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The best sentence I read yesterday
Sit down, not all of you are going to like hearing this one...
Moreover, the bigger CPI bias, the more social democratic we should be.
Here is more.
Posted by Tyler Cowen on September 21, 2006 at 06:47 AM in Economics | Permalink
Comments
Hmm. is this new good bias the same as the issue that people are buying better TV's for the same price today as their previous TV cost 10 years ago? Or is that considered a separate bias?
I really like Brad's argument, but IMHO it is a little overstated. He's right about computers -- internet access is still less than 50% of the population (I had to look that up, and I was quite surprised). But cell phones are owned by 75% of 30-45 yr olds and 60% of 60-69 year olds, so improvements in cell phone pricing and technology are affecting people in the middle of the income distribution. (numbers from Robert Samuelson, http://www.msnbc.msn.com/id/5707878/site/newsweek/ ).
The policy conclusion I draw from this argument is that Congress needs to stop the mandatory conversion to digital TV.
Posted by: DK at Sep 21, 2006 9:07:32 AM
DK -- the debate is really about the erarly adopters. Yes, the cpi mises the very large price drops and quality improvements in the very early stages of its development
and introduction to the market. But by the time it becomes wide spread--like the cell phone -- it is incorporated into the cpi. Take the snowblower case. Prices fell from $200 to $100 in its very early stages that were not incorporated into the cpi. But what was the weight of that snowblower when it was first incorporated into the cpi -- probably somehting on the orders of 0.001% of the cpi. So the price drop from $200 to $100 would have been on weights that increased from 0.0001% --essentially zero -- to 0.001% of the cpi. So how much of a bias is that in the total cpi? Note the article talked about the price drop but not about its weight. So Delong said it is a social issue. that is his privelege, but it is really irrelevent.
Posted by: spencer at Sep 21, 2006 10:33:42 AM
This argument misses the flip side of the discussion, and, IMO, mitigates a lot of the argument.
By adjusting the price of goods higher to reflect the higher quality of goods, the CPI fails to compensate for the fact that the lower quality/lower priced item stops being available. That removes a choice that many people might otherwise make. For example, seat belts are a standard item on automobiles now. The CPI adjusts the base price of an automobile higher because it includes a seat belt. Yet this would only fully justified if automobiles without seat belts were still available, s that people that assign less utility to seat belts (if they weren't required by law) would be able to make that choice. Since that choice isn't available, however, there is an inflationary component to seat belts that is not measured by the CPI because of the quality adjustments.
The same argument will be applicable when television goes over fully to HD. Higher quality sets, yes, but since the older lower quality versions won't be sold any longer, there should be an inflationary component, but it won't be reflected in the CPI because of the quality adjustment.
So while CPI may be overstated for higher income individuals, it is probably understated for lower income individuals.
Posted by: gvtucker at Sep 21, 2006 10:34:55 AM
DeLong's point seems to strangely assume that the thing holding us back from being more social democratic is that we cannot afford it, but if it turns out we can afford it after all, then nothing stands in the way. First, what if it's the case that the U.S. can afford it (and lots of other countries can afford it) because the U.S. is not a social democracy? Second, of course, none of what JBD says approaches the debate between classical and statist liberals on the relative effectiveness of state-sponsored welfare versus voluntary civil society. We could just as well infer that, due to CPI bias, the worst off among us are in fact quite close to material sufficiency already, and that since people generally are wealthier than we thought, we are financially well-prepared to lavishly fund civil society institutions that will be able to help those few who don't have enough. So, basically, the argument from CPI bias to social democracy is a non-sequitur.
Cell phones: It's plain wrong to assume that if someone does not own a cell phone, then she doesn't benefit from cell phones. She will be able to more effectively reach people who do have cell phones, whether or not she has one. Other people having cell phones increases the value of your land line.
Posted by: Will Wilkinson at Sep 21, 2006 10:37:14 AM
What I find interesting is that in 1999 Gorden said the BLS had adapted much of the Boskin Commission recommendations and significantly reduced the overstating of the CPI. But here he is back using the same guessestimate of a 1.1% bias. So which was right, Gorden in 1999 or Gorden now?
Also note that in calculating the real income data census does not use the cpi-u. Rather it uses the cpi-rs, a series that goes back and applies the new changes in the cpi to show what it would have been if the new medhods had been used all along. The cpi-rs shows inflaion of roughly 0.5% annually less then the cpi-u.
