Economics in Everyday Life

There are many ways to learn the ideas of economics. One way is through the standard method – read textbooks or attend lectures where ideas are described. But economics is about human action – which means the lessons of economics can also be found in our own lives. Some people claim that basic econ is often counterintuitive, and it indeed may be to some or most people. But as I began to study economics many years ago, I found its lessons extremely intuitive, because the ideas being described were things I had witnessed or experienced throughout my life. 

For example, I found it very easy to envision all the ways people adjust their behavior in response to taxes. I grew up in Washington state, very close to the border with Oregon. There were two big tax differences between those states. (Well, probably more than two, but there were two I cared about at that time.) Oregon had a state income tax, while Washington did not. And Washington had a state sales tax, while Oregon did not. 

Both of those were often cited as factors in decisions people would make. As people started getting jobs, it was common to find opportunities that were similarly appealing and equidistant, some in Washington and some just over the river in Oregon. When that happened, people would heavily favor finding a job in Washington, because if you worked in Oregon you had to pay Oregon state income tax, even if you weren’t an Oregon resident. (But even though you were an Oregon taxpayer, you were unable to cast any votes in Oregon – taxation without representation!) But it didn’t work in the other direction – friends I had in Portland didn’t feel any extra incentive to find a Washington job, because even if they worked in Washington, they would still have to pay Oregon state income tax. 

However, the sales tax difference made a much more frequent impact. Washington’s sales tax in those days was, if memory serves, around 7.7%. This made it very common for people in Washington to put a little extra effort into driving to Oregon to make a purchase, particularly if it was a large purchase. If you needed to buy a new TV or a new couch, why would you voluntarily choose to pay what amounted to an unnecessary 7.7% surcharge on top of your already expensive purchase? I’m sure that over the years, retailers along the border in Washington lost a considerable number of sales to retailers just along the Oregon border, precisely because people would adjust their behavior in response to taxes. 

But at the same time, the sales tax issue wasn’t decisive. If you were going to buy a new TV for a thousand dollars, if often made sense to take the extra ten minutes to drive over the Columbia River and buy it in Oregon to save nearly eighty dollars in sales tax. But if you just needed to make a small purchase, the extra time and gas costs of the longer drive meant it wasn’t worth doing to avoid the 7.7% tax rate. And the further you lived from the Oregon border, the larger a purchase would have to be in order to make you willing to do the longer drive in order to save on sales tax. Though I didn’t know the term at the time, this showed me the importance of transaction costs in our decision making. The choice you will make will be in part influenced by the fact that the choice itself carries its own cost. 

One other difference between Oregon and Washington gave me a healthy skepticism of “but it creates jobs!” as a justification for some program or regulation. While I lived in the area, and until very recently, it was illegal for you to pump your own gas in Oregon. By law, you would have to hand your cash or credit card to a gas station employee and have him pump your gas for you. I absolutely hated the experience, because it just slowed the whole process down. It was very common to get to a gas station with eight pumps and only two attendants and have to wait several minutes for one to work his way over to you, tell him you wanted to fill the tank, hand him your card, and have him start filling your tank. Meanwhile he’d wander off to another vehicle, your car would finish filling up, and you’d still be left waiting several more minutes before he got back and put the nozzle away and returned your credit card so you could be on your way. Nothing was more productive as a result of these jobs existing – the whole process just became slower and more time consuming. This made it very intuitive for me to see why economists focus on production, not employment. It’s not about how many people are doing stuff, what really matters is how much stuff gets done. Using more people to achieve the same level of production (or less) isn’t how progress is made.

What about you, EconLog readers? Are there any ideas in economics you learned about and immediately recognized from your own life experience? If so, drop some comments sharing what those ideas where, and where in life you saw them in action.