The economics of stuff

Some simple observations:

1. Economies grow when people buy stuff.

2. Over time, people accumulate more and more stuff.

3. People can only handle so much stuff. Sock drawers get full of socks. Cupboards get full of cups. Bookshelves get full of books.  

4. It's hard to get rid of stuff. Economic models typically assume disposing of unwanted things costs nothing. But life isn't like that. Sorting out stuff that can be tossed from stuff that is worth keeping takes time and effort.

5. People are "loss averse". Throwing things away - clothes that don't fit, vinyl LPs - hurts psychologically. 

6. There's no need to replace perfectly good stuff. True some stuff, like mobile phones, only lasts a year or three. But other stuff, like cast-iron frying pans, lasts for decades.

Taken together, observations 2 through 6 imply that, as people get older, they buy less and less stuff. Combined with observation 1, these observations explain why countries with aging populations experience lower rates of economic growth.

This post could have been called, "Secular Stagnation and Cast-Iron Frying Pans".  Secular stagnation is sometimes thought to be caused by an imbalance between savings and business investment. The economics of stuff explains secular stagnation in terms of household investment, that is, investment in consumer durables.

Buying cast-iron frying pans is a form of investment - one that pays dividends for decades in the form of excellent grilled cheese sandwiches. But I already own three cast-iron frying pans - I'm not planning on buying any more for the foreseeable future.

The economics of stuff suggests secular stagnation is due to deficient population growth, as well as population aging. It doesn't matter how many old people there are, as long as the population is growing, young people will come along who will need to buy stuff. But if there is no net population growth - or if the number of old people exceeds the number of young people - the young no longer need to buy stuff. They can get all the cast-iron frying pans (and furniture and wine glasses and vinyl LPs) they need from old people. Who are happy to get rid of it.

All of what I've written here is basically common sense, but it points to two limitations in the micro-foundations of other explanations of secular stagnation. First, because other explanations fail to take into account the limitations of people's capacity to store stuff, and people's (irrational) aversion to getting rid of stuff, they fail to predict the extent to which people's demand for new stuff falls over time. Second, they treat "consumption" as something that lasts one period and then disappears. That's wrong.

Stuff is messy and hard to deal with. But that's not an excuse for tossing it out of economic analysis.

Comments

[Stephen Gordon]

On the other hand, demand for services should increase.

[Min]

More services for the old folks! :)

[Benoit Essiambre]

The other interesting aspect of stuff is its return relative to other investments. The cast iron pan probably is one of the better returning household investment since it is so durable but in general the real return on stuff after storage, maintenance, insurance and obsolescence costs on storable household supplies is probably quite negative. I wonder how good a return you can get, especially if your investment is bought in discounted bulk and you have low storage costs (you could have an unused corner in your basement).

Say we can find enough stuff with a -3% or 4% annual real return, this means that getting out of a recession could be just a matter of inflation reaching 3 or 4% for people to start turning idle cash into stockpiles of stuff they are going to need later while getting people back to work producing it.

[Benoit Essiambre]

What I am trying to say is that is kinda puts an upper bound on how high inflation needs to be to solve unemployment.

[rjs]

as others have noted, economic growth isnt just 'stuff'...US healthcare expenditures totalled $2.9 trillion in 2013, or $9,255 per person, and accounted for 17.4% of GDP...

[Joseph Savon]

How can anyone be happy w/o a cast-iron frypan? Only way to do steak..or lamb chops or soda or potato farls..
2) thru 6) suggest that maybe "lower rates of economic growth" are not necessarily the end of civilization as we know it, but may actually be accompanied by an increase in that elusive observable "contentment".

[Frances Woolley]

Steve - "demand for services should increase" - yup, businesses selling stuff are being replaced by spas and hair stylists and restaurants. But there's no reason to expect that the demand for services will increase enough to offset the decreased demand for stuff. Indeed, the whole reason we're having this conversation is that, empirically, population aging is associated with lower rates of economic growth - this is the fact that needs explanation, and so I'm offering an explanation of it.