Posted by: spencer at Sep 21, 2006 10:40:49 AM
Also, I simply don't understand the idea that CPI bias is bigger for upper incomes. Sure: new technology is expensive, and so affects wealthier people first. But downward pressure on prices brings new tech and quality improvements to lower income people pretty quickly. Also, lower income people are more likely motivated to benefit from outlet substitution, e.g., go to Wal Mart.
Posted by: Will Wilkinson at Sep 21, 2006 10:52:36 AM
Thanks spencer.
Will, great point about cell phones. And it's not just who you call. WalMart wouldn't have low prices without a massive investment in computers, cell phones, gps and rfid tracking, etc; in some ways WalMart is a high-tech company. WalMart's prices of course are included in the CPI, but they are relevant to the larger question of who benefits from tech.
Posted by: DK at Sep 21, 2006 11:36:03 AM
The fatal flaw:
"A country that is so phenomenally more productive than the country of the mid-1970s should be able to do a much better job at providing an economic environment in which all Americans can have greatly improved income security, education for their children, and leisure time, as well as a much greater share in the rises in real material standards of living..."
So the argument is:
1. if we're a lot richer than we think
2. we can make a lot of people better off with welfare
3. therefore we should
Never mind the errors in logical flow, #2 is simply false. It doesn't matter whether per capita income has increased by 90% or 125%, confiscating that to buy hammers and toilet seats for $500 a pop, fight foreign wars, and tell me I'm too fat doesn't make people better off, it makes us worse off.
The richer we are, the more social democratic we can afford to be. This does not in any way imply that we should be.
Posted by: Noah Yetter at Sep 21, 2006 12:33:02 PM
gvtucker,
You seem to be confusing seat belts (which were imposed by law from the government)
with advances in television technology (the government never outlawed regular TV).
The last time I checked at Best Buy or Target, however, I could still find and old stlye TV for that is 20 inches for around $100-120 bucks, easily affordable by the lower
middle class. This was not the case 20 years ago.
Similarly, I strongly disagree with the claim that lower income people
in this country are not better off in absolute terms than they were previously.
Take the point of AIDS. Touche. That is obviously a problem. But in the aggregate porrer people are more healthy now than many upper middle class were in the 1970s (in the sense that they live longer).
Putting aside the CPI bias for a second, its plain common sense that most americans are better off now than they were 30 years go.
Posted by: Matt festa at Sep 21, 2006 2:40:04 PM
Matt festa,
I don't know what the current timing is, but yes, the government is threatening to ban ordinary TV broadcasts.
But there are lots of examples of inferior goods that cease to be available without government intervention. Do you really believe that the larger sodas in vending machines reflect demand more than camoflaged inflation?
Finally, the ludicrously fast inflation of medical, housing, and education costs make it not at all obvious that Americans are better off today. Maybe I have to compare to 40 years ago, so that crime is flat.
What is your source for life expectancy?
Posted by: Douglas Knight at Sep 21, 2006 4:52:34 PM
how can you point to inflation in cost of housing as basis for asserting we're not better off when home ownership has increased? similarly, thoe percentage of folk with college educations has increased. so the rising costs isn't prohibiting more folk than joining in. put another way, doesn't that prove that those costs aren't outstripping gains in income?
Posted by: dj superflat at Sep 21, 2006 6:12:31 PM
The cost of housing raises a tricky issue. If you consider a low-wage worker living and working in New York City or the Bay Area that person may very well be worse off than 15 or 20 years ago. Rent on the same quality apartment or house will have probably risen faster than nominal wages or the prices of consumer goods. The result is that the worker faces an arguably smaller choice set since more of his income is devoted to housing. Workers in other parts of the U.S. no doubt faired much better but it is important to keep in mind that real wages can differ quite a bit in different localities.
Of course the worker could move further out into the 'burbs but this would increase his commute time and expense and would lower measured standards of living. Similarly, he could change location entirely and move to Las Vegas or Atlanta but that too has a cost we should acknowledge.
