Hidden prices, hidden taxes

Not really. The budget constraint still binds so the worst that could happen is if you find yourself, at the middle of the month, having finished your paycheck.

Mark Thoma has some interesting thoughts over at his blog. Obviously the budget constraint still binds, but it doesn't have to get that extreme. If we're talking about small amounts, where the substitution toward other goods would be small anyway, could that substitution be even smaller when the payment itself is easier? Maybe. But I also think Mark is onto something with his ideas (lower menu costs mean more frequent smaller changes in price, and that some of the change reflects the value of less waiting). That could explain some of it too.

A number of bloggers have been perplexed as to why significant increases in consumer debt have not resulted in decrease spending and a recession. For example Bonddad wrote just the other day:

“Over the last few years, I've written a fair amount about the heavy indebtedness of the US consumer. The short version is household debt has increased from a little over 70% of total US GDP in 2001 to over 90% in the fourth quarter of 2007. In addition, over the same period of time household debt has increased from over 90% of disposable income to over 130%. Mortgage debt is the primary reason for this increase, as households went on a huge home buying and mortgage equity withdrawal binge over the last few years.

However, I also predicted that the high debt load would lead to a recession or economic slowdown. While the economy did slow in the first quarter of 2007, predictions are for an increase in the second quarter. In other words, my analysis was right by my conclusion was wrong.”

It seem to me that “Hidden prices, hidden taxes” points the way to explaining why increased prices and debt to not cause a slow down in the economy. For example, if my total gas bill for a month goes up 20% and my minimum gas credit card payment only goes up 2% and there is no limit on my credit card, then the increase in the price of gas will not cause me to use less gas. If on the other hand, I have to pay cash and I do not have the cash, then I will be forced to drive less. Not to mention become politically active.