Tuesday, July 12, 2016

The Pokemon Go Economy

Interesting little essay from Timothy Lee at Vox:
If you were looking to have fun with some friends 50 years ago, you might have gone to a bowling alley. Maybe you would have hung out at a diner or gone to the movies.

These were all activities that involved spending a certain amount of money in the local economy. That created opportunities for adults in your town to start and run small businesses. It also meant that a teenager who wanted to find a summer job could find one waiting tables or taking tickets at the movie theater.

You can spend money on Pokémon Go too. But the economics of the game are very different. When you spend money on items in the Pokémon Go world, it doesn’t go into the pocket of a local Pokémon entrepreneur — it goes into the pockets of the huge California- and Japan-based global companies that created Pokémon Go.
Of course Pokemon Go is cheap, and if you have a smartphone you can play for free, which is nice. So maybe Pokemon Go provides more entertainment per dollar than bowling. But every cent skips the local economy and goes to big, distant companies.

To Lee, this explains why interests rates are so low and the economy refuses to kick into high gear:
In the 20th century, new industries tended to create a lot of demand for capital. It took a lot of cash to build assembly lines and movie studios, of course. But beyond that, thousands of people all over the country would go to their local banks to finance the construction of movie theaters, auto dealerships, and so forth.

This meant that people with capital to lend could almost always find people eager to borrow it to finance new business ventures. This, in turn, made the job of America’s central bank, the Federal Reserve, relatively easy. Anytime the Fed wanted to boost growth, it could cut interest rates and get a burst of entrepreneurs starting new businesses.

But the Pokémon Go economy is different. Nintendo and its partners obviously needed to invest some cash in hiring programmers and designers to build the game. But the sums involved here are tiny compared with the cost of building a new car assembly line. And Pokémon Go seems unlikely to produce very many opportunities for complementary local businesses. People play on their smartphones, so there’s no need for Pokémon cyber cafes. Smartphones are too cheap for smartphone repair shops to be a good business.

And this seems to have severed the traditional link between capital accumulation and economic growth. Since 2008, the US economy has been awash in cheap capital. In a few places, especially Silicon Valley, that has created bubble-like conditions where every crazy ideas seems to get funding.

Yet the total sums being invested in these areas are a fraction of the overall capital people have available to invest. And in the rest of the country, people are struggling to find any productive investment ideas. So interest rates keep falling as people increasingly despair of finding ways to get high returns from their savings.
The rapid accumulation of useless capital is one of the weirdest things about the contemporary economy. The world economy was almost blown up in the 2000s because investors couldn't think of anything to do with their money other than lend it to homeowners who might never be able to pay it back.

I am open to suggestions, but the only thing I have heard that makes any sense to me is for governments to seize a big slice of that money through higher taxes and spend it on infrastructure. The DC Metro could sure use a few billion, and I am sure the same is true of many other systems. What else are we going to do with it?

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