Posted by: Mark at Sep 21, 2006 10:27:52 PM
Mr. Knight,
Sorry it is late so this will be brief
1) Source on life expectancy: http://www.policyreview.org/138/eberstadt.html Particularly this passage:
"Perhaps not surprisingly, adults without a high school diploma had significantly higher age-standardized death rates than the general population: In 2002, the differential was over 50 percent among both men and women. Despite the relative magnitude of this disparity, however, in absolute terms death rates in 2002 for this educationally disadvantaged group were lower than they had been among the general public some years earlier. The overall age-standardized death rate for women 25 to 64 years of age in 1970, for example, was slightly higher than the 2002 rate for their counterparts who had not completed high school. Among adult men, death rates for the general public in 1970 were about 10 percent higher than among high-school dropouts in 2002.
For babies and infants, the single most important measure of health status is surely the infant mortality rate. Between 1970 and 2002, the infant mortality rate in the United States fell by nearly two-thirds, from 20 per 1,000 live births to 7 per thousand. The infant mortality rate continued its almost uninterrupted annual declines after 1973, when officially measured poverty rates for U.S. children began to rise. The contradistinction is particularly striking for white babies. Between 1974 and 2001, their infant mortality rates fell by three-fifths, from 14.8 per 1,000 to 5.8 per 1,000; yet over those same years, the official poverty rate for white children rose from 11.2 percent to 13.4 percent. (See Figure 4.) "
2) Do you really believe that the larger sodas in vending machines reflect demand more than camoflaged inflation?
Not sure what your getting at here. Last time I checked, I could buy soda in a number of different ways: in cans at the
store, in big bottles (usually 2 for 1 if you look correctly), at a soda machine, on tap. I was not alive back when soda
was first popular but all the people I talk to say that the choice was much more limited than it was before.
3) Whatever Jason Furman thinks about my other views, I agree with him on this:
"The rising cost of health and college is a central part of the middle-class misery narrative. And no doubt it’s a major strain. But in comparing living standards we should be focused on quantities not prices. And the quantity increases in health and college are enormous – and much more important to me than the quantity increases in gadgets. And health is not just about lower mortality and morbidity, but also about, among other huge improvements, fewer nights in the hospital, more outpatient procedures, and less invasive procedures. The CPI for medical care is so incapable of capturing these developments that it's completely useless."
4) I also agree with Jason on this: its actually kind of irrelevant to whether income inequality should be declining. But lets not
try and make it like the broad middle/lower middle class is not better off than they were, they are and they know it.
Thanks
Matt
Posted by: Matt Festa at Sep 22, 2006 12:22:53 AM
"Moreover, the bigger CPI bias, the more social democratic we should be."
Well, there are two countervaling trends. Yes, the richer we are (and we're richer if CPI is understated) then the more we can afford to do for the poor. But also the richer we are, the fewer the absolute material deprivations of the poor, and so the traditional justifications for socialism don't work as well.
This is a persistent rhetorical problem for social democrats. John Edwards tried to talk about the little girl shivering because her family couldn't afford a warm coat (a traditional image of want) but in 2004 this was ridiculous because new coats can be had for very little at Walmart (a few hours of minimum wage labor) and virtually nothing at second-hand stores (used clothing is worth so little in the U.S. that it's shipped out in bulk to 3rd world countries).
And so the arguments for social democracy need to be revamped once the lower classes are no longer starving (they tend toward obesity) or freezing or lack access to education and when they own most of the fruits of modern technology (cars, air-conditioning, cell-phones, cable TV, microwaves, DVD players, game consoles, computers, digital cameras, air travel).
And the faster we're getting richer, the more that middle and upper class voters will consider the lives of the poor and think, "Hell -- they're better off than my family was when I was young -- I shared a bedroom, we didn't have central air, I never flew on a plane until I was an adult, we didn't have..."
Politically, it's quite unclear how things will go when the poor are no longer poor in an absolute sense.
Posted by: Slocum at Sep 22, 2006 7:25:36 AM
Politicians have been messing with CPI for some time, but Alan Greenspan's introduction of hedonics has been a big factor in understating CPI. I think people can fairly argue about the weightings used with the basket of gooods, but the price should be the price. Since it is a survey of all types of people, the early product buyers are averaged out by the laggards. But to tell me that even though I spent $2500 on a laptop, that its "real" price is $500 because of all of the new technological benefits is pure b.s.
So why would the government do this? To reduce the cost of all of the inflation adjusted benefits/salaries that it doles out.
Posted by: Patinator at Sep 22, 2006 2:58:33 PM
