The Pokémon Go Economy, Explained without a Silly Headline

In a recent Vox post I tried to combine a headline designed to troll my least favorite website — “Pokémon Go is everything that is wrong with late capitalism” — with a serious policy argument. Unfortunately, I think the silly headline overshadowed the content of the article. So let me try to make the point again in a more systematic and (hopefully) clear way.

Suppose you have two regions, Region A and Region B. And suppose that a productivity shock causes output in Region A to grow much faster than output in Region B. Money starts to flow from Region A to Region B much faster than in the opposite direction. Logically speaking, one of five things has to happen:

(1) Workers can move from Region B to Region A.

(2) Companies can move jobs to from Region A to Region B.

(3) A government can tax people in Region A and give the money to people in Region B.

(4) Wages and prices can rise in Region A, causing people in both regions to buy fewer products from Region A and more products from Region B.

(5) Region B can enter into a deflationary spiral — with either falling prices or falling real output.

If Region A is Germany and Region B is Greece, then I’ve just provided a thumbnail explanation of the eurozone crisis. The problem in the Eurozone is that none of these five options is working very well:

(1) Language and cultural barriers make it hard for workers to relocate from Greece to Germany

(2) Language and cultural barriers — and perhaps a lack of relevant skills among Greek workers — make it hard for German companies to move jobs to Greece.

(3) The EU doesn’t have independent taxing authority, and of course the German government doesn’t want to tax Germans and send the money to Greece.

(4) Tight money policies by the European Central Bank have prevented significant price increases in Germany. (The Mercatus Center recently did a great report on this.)

That leaves (5), a deflationary spiral in Greece. Deflationary spirals are painful because because (a) workers really hate taking nominal wage cuts, and (b) Greece has a lot of euro-denominated debt, so falling prices means that Greece’s debt keeps growing as a share of GDP.

This kind of issue, incidentally, is why Milton Friedman warned against the creation of the euro back in 1997. He pointed out that if Greece and Germany have different currencies, then you can make the necessary adjustment by devaluing Greece’s currency — with much less severe consequences than the deflation spiral Greece is suffering today.

OK, so what does all this have to do with Pokemon Go? Well, let’s now change examples and say that Region A is “big American cities” like San Francisco (and their metropolitan areas) and Region B is “real America” — everywhere else. In the last couple of decades, powerful technological and economic forces — of which Pokémon Go is a small but evocative example — have caused productivity in regions like Silicon Valley to skyrocket. The rest of the country has gotten left behind.

The same analysis applies in this case:

(1) Strict regulations have caused severe housing shortages in cities like San Francisco and New York, limiting the number of people who can move there to find work.

(2) Agglomeration effects make it hard to relocate high-skilled, high-paying jobs outside of the biggest cities.

(3) The federal government does tax rich people (who are disproportionately in big cities) and give the money to others (think Social Security, Medicare, food stamps, farm subsidies, etc), but recent economic data suggests that these policies have not been sufficient to prevent the economies of big cities from diverging from the rest of the country.

(4) Thanks to tight-money policies by the Federal Reserve, inflation has been below the Fed’s 2 percent target, leaving little room for inflation in big cities to accomplish the needed economic adjustments.

(5) That leaves sluggish growth in the rest of the US. To be sure, the economies of Cleveland or Memphis aren’t in nearly as bad shape as the economy of Greece. But small cities and rural areas are suffering the worst economic recovery in decades even as big cities are booming.

To solve the problem, policymakers could attack any one of the first four issues: (1) They could deregulate housing. (2) They could invest more in education and infrastructure so more jobs could move to smaller cities (thought his could take decades and may or may not work). (3) They could raise taxes on the rich and make government transfer programs more generous. (4) The Fed could cut interest rates to boost economic growth generally.

Personally, I’m most enthusiastic about options (1) and (4). I’m skeptical that option (2) is going to work, though it’s probably worth trying. And I worry that these options may not be enough, and we may ultimately be forced to adopt some of option (3).

Ultimately the point here isn’t that Pokémon Go is bad. Obviously, consumer surplus is a good thing. The point is that our existing policies and economic institutions aren’t set up to deal with the emerging internet economy, in which a hugely disproportionate share of the wealth is created by a handful of big cities.

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One Response to The Pokémon Go Economy, Explained without a Silly Headline

  1. Rudolf says:

    The fourth solution would likely not yield much benefit as it doesn’t affect the disparity between the regions. A dollar invested in California is still likely to earn more, moving more dollars there. An unprofitable business venture with the current rate is going to be profitable with a new rate, but likely there are more of these businesses and businessplans in California then in Georgia. So the disparity continues and may even be exacerbated.

    Years of low interest rates did nothing for the fundamental problems of the Japanese economy and it doesn’t seem to do anything for the fundamental problems of Europe and the US.

    That leaves us with option 1, which will have primarily as an effect to suck the poor areas dry and draw their people to the rich areas. This is what we’ve seen in developing countries the world over. It doesn’t really solve the city’s problem and it makes the poor area even more poor.

    Two and three however have proven to be long term more beneficial. When the Netherlands closed its mines. It didn’t let the area bleed dry. Instead in invested heavily in new industries and better infrastructure. Now that area is doing well again, unlike similar areas in for example the US and UK. You may not be able to help the current generation, but you can build hope for a future generation.

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