Friday, 15 November 2013

Strippers and inflation

Tyler Cowen notes some of the potential ambiguity in inflation incidence. Where SMBC suggested that inflation is particularly bad for strippers, who tend to be paid in $1 notes, Cowen noted that this is only a medium-term effect: at some point, customers will round up to either the $2 or the $5 note.

Mileage may vary by more than Tyler suggested. Suppose a customer wants to tip $5. If it's hard to tell from a distance whether an American note is a $1, $2, $5 or $10, customers would tend to prefer holding up five one-dollar notes to one five-dollar note. The former is clearly $5 while the latter isn't. I think Tyler's results require that the dancer is able to judge the denomination from a distance. That will work in Canada, New Zealand, or other countries that make it really easy to tell which note is which with brightly coloured notes, but not so much in the US. This doesn't run contrary to Tyler's suggestion about inflation incidence, but where SMBC's primary concern was dancers being burdened with too many low-value bills, I think that continues to hold in the US.

Things might be further complicated in countries that use coins for low-denominations. It would take field research to find out how things work. I've outsourced that work to Bruce Hoult, who reports:

Dr. Phil suggested:
I doubt that this would work. While Canadian Tire money did circulate, it's not like your partner would give you trouble for finding Canadian Tire money in your wallet while fishing around there for cash because she outsources all the bank machine cash-getting to you. Stripper-bucks, on the other hand, well, I'd be reluctant to take them as change when getting groceries. Sam Wilson suggests sentimental attachment to the glamour of one's own currency might also militate against the switch to alternative inflation-indexed currencies.

I doubt that inflation-adjusted notes are really that worthwhile in New Zealand, where RBNZ has been pretty decent at keeping inflation at 1-3%. Or anyplace where people hold low cash balances and accrue interest on bank balances, although with the caveat that taxing the inflation portion of nominal interest returns on same can distort things at higher inflation rates.

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