Economy's 3rd quarter growth rate revised to 5.2% from 4.9%

Only economists can probably get so excited about 0.3%. I will explain below. See Economy Grew Faster Than Thought in 3Q, But Slowdown Expected by Austen Hufford of The WSJ. Excerpts:

"The economy grew faster than previously estimated during the third quarter - at a blistering seasonally and inflation-adjusted 5.2% annual rate"

"The new figure was revised up from an initial estimate of a 4.9% pace."

That might not seem like a big deal, just 0.3% more than before. In my macro courses we read a chapter in the book The Economics of Macro Issues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Using the latest GDP figures for another example, if we grow 5.2% a year for the next 30 years, and if per capita GDP now is, say, $60,000, it would reach $274,000. But if it only grows 4.9% for 30 years, per capita GDP would be $252,000. That is about $22,000 less than if we grow 5.2%

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

 

Prompt engineers chat with generative-AI chatbots (creative destruction and how the economy just keeps creating new types of occupations & professions)

See Talking to Chatbots Is Now a $200K Job. So I Applied: Welcome to the world of prompt engineering, where you’re paid to get the best answers from AI by Joanna Stern of The WSJ. Related posts are listed below as well as some history of the term "creative destruction." Excerpts:

"Prompt engineering is a totally new job that would have sounded crazy even a year ago. But it can pay six-figure salaries to people who extract the best results from the mysterious artificial-intelligence black boxes that are now part of daily life."

"Natural as they sound, many chatbot answers are unwieldy, unhelpful and, sometimes, untrue." 

"Sure, AI can do some of our writing, computer coding and research jobs. But we wouldn’t want to bet our businesses on them alone.

nter the prompt engineer! This person fine-tunes the prompts that go into a generative-AI large-language model—aka LLM—to extract valuable but buried information for an employer or its clients. Think of it as an AI whisperer."

"On LinkedIn and the job-search site Indeed, thousands of listings came up for the search term “prompt engineer,” and among those that stated salary, the annual pay could range from $100,000 to over $200,000."

"you need to understand how these systems work, have specific tricks up your sleeve and, in some cases, be able to do some coding."

"“You can think of prompt engineering as programming in the English language,” George Sivulka, Hebbia’s chief executive and founder, told me."

"Instead of an analyst sifting through hundreds of pages to research a company, the AI can summarize and pull out key points for them."

"what the prompt engineer does: “Your role is to deeply understand our users’ needs, figure out and test the best way to prompt models to meet these needs, and then teach our users.”

Translation: Get the robots to cough up valuable answers to keep our human customers happy."

Related posts:

"Moms away from home" look after college students (creative destruction and how the economy just keeps creating new types of occupations & professions) (2023)

Who wrote your potential love's online dating profile? (maybe they outsourced it to a professional who specializes in that) (2016)

New Profession Of "Wedding Hashtag Helper" Might Be An Example Of Creative Destruction At Work (2022)

Are dating coaches who help you with texting modern Cyrano de Bergeracs? (2023)

Do You Need a Fixer for Your Disney Vacation? Third-party companies tout advanced knowledge for private tours of complex amusement parks that can cost $1,000 and up (2023)

Parents Hire $4,000 Sorority Consultants to Help Daughters Dress and Impress During Rush (creative destruction and how the economy just keeps creating new types of occupations & professions) (2023)

 

Creative Destruction

See Creative Destruction by Richard Alm and W. Michael Cox. Excerpt:

"Joseph Schumpeter
(1883–1950) coined the seemingly paradoxical term “creative destruction,” and generations of economists have adopted it as a shorthand description of the free market’s messy way of delivering progress. In Capitalism, Socialism, and Democracy (1942), the Austrian economist wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)

Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” in which he described capitalism as “the perennial gale of creative destruction,” it has become the centerpiece for modern thinking on how economies evolve."

But also see this link which suggests that the idea goes back even before Schumpeter to other scholars: Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter by Hugo Reinert and Erik S. Reinert.

"Abstract

This paper argues that the idea of ‘creative destruction’ enters the social sciences by way of Friedrich Nietzsche. The term itself is first used by German economist Werner Sombart, who openly acknowledges the influence of Nietzsche on his own economic theory. The roots of creative destruction are traced back to Indian philosophy, from where the idea entered the German literary and philosophical tradition. Understanding the origins and evolution of this key concept in evolutionary economics helps clarifying the contrasts between today’s standard mainstream economics and the Schumpeterian and evolutionary alternative."

Capitalism, rationality and double-entry bookkeeping

In his book Capitalism, Socialism, and Democracy the economist Joseph A. Schumpeter discussed the deep and widespread rationalizing influence that capitalism had on society, particularly that of double-entry bookkeeping.

Excerpts:

"the rational attitude presumably forced itself on the human mind from economic necessity; it is the everyday economic task to which we owe our elementary training in rational thought and behaviour’— I have no hesitation in saying that all logic is derived from the pattern of the economic decision."

there is "inexorable definiteness and, in most cases, the quantitative character that distinguish the economic from other spheres of human action, perhaps also to the unemotional drabness of the unending rhythm of economic wants and satisfactions. Once hammered in, the rational habit spreads under the pedagogic influence of favorable experiences to the other spheres"

"capitalism develops rationality and adds a new edge to it in two interconnected ways.

First it exalts the monetary unit—not itself a creation of capitalism—into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping." 

Without going into this, we will notice that, primarily a product of the evolution of economic rationality, the cost-profit calculus in turn reacts upon that rationality; by crystallizing and defining numerically, it powerfully propels the logic of enterprise. And thus defined and quantified for the economic sector, this type of logic or attitude or method then starts upon its conqueror’s career subjugating— rationalizing—man’s tools and philosophies, his medical practice, his picture of the cosmos, his outlook on life, everything in fact including his concepts of beauty and justice and his spiritual ambitions."

"The rugged individualism of Galileo was the individualism of the rising capitalist class."

"rising capitalism produced not only the mental attitude of modern science, the attitude that consists in asking certain questions and in going about answering them in a certain way, but also the men and the means."

"capitalism—and not merely economic activity in general—has after all been the propelling force of the rationalization of human behavior."

"all the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process."

"The capitalist process rationalizes behavior and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts."

Never Mind the 1%. Mini-Millionaires Are Where Wealth Is Growing Fastest.

Many people in the upper middle class are now millionaires thanks to college, savings, bull markets and timing

By Josh Zumbrun of The WSJ. Excerpts:

"according to the Fed’s Survey of Consumer Finances, . . . the level of median wealth was much lower than the average, it actually rose more than the average between 2019 and 2022—by 37%, adjusted for inflation—to $193,000. That means wealth inequality actually narrowed."

"About 16 million American families—just over 12%—have wealth exceeding $1 million, up from 9.8 million families in 2019. Nearly eight million families are multimillionaires, i.e., their wealth exceeds $2 million, up from 4.7 million."

"Who are these mini-millionaires? They generally earn between $150,000 and $250,000 a year."

"they have in fact seen bigger wealth gains over the past three years than the top 10% of families. Indeed, the biggest wealth gains between 2019 and 2022 were among the approximately 13 million families in the 80th to 90th percentile of the income distribution. Their median wealth jumped 69% from 2019, adjusted for inflation, to $747,000 in 2022."

"They benefited extraordinarily from low interest rates, cutting debt payments as a share of their incomes from 19% in 2007 to 12.9% in 2022."

"Rather than being swallowed by the 1%, the economy, according to these numbers, is creating a growing upper middle class. Many people got there by pursuing college degrees, steadily building retirement accounts and purchasing homes."

"only 1% of families under 35 are millionaires, but that rises with age. By ages 55-64, 21% of families are millionaires."