[Frances Woolley]

Benoit: "this means that getting out of a recession could be just a matter of inflation reaching 3 or 4% for people to start turning idle cash into stockpiles of stuff they are going to need"

The point is that people don't have room to stockpile (more) stuff. Inflation could not increase to a point where I would want to stockpile anything other than food and basic necessities because *my house is already full of stuff*.

Joseph ""lower rates of economic growth" are not necessarily the end of civilization as we know it, but may actually be accompanied by an increase in that elusive observable "contentment""

Absolutely right.

[Trevor Adcock]

Economic growth is only lower if you don't consider non-market goods like leisure and environmental quality. So maybe real GDP growth is lower, but total value of all consumption and leisure should continue to grow at the same pace if productivity growth is still the same.

[Squeeky Wheel]

Regarding inflation - It seems to me that for sufficiently high rates of inflation, one would be incentivized to look at all the stuff and say 'is there anything I might want to replace in the next five years?' then buy it now because there will be no savings left in five years. That would not only bring (limited) household investment forward, it would probably generate demand as people are averse to the loss of the option to replace stuff.

Contentment - I've always wondered why economics seemed so focused on growth to the point of considering it a necessity. Most people in developed nations have much more stuff than their parents, but I'm not convinced they are happier.

Also on contentment - this makes me think of a paradox in how Japan is viewed. In econ blogging and media Japan is referred to as an economic failure. But talking to people in Asia they typically view the Japanese as very rich. Most Chinese, and probably most Indians would love to have the Japanese economy. I think the tone in econ on Japan is wrong - Japan is an economic super success, just a stable one.

[Jacques René Giguère]

In olden times (my youth), gonmint thought their duty to absorb excess productivity and lower consumption by buying stuff.
As Keynes said, ancient Egypt owed its fabulous wealth to things with non-decreasing marginal utility :gold mines and pyramids. Middle Ages had cathedrals. My youth had space races...Keynes again: we are so rational we don't build a second railway from London to Manchester. We no longer do because, well because..

[JKH]

Very interesting post

"Secular stagnation is sometimes thought to be caused by an imbalance between savings and business investment. The economics of stuff explains secular stagnation in terms of household investment..."

It should only be secular to the degree that the population as a whole is aging or stuff is lasting longer (both of which may be true) - otherwise, its a steady state model, more or less?

"... as long as the population is growing, young people will come along who will need to buy stuff. But if there is no net population growth - or if the number of old people exceeds the number of young people - the young no longer need to buy stuff..."

I'm not sure that's sufficient for "secular" stagnation - could still be steady state with a constant population?

[Frances Woolley]

JKH -

"stuff is lasting longer" - plastics and synthetic materials have changed the length of time stuff lasts. But I'm not convinced that, on balance, stuff lasts longer than it does.

Yes, "the economics of stuff" suggests there is a new steady state rather than a temporary change

[Eric]

Very interesting post. It's hard to untangle the different factors here. You focus on aging, storage and disposal, but there are also questions of the ratio between stuff and services, how expensive it is to make stuff, how much labor it takes to make stuff, etc. I love cast iron frying pans. And they are a great example, because they are much less expensive than newfangled pans, but they work better and last longer.

[JF]

Govt revenue systems that lay burdens on consumption (sales/VAT types) also affect those who have stuff but may want newer and better stuff. Placing burdens on consumption in an ageing population should put a drag on this age cohorts choices, lower demand otherwise.

It seems to me that countries that have zero population growth and are ageing should look to lower taxation on consumption (not for luxury goods, however). The higher these rates are, the more precautionary planning and actions are taken by people too, increasing basic savings but lowering the contribution to aggregate demand by the age-cohort just before too.

[Andy Harless]

Stephen: "On the other hand, demand for services should increase.

And possibly that is just the problem. Services promise to remain in high demand but are not storable. If you want to make provisions for the future, you need to buy goods, most of which (since you can only accumulate so much stuff for your own use) you will want to sell to someone else. But that means that the equilibrium return on goods as stores of value is very low, possibly negative, because (on the margin) people mostly want them to sell to someone else in the future rather than to use. Hence we have booms (implying low required future returns) in highly storable goods like houses and an excessive fondness for artificially storable goods like money (artificially storable in the sense that the central bank promises to maintain most of its value regardless of what private sector preferences imply about the equilibrium return). Thus secular stagnation.

