D
oh, and it was OPEN NOTES
I just don’t get some people.
why even bother with exams?

#1:  why bother going to college?

if you’re going to get EVERY opportunity to ace the exam and still don’t?

I can understand social/parental pressure I guess, but WHY ARE YOU IN MY MAJOR???
#2:  my students this year who need to come to office hours aren’t.  They may not pass.
#2:  they should, but they’re not putting the time in

#1:  should, but shan’t.  It’s sad when someone takes both my classes at once and can’t pass either

(though again, how did you get to be a senior in this major???)
Also, accidentally, I graded these exams in the school colors!

Emergency office supplies

Keeping emergency supplies at work can help save time and money because you don’t need to go out and buy something more expensive (see: a meal out) and unplanned right when you need time most.  It can also improve your productivity by decreasing discomfort.
#1 and #2 discuss further.
#1: It rained really hard and I got soaked.  The sandals will dry eventually; meanwhile, I’m barefoot in my office
#2:  I have emergency back-up shoes here
#1:  I wish I had socks, but oh well.  I’ll just sit on my feet
#2: :  hm, I seem to have taken my emergency backup cardigan home to get washed
#1:  I have an emergency backup umbrella in my office, which enabled me to give my regular one to a colleague who was heading to class unprotected.  I have a blazer that lives on my office chair in case of chills. I also have tampons, floss, mirror, ibuprofen, etc.

#2:  let’s not forget emergency chocolate!
#1:  almost out of that!  Still good on emergency nuts though
#2:  mmmmmnuts
What contingency supplies do you have in your office?

link love

I’ve sent you this site before but I still like it: Especially the little story about dad on an airplane

link love candidate: the insidiousness of pink

oh man, also,

though the end of that post… it is not my job to determine why someone isn’t turning in his homework or going to exams if he doesn’t want to ask for help.  I’m not a clinical psychologist or therapist and could do real harm by poking into things I’m not qualified to poke into.   Definitely point people to resources and make allowances given emergency situations, but at some point I’m not qualified to probe.
I generated a plot using the plot-generation device: