A dollar is not very much money. A billion dollars is a lot of money. Twenty billion dollars is an awful lot of money.

For most people reading this (though not for Bill Gates or for the billion or so people living on a dollar a day or less), these statements should seem pretty obvious.

But all of these can be (and have been used as) different ways of measuring the same thing. If every Australian receives, or pays, a dollar a week, the total amount is very close to a billion dollars a year. And if you have a cash flow of a billion dollars a year, and your interest rate is 5 per cent, the present value of that cash flow (the amount of extra wealth you would need to generate the flow) is twenty billion dollars.

It’s easy to stretch this gap even further. A dollar a week is about fourteen cents a day. And, if we looked at the US (about 300 million people), or the entire developed world (around a billion people, depending on your definition), the total would be that much larger. Fourteen cents a day for everyone in the developed world has a present value of one trillion dollars.

The fact that the same flow of money can be presented in such radically different ways, and that each of them is appropriate in certain contexts, is one reason public policy debates get confused.

Having posed the problem, I’ll leave it for discussion, and hope to come back with some relevant examples and suggestions on how to improve our understanding of these things.

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The sudden collapse of shares in the Centro group following the announcement that they were having trouble refinancing their debt (there’s been a partial recovery today) reminds us that no-one really knows what is going on in global credit markets. Bad debts have been buried under layers of collateralised debt obligations, and seemingly sound companies may (or may not) have all kinds of off-balance sheet obligations, liable to be called in at short notice.

Given that we are collectively among the most indebted people on earth, we probably ought to be more worried than we are. But, as Costello and Howard found during the election campaign, it’s hard to stir up concern about a possible crash when we’re still worrying about whether strong growth will overheat the economy.

Individually, the only real preparation for a possible jam in credit markets is to make sure that we are not relying on the availability of credit on easy terms in the near future. For example, if you are planning on refinancing a home loan and locking in a fixed rate, you might think about doing so sooner rather than later (note: I’m not a financial adviser, and this isn’t financial advice – if you’re actually in this, or a similar, situation, consult a professional).

As I mentioned a few days ago, using current market exchange rates, Australia now has a higher income per person than the US. Matthew Turner observed the UK passing the US a few months ago and estimated several years ago that the critical value for the Eurozone is around $1.46, which was reached in the last couple of days. I haven’t checked on the GDP comparison, but the yen and franc are also rising

Of course, it would be silly to use these numbers to support a claim that Americans are, on average, worse off than people in other developed countries. The Purchasing Power Parity indexes produced by the International Comparisons Project of the World Bank provide a much better (though far from exact) basis for comparisons of this kind. But, for the many advocates of free markets who’ve used the economic performance of the US as the basis for their case, there’s a big rhetorical problem here. You can, I suppose, argue along the lines “The market values the output of the average American less than that of the average European (or Australian) but analyses prepared by international bureaucrats show that Americans are actually better off, and therefore we should prefer the market to the state”, but it’s not a position I’d want to defend.

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Not that long ago, international comparisons of income levels and so on were always done using market exchange rates. If this were still the standard practice, there would be some surprising news to report. On an exchange rate basis, Australia has a higher GDP per person than does the US (I’d guess the same would be true of more relevant measures like national income per person, though the gap would be a bit smaller because of our greater indebtedness).

Currently US GDP per person is around $US 44000. Australia’s is about $A51 300, which at a market exchange rate of 0.93 converts to about $US47700.

Before we break out the champagne, I’ll point out that these exchange rate comparisons aren’t really useful – this is obvious given that the $US/$a rate was heading for $0.50 not long ago, and is now headng for parity . Standard practice these days is to use a “Purchasing Power Parity” measure, based on the estimated relative cost of a standard bundle of goods and services. The estimated $UA/$A rate is around 0.70 which leaves us a fair way behind the US.

Although PPP estimates are better than those based on market exchange rates, they shouldn’t be treated as exact. They are statistical estimates, with a large margin of error, and the underlying economic theory (revealed preference) implies that even with perfect data, there is always a range of possible values for index numbers like this. Typical international comparisons should be taken to have a margin of error of 10 to 20 per cent.

In passing, a useful tip for students of the economy. If you want a round number estimate of the magnitude of any economic variable, you can approximate GDP as $1 trillion, population as 20 million, and income per person as $50 000. These will be accurate to within 10 per cent for another year or two.