[Chris J]

Frances,

Great post. Will be interesting to see how how the experiences-vs-stuff thing plays out numerically.

Our big family gift from my mom was a week's pass for the family to an indoor rock-climbing gym.

Concerts are now expensive.

Also consumables: my wife and I got my father in law a mice bottle of scotch.

Comment from my phone... forgive the terseness.

[Jim Sentance]

Very interesting post, but from personal observation I'm wondering if you are underestimating the ability of people to store more stuff, and the whole issue of buying storage units and organizing systems for stuff. Then there's the whole storage space industry to consider, which TV tells me has expanded our horizons considerably (though I haven't gone there yet as I'm good enough with tools to reimagine the capacity of my own space as yet).
I also question to some extent the ability of much stuff to last long enough these days to be a huge issue. Much stuff doesn't seem to be designed to last very long anymore (cast-iron frypans are I'd argue a very untypical type of stuff) and of course nothing is engineered to be repairable these days. I'd agree that stuff in good condition is hard to part with, but broken and worn out stuff is much more disposable.
There's also the issue of quality. I may have finally reached the capacity of my wine cellar to be expanded, but I find I'm still spending as much on wine as before; even though I can't fit an increasing number of bottles in I'm adjusting to buying more pricy wine.

[Frances Woolley]

JF - arguably one of the most pressing public finance problems at the moment is how to persuade old people to pay taxes - because in an economy with lots of old people, if the old people won't pay taxes, who will? Shifting away from consumption taxes will just make the problem worse.

Andy - that makes sense to me. I hinted at some of these issues here a couple of years ago http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/you-cant-escape-demographics-quite-whining-and-deal-with-it.html

Chris J - sounds like a great set of presents!

Jim - yes, there is a huge variation in people's ability to part with stuff. And, yes, the storage industry is basically a response to the "too much stuff" problem. I also agree that more things are built to be disposable, and rapidly disposed of, than was once the case - IKEA furniture, clothes, etc. But look around your house - if you wanted to get something new, where would you put it? What would you throw out to make room for it? Perhaps you don't struggle with this - I do.

[Jim Sentance]

Frances - "But look around your house - if you wanted to get something new, where would you put it? What would you throw out to make room for it? Perhaps you don't struggle with this - I do."

So far its a matter of more efficiently arranging or stacking things, building more shelves and so on. The fact that things break or wear out helps as spaces open up, but I rely a good bit on my carpentry and organizational skills (and perhaps a high tolerance level for clutter). For a while I made some room by cycling things away to departing offspring, but that seems to have backfired at least temporarily - longer term there are prospects there though if they can be convinced to take at least their stuff with them and their rooms can be re-purposed to some extent, and that's probably true for a lot of somewhat older people, at least as long as they don't downsize as the kids leave.

For me a more compelling factor in reducing the amount of stuff I buy seems to be already having everything I could possibly want or need rather than not having the space. As far as durable things like kitchen equipment for example, new acquisitions these days are largely limited to replacing broken things or upgrading quality. Consumptibles like wine need to be replaced, but using them up solves the problem of making space.

[Luís Jorge]

If you have 3 iron-cast frying pans, you could conceivably be happier with 3 iron-cast gold coated and diamond-studded frying pans, if only you had the money to buy them. And with enough money, you could buy a bigger house with a bigger cupboard and not have to go through the pain of throwing the other 3 away.

This is another version of the age-old question of "are human wants satiable?". The existence of rich people with their own (outrageous by middle-class standards) patterns of consumption leads me to conclude that no. People always find a way to buy and store more stuff, and if they don't, they can buy better stuff instead.

[Senator-Elect]

Great post! Brings up so many questions that economists could help the public understand.

1. Why do we have so much stuff? Middle-aged, middle-class Canadians probably have more stuff than they could ever fully enjoy. Yet they are always out buying more.