"the idea that only the 1% are getting richer is at odds with the numbers"

Related posts: 

The share of wealth held by the top 5% of households drops from about 72% down to 45% when pension wealth & Social Security benefits are included (2021)

Most Americans Got Richer During Covid-19 Pandemic (2021)

What has happened to the distribution of wealth in recent years? (2011)

Millionaires Are Regular Folks (2007)

Why Buy-One, Get-One-Free Offers Are More Complicated Than You Remember (maybe it is because of price discrimination)

Marketers’ race for data is leading to buy-one-get-one deals that make customers work a little bit harder

By Katie Deighton of The WSJ. Excerpts:

"Buy-one, get-one-free offers are evolving from one of marketers’ simplest and most alluring tools to…something more complicated. 

BOGOs, as they are called in the industry, once mostly existed to help companies clear out excess inventory, hit sales targets or go head-to-head with competitors at key moments. But marketers’ increasing obsession with data means many of their offers now come with red tape that is designed to either help collect information about their consumers or capitalize on a data-driven insight."

"Customers who order a Domino’s pizza online under the chain’s current “Emergency Pizza” promotion, for example, can’t get their promised free second pie at the same time. They have to collect that freebie in a subsequent online order. And they have to belong to the company’s loyalty program to participate at all.

The Emergency Pizza campaign has a goal beyond just moving pizzas, said Kate Trumbull, chief brand officer at Domino’s. It is also designed to drive memberships in Domino’s Rewards, Trumbull said. Such programs let businesses collect data on customer spending habits to better tailor their marketing and wider business strategies."

"At the heart of a complex BOGO deal is the economic principle of price discrimination, in which sellers try to keep deals and discounts away from “price insensitive” shoppers who would likely pay full price in any instance, said Scott Neslin, a marketing professor at Dartmouth College’s Tuck School of Business.

Making customers work a little harder for deals increases the chances that only price-sensitive consumers collect, thereby helping to protect a company’s margins, Neslin said.

“The complexity throws up a barrier that only the price sensitives are willing to transcend,” he said.

California Pizza Kitchen last month offered a BOGO with a similar twist to Domino’s, but tweaked the reward: Customers who ordered a cooked pizza at a restaurant were offered a free “Take and Bake” pizza to cook at home. The free, uncooked pie was only handed out when they returned to the restaurant."

Businesses can make more money if they charge different prices to different buyers instead of just one price to everyone.

Charging different prices to different groups of customers based on their ability and willingness to pay (a discount) is price discrimination. Buyers with a lower price elasticity of demand will be charged a higher price.

If the firm were to charge the same price to each group, they would actually make less profit since they would end up violating the rule which says "choose Q so that marginal revenue (MR) = marginal cost (MC)."

Suppose a firm has two groups of customers, A and B, shown below. Group A's demand is generally less elastic. The blue line is demand. Green is MR. The flat line is both MC and ATC (average total cost). Having ATC = MC is not realistic but it simplifies the explanation.

The darker red lines just show us how to find P and Q for each group. Profit is Q*(P - ATC).




Now group B


Group A profit) 8*(24 - 8) =128

Group B profit) 12*(20 - 8) = 144

Total profit = 128 + 144 = 272

What if they charge both groups 22?

Group A profit) 9*(22 - 8) =126  (at Q = 9, MR does not equal MC)

Group B profit) 10*(22 - 8) = 140 (at Q = 10, MR does not equal MC)

Total profit = 126 + 140 = 266

So there is less profit (266) if they charge the same price to each group than if the price discriminate (272).

Economist Robert P. Murphy gives an example of how there is nothing wrong with price discrimination:

"the granting of special pricing for certain groups need not harm the groups paying full freight.

For example, if a movie theater in a small town were barred from giving child, student, and senior discounts — and instead had to charge one ticket price for all customers — it might not be able to stay in business. It would hardly help the middle-aged adults to have a "fair" pricing policy with no theater in town. This example shows the pitfalls in thinking about "the cost" of providing a seat in a movie theater and deriving the "fair" price that a theater ought to charge all customers."

See The Economics of Coupons and Other Price Cuts

Also see Price Discrimination by Tejvan Pettinger. A key passage is:

"Price discrimination will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off-peak. Without price discrimination, they may go out of business or be unable to provide off-peak services."