Update In comments, Matthew Turner reminds me that he’s been making this point for years. I think I came up with it independently, but he was certainly first. Interestingly, Matthew calculates that the critical value for the euro/$ exchange rate, at which euro GDP per person exceeds US is $1.46. Yesterday, it hit 1.457.

Following up my post on consumption and living standards in the US, there was a fair bit of discussion at CT of what’s been happening to leisure. Juliet Schor and others have argued that the long-term trend towards reduced hours of work and more leisure reversed some time in the 1970s, and people have been working harder since then. A study by Aguair and Hurst (the final QJE article is subscription-only, but I found a preliminary version here) has been widely quoted as proving the opposite (here, for example, by Tyler Cowen) and the abstract seems to support this interpretation, saying “We find that a dramatic increase in leisure time lies behind the relatively stable number of market hours worked between 1965 and 2003.”

However the data periods don’t exactly match up. It turns out that, using any of the definitions of leisure considered by Aguair and Hurst, the majority of the increase in leisure time took place between 1965 and 1975, and most measures show little change since 1985.

There’s an important gender/family dimension too. On Aguair and Hurst measures 1 and 2 (which exclude child care), leisure time for women peaked in 1985 and has declined since then, while leisure time for men has been pretty much stationary.

So that readers can make their own comparisons, I’ve extracted the relevant table, which is over the fold. I’d say it matches Schor’s story (increasing leisure until the late 70s followed by a decline) at least as well as that suggested by the authors (dramatic long-term increases in leisure)

There’s lots more data in the Aguiar and Hirst paper and one point worth noting is that the trend in the distribution of leisure time is the opposite of that in income. High income, high education people have experienced a significant decline in leisure relative to those with low income and low education. That somewhat offsets the growth in inequality I’ve been talking about. Also, combined with the gender pattern I already mentioned, it almost certainly means that educated women have, on average, less leisure than in the late 1970s.
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To consider the possible future of the Australian economy, particularly if the current government stays in office, we should look at the US. One of the striking features of US economic data is that, at least on its face, it shows that most measures of median income (wage rates, household incomes and so on) haven’t changed much in the past thirty years. Here’s a fairly typical example, reporting that American men in their 30s have, on average, lower wages than their fathers did at the same age. Median household income did a bit better in the decades after 1970, because of greater labour force participation by women, but hasn’t shown any any clear increase since about 2000. Average household size may have decreased a little bit. In summary, the general evidence is that the average (median) American depending on labour income hasn’t seen a significant improvement in real income for a long time.

That doesn’t seem to square with casual observation suggesting that consumption of most things by most people has gone up. Of course, savings have declined, but that can scarcely be the whole story. An obvious implication of declining incomes is that, if consumption of some things has gone up, consumption of others must have gone down. This is all the more so, given that there are new items of consumption (computers, for example) that didn’t even exist a few decades go, leaving less for expenditure on goods and services that were available then.

So, I’m always on the lookout for examples suggesting that consumption of some category of good or service has declined in real, quality adjusted terms.

Here’s one example I’ve found. According to the NYT, Americans have worse teeth now than a decade ago.

I’d be interested to know how fluoridation has affected this. My guess is that there was an expansion in the postwar years leading to a “free” (that is, no direct cost to households) improvement in dental health, but that there hasn’t been much change recently. Also guessing, I’d imagine that what’s true of dental health is true of lots of chronic, but not life-threatening health conditions. With declining coverage of private health insurance and tighter conditions for public provisions, a lot of these conditions must be going untreated. Then there’s the striking fact that Europeans are getting taller while Americans are not This seems to be true right up the class spectrum, so a simple explanation based on access to health care and dietary info is problematic. Still, it seems reasonable to put down non-critical health care as a likely example of declining real median consumption in the US.

This Boston Review piece by Elizabeth Warren and Amelia Tyagi pointed out by Kjohnson in comments, has lots of interesting info, particularly with respect to housing, where median house size hasn’t increased nearly as much as popular discussion suggests. There’s also the huge growth in manufactured homes (aka trailers) to take into account.

Of course, that still leaves plenty of categories where median consumption is increasing. There’s enough here to keep us going for quite a while. Thanks to commenters who’ve already helped.