2. Household goods are incredibly cheap. Most young people can't afford to buy a home, but they can certainly fill their rented apartments with stuff. Why is there such a gap in price between consumer goods and the houses to put them in?

3. Given our planet's limited resources, lower consumption of stuff should be a cause for celebration. Why are we worrying about it? If people decided they need less stuff to be happy and reduced their consumption, causing the economy to tank, would we worry about it? Isn't that increased efficiency and therefore something to celebrate? What if the cause for the decline in consumption were an innovation that allowed for infinitely lived stuff? Wouldn't that be an innovation worth celebrating?

4. Given #3, how could we maintain economic growth or living standards without lots of consumption? How could we shift our economy away from producing and consuming stuff?

[Senator-Elect]

I'm also curious why people's aversion to getting rid of stuff is deemed irrational. There are many possible rational reasons why someone would not wish to have their stuff buried in a landfill. "Reduce, reuse, recycle" being three obvious ones.

[Derivs]

Made me remember this... still good after all these years... George Carlin on "Stuff"

https://www.youtube.com/watch?v=MvgN5gCuLac

[Alex Bollinger]

This is the economic theory version of "It's so hard to buy a gift for my parents; they already have everything they want!"

Interesting, and you're right, there is no reason to assume that luxury services and health care (what older people spend money on) will replace the hole in demand left by their needing fewer cast-iron pans.

That said, all this points to is a need for a better definition of growth, one that's tied to welfare and not to the quantity of economic transactions.

[JF]

FW said in reply: "arguably one of the most pressing public finance problems at the moment is how to persuade old people to pay taxes - because in an economy with lots of old people, if the old people won't pay taxes, who will? Shifting away from consumption taxes will just make the problem worse."

I thought the problem you wanted to focus on was how basic demand will decline in some proportion to the ageing of society. I agree this should be studied and understood more as a matter of economics, including when using economics to inform tax policy. Taxing consumption will undoubtedly affect demand, just wanted top highlight that; I admit the comment was intended to get people to think about other tax types in an ageing society, if the problem is basic demand weakness.

Jurisdictions have to tax something they can touch, so to speak, and residents who won't move, or can't afford to move, might see tax burdens increase for this reason. But what problem are you addressing that you think will be made worse by keep high consumption tax burdens on the elderly and everyone else?

[Shangwen]

"More services". If services outpace goods, does cost disease become a bigger problem in the economy?

[Phil Koop]

Great post, and one I expect all of us of a certain age read ruefully in an introspective light.

I agree with your reply to Stephen re services. If the population is not growing, from whence can growth come? One possibility would be greater work force participation. But empirically that is not happening. Nor should that surprise us in a stable population that is simultaneously aging. Another possibility would be an increase in productivity. There are some services which have become more productive, I know, but when I consider the the actual services toward which my consumption has shifted - vacations, restaurant dinners, operas, concerts etc - they are mostly resistant to productivity improvements. (Am I a bad person because I watch opera live instead of watching the Met in a movie theatre?)

@Shangwen, I suppose that cost disease would become a bigger problem, if it occurred. But in theory, cost disease, as opposed to plain rent, occurs because of wage increases due to productivity increases in non-service sectors. That doesn't seem to be an empirical problem at present.

[Frances Woolley]

Shangwen - "If services outpace goods, does cost disease become a bigger problem in the economy?"

As Phil Koop points out, services are mostly resistant to productive improvements so, yes, the relative cost of services could be expected to increase - and this is what I take cost disease to mean. Although the (lack of) willingness of older folks to pay for services would tend to depress wages in the service sector - much like the price of child care is limited by the fact that child care costs tend to come out of women's pay cheques, and women's pay cheques are not large.

JF "But what problem are you addressing that you think will be made worse by keep high consumption tax burdens on the elderly and everyone else?"

We may be talking at cross purposes here. I don't think any problems will be made worse by keeping high consumption tax burdens.

Luis Jorge writes: "This is another version of the age-old question of "are human wants satiable?". The existence of rich people with their own (outrageous by middle-class standards) patterns of consumption leads me to conclude that no."

While Jim Sentence writes: "For me a more compelling factor in reducing the amount of stuff I buy seems to be already having everything I could possibly want or need"

Whether satiation or non-satiation is a better approximation of reality depends upon the question and the context. What this post is arguing is that, as people acquire more and more stuff, their marginal utility of consumption falls sharply - and this fall in the marginal utility of consumption as people age explains recent macroeconomic trends (though speaking of satiation/non-satiation/goods/services- if any of my family are reading this - a week's pass to a rock climbing gym would be an awesome present, especially if you were able to join me).

Alex: "all this points to is a need for a better definition of growth"

People at working on it.

[Patrick]

OT: "the price of child care is limited by the fact that child care costs tend to come out of women's pay cheques"

Really? Question for another time, perhaps: Do most married people really tend to keep their finances separate? In our house all the money just goes in one pot (one joint chequing account). I thought this was normal. Anything else seems very inefficient (extra fees, coordination, etc).

[Thornton Hall]

Careful. Too much thinking like this and economics might start to resemble the real world.

[Frances Woolley]

Patrick - perhaps a clearer way of putting it would have been "willingness to pay for childcare is constrained by the after-tax earnings of the lowest-earning parent".

[Odie]

Great post. When looking at Japan I was already wondering which sector was supposed to contribute to growth other than having a trade surplus. Aside from cast-iron pans, one other point that should not be overlooked, IMHO: W
hat will happen to residential investment in a country with a stagnant, aging population? Seniors are not building any new houses and the working population may just take over the houses they receive from their parents' generation instead of increasing the housing stock. Who moves into a nursing home will also reduce his/her "stuff" and command less living space.
With fewer mortgages the financial sector will have to find other investment opportunities (such as government bonds). There seems to be some evidence that suggests residential investment is a major contributor to economic growth: https://ideas.repec.org/a/cuf/journl/y2001v2i2p437-444.html

Overall, Japan's "no-growth" economy may just be the logical result of their demographics. With baby boomers retiring in the US will the effects be similar?

[Steve Ambler]

Sorry Frances, but I couldn't resist linking to this, a classic:
https://www.youtube.com/watch?v=MvgN5gCuLac

[Larry Signor]

Remarkable concept. Can't be re-posted enough (which I did with attribution. http://frominsidethetincan.blogspot.com/2015/01/on-gettin-older.html, http://www.cepr.net/index.php/blogs/beat-the-press/it-is-important-that-women-can-combine-work-and-family-obligations-we-dont-need-more-kids-japan-edition).

[Frances Woolley]

Larry - I appreciate the good intentions behind the reposting. Generally we're o.k. with people reposting a portion of a post, but we would prefer people not reproduce entire posts - just reproduce a portion of it and then link back to WCI. Thanks!

Steve - truly a classic. Good to see you on the blog.

[Avon Barksdale]

Economies don't grow because people “buy stuff” that they store up. Economies grow from innovation. Paul Romer put it best:

“Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. History teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material...

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up. They multiply.”

If you want to look for a micro-foundation of stagnation, look for the sand in the innovation gears.

[Jacques René Giguère]

Avon:"Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered."
From the Mayas and the Pascuans to the modern Fox News civilisation, no they don't.

"And every generation has underestimated the potential for finding new recipes and ideas."
Whether you under or overestimate,the first paragraph is the operational one.

[Min]

Why should economies grow from buying stuff that they store up? The storing up reduces growth, right? (Capital and infrastructure are different, OC.)

Also, in ecology the dominant species in an ecosystem is in energy balance with its environment. From that standpoint modern humans are not the dominant species. ;) Now perhaps as an economy ages it approaches energy balance with its environment, and an economy in energy balance with its environment is ipso facto low growth. (See Tokugawa Japan.)

[LInda Welling]

I don't know how to disentangle growth from technological change here (old problem, I know). While cast-iron frying pans may last generations, and be appreciated by future generations, I am positive that my daughter would not accept my (perfectly fine for me) television, or cellphone, or computer....The source of the built-in obsolescence is not the good's finite existence, but mine. And I find it hard to imagine these goods becoming sought after as antiques - although I have seen "rotary phones" for sale lately, albeit with new insides so they can function with current infrastructure. Some replacement of durables will be driven by the need to connect with infrastructure = I bought a new computer because my old one could not handle the new version of the software my employer required me to use....So how long will infrastructure drive growth?

[Frances Woolley]

Linda - thanks for commenting. Yes, our gadgets rapidly become obsolete. But what % of stuff is gadgets? And are the number of gadgets necessary for a good life multiplying, or becoming fewer as stereos converge with computers converge with TVs converge with telephones converge with....? I ask because I really don't know - another blog post perhaps...

[Too Much Fed]

"This post could have been called, "Secular Stagnation and Cast-Iron Frying Pans". Secular stagnation is sometimes thought to be caused by an imbalance between savings and business investment. The economics of stuff explains secular stagnation in terms of household investment, that is, investment in consumer durables.

Buying cast-iron frying pans is a form of investment - one that pays dividends for decades in the form of excellent grilled cheese sandwiches. But I already own three cast-iron frying pans - I'm not planning on buying any more for the foreseeable future."

JKH, is that technically correct? I thought a cast-iron frying pan would be considered a consumption durable like vehicles.

[Too Much Fed]

Various:

"Steve - "demand for services should increase" - yup, businesses selling stuff are being replaced by spas and hair stylists and restaurants. But there's no reason to expect that the demand for services will increase enough to offset the decreased demand for stuff. Indeed, the whole reason we're having this conversation is that, empirically, population aging is associated with lower rates of economic growth - this is the fact that needs explanation, and so I'm offering an explanation of it."

"The economics of stuff suggests secular stagnation is due to deficient population growth, as well as population aging. It doesn't matter how many old people there are, as long as the population is growing, young people will come along who will need to buy stuff. But if there is no net population growth - or if the number of old people exceeds the number of young people - the young no longer need to buy stuff. They can get all the cast-iron frying pans (and furniture and wine glasses and vinyl LPs) they need from old people. Who are happy to get rid of it."

"Benoit: "this means that getting out of a recession could be just a matter of inflation reaching 3 or 4% for people to start turning idle cash into stockpiles of stuff they are going to need"

The point is that people don't have room to stockpile (more) stuff. Inflation could not increase to a point where I would want to stockpile anything other than food and basic necessities because *my house is already full of stuff*."

Sounds like people are trying to violate the most common definition of economics, unlimited wants/needs and limited resources?

[Too Much Fed]

"Joseph ""lower rates of economic growth" are not necessarily the end of civilization as we know it, but may actually be accompanied by an increase in that elusive observable "contentment""

Absolutely right."

What about all the debt?

[Too Much Fed]

"JKH -

"stuff is lasting longer" - plastics and synthetic materials have changed the length of time stuff lasts. But I'm not convinced that, on balance, stuff lasts longer than it does.

Yes, "the economics of stuff" suggests there is a new steady state rather than a temporary change"

Does the new steady state mean real GDP = real AD instead of potential real AS?

[Frances Woolley]

Too much fed: "Sounds like people are trying to violate the most common definition of economics, unlimited wants/needs and limited resources?"

Yes and no - unlimited wants/needs is pretty much tautological. It's always nice to have more money, because then I can give it away to my kids. But I don't want much for myself. Because I already have too much stuff.

[Too Much Fed]

Frances said: "Yes and no - unlimited wants/needs is pretty much tautological. It's always nice to have more money, because then I can give it away to my kids. But I don't want much for myself. Because I already have too much stuff."

If you want more money (assume it is durable) and don't want to spend it on stuff because you already have too much stuff (goods), don't want to spend it on services in the near future and in retirement, and give it as an inheritance, I'd say you just violated the most common definition of economics.

If your demand for services was unlimited, you would spend the money on services in the near future or in retirement and give $0 away as an inheritance.

Think about Warren Buffett. Is there any good/service he demands that he does not already have?

[carsjam]

Late to the fry-pan party, but just a quick observation that a fitness franchise is rumoured to be the likely new occupant of the closed Target store locations.