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My email to Don Boudreaux and David Henderson
Take 1900 to 2008, minus the few years of deflation near the Great Depression [and a few others] and of course wartime is odd so cut that out too.
Any single year there has been inflation, from one year to the next.
From 1900 to 2008 there has been radical *deflation*, for instance in the Sears catalog. You'd rather spend 10K in the modern catalog than in the old catalog.
If you are spending a million dollars (in either 1900 or 2008), there is very radical deflation. If you are spending $5, you might prefer the Sears catalog of 1900, at least get a few good white shirts.
I don't think it all quite adds up.
Posted by Tyler Cowen on January 16, 2008 at 10:45 PM in History | Permalink
Comments
True enough. And yet I would rather have the university education I had for almost free than the one my son is getting for a lot more money.
It's not clear what an average of apples and oranges means.
Posted by: tom s. at Jan 16, 2008 10:17:30 PM
I think its a fantastic observation. I was wondering if inflation might affect different income classes differently. and worse if it affect the poor in worse-than normal manner.
Typically CPI contains products that everyone consumes - but are these products essentially manufactured by the poor? The CPI might for expense basket for everyone but does it form "income basket" for majority of the poor? Then again keeping inflation low would keep some wages (of poor people?) lower as someone's expense is other persons income. In that context Chinese policy of allowing high food inflation - as a mechanism for transmitting wealth to farmers seems reasonable.
if we get answer to this question then possibly we can understand impact of inflation.
Rahul
Posted by: Rahul Deodhar at Jan 16, 2008 10:27:44 PM
I guess I'm confused. From wikipedia:
"Beginning in 1908, Sears issued its first specialty catalog for houses, Book of Modern Homes and Building Plans, featuring 22 styles ranging in price from US$650–$2,500 ($12,200-$47,100 in 2003 dollars). Sears bought a lumber mill and arranged for production of kits from which homes could be assembled to be made in Southern Illinois. The first mail-order was filled in 1909."
Posted by: odograph at Jan 16, 2008 10:36:58 PM
I'm missing something... to measure inflation/deflation in the catalog, wouldn't the comparison have to be of prices of goods available back in 1900 against prices of those same goods today?
If one introduces goods (TVs, computers, other items one would spend the $10,000 on in today's catalog) isn't that measuring something other than inflation (like tech. progress)?
Posted by: Delirious at Jan 16, 2008 10:39:18 PM
Or, given evidence that people prefer lower absolute and higher relative incomes to the opposite, you'd rather you'd rather want the million now than later -- but if happiness research is to be believed, humans would rather be in the top .001% of the income distribution without indoor plumbing than to be in the top 10% with high-speed Internet access.
I'd rather be the kind of person who'd rather be absolutely than relatively rich, but I'm not sure it's the case.
Posted by: Byrne at Jan 16, 2008 10:40:00 PM
I guess I'm figuring it out. The idea is that none of us would want to live in 1909 houses, and so their price is irrelevant(?)
What good is a $2500 house if it doesn't have cable tv? Not sure that works.
Posted by: odograph at Jan 16, 2008 10:44:48 PM
I highly recommend looking through the contents of Wishbook, a Flickr user. There are some great examples in the catalogs listed from the Seventies, through the 80s.
1982 Wishbook. A brand new video camera outfit for a total of $2189. In 2006 dollars, that's about $4600. You can get all the same features now in a sub-$200 Canon digital still camera.
Posted by: JonBuck at Jan 16, 2008 10:54:49 PM
The Boskin Commission was convened to study this question about 10 years ago. I believe they estimated that the official consumer price index (CPI) overstates inflation by something like 1% per year because it omits the value of new goods, has substitution bias (we change the basket of things we buy as relative prices change) and has other specific biases.
Arguably, there are other more serious, but perhaps less quantifiable biases as well, which could conceivably even turn positive inflation numbers into negative ones (deflation).
Looking at the "Sears catalog" (or more generally, the set of goods, services and prices) from 1900 vs. today is the right way to look at the question if one wants to assess whether the dollar is worth more or less now.
Which would your rather have -- 1900 prices and goods, or 2008 prices and goods? How much would you need to be compensated to switch your answer?
Posted by: A student of economics at Jan 16, 2008 11:24:22 PM
Perhaps the way to resolve this paradox is to evaluate prices in hours of labour (using various quintile wage rates), rather than dollars. this won't fix the wider avaialbility problem, but it shoudl give a purer indication of prices as they would appear to different segments of society.
Posted by: James at Jan 17, 2008 12:35:52 AM
What are the chances you'd have $10,000 cash to throw around in 1900, as compared to say, 2008?
Inflation / deflation effects not only prices, but incomes. The significance of price in part is relative to the purchasing power of buyers.
I'd rather have a professors salary in 2008 than a professor's salary in 1900 -- and it would especially be great to time travel and use 1/10th of my salary from 2008 (say, $10,000) to buy 1900 stuff. Then think about it the other way. You take 1/10th of your salary from 1900, and you time travel to 2008. You've got $1,000. You've got to buy shirts, shoes, etc, that you always had to buy, then you expend what left at the margin for something else. Not much left over.
Do I need to playout any more of this to make my point?
In other words, you need to compare whether you'd like to spend $10,000 of today's dollars from your wallet right now in the 1900 catalog, or $1,000 dollars from the wallet you'd have in 1900 in the 2008 catalog.
I haven't taken a look to see where things would come out, but just thinking about whether I'd like to be buy, say, U.S. Postage stamps, I doubt it.
Now, if I could buy an internet connection, that might be another thing ..
Posted by: PrestoPundit at Jan 17, 2008 12:58:44 AM
Life expectancy at birth in the US in 1900 was 47 years, compared with 77 today. Given the state of medicine in 1900, how many hours of your salary do you reckon it have taken to obtain health care that would extend your life by 30 years?
Posted by: John S. at Jan 17, 2008 4:06:29 AM
odograph, you want this Wikipedia paragraph -- what you're looking at is a later spin-off of the original Sears catalog.
Doesn't this depend on what you want to buy? Trying to think of comparable things across that time period, I hit on musical instruments. Woodwinds have changed quite a bit since 1900, but as far as I know, string instruments are still pretty much the same (carbon-fiber bows and fancy strings aside). I don't have a 1900 catalog handy, but I'm pretty sure a comparable string instrument is at least ten times as expensive now as it was then. Assuming they still had wooden flutes available that late, I'd jump at the chance to buy one (or ten) at 1900 prices -- they are probably a hundred times as expensive today.
Obviously there has been extreme deflation in the price of technology. In 1982, $1000 would buy you a Commodore 64. That money today will buy a machine more than 4,000x faster with 30,000x as much RAM, plus a host of other features simply not available in 1982. Actually, that $1,000 machine today would handily outperform a multimillion dollar Cray X-MP supercomputer from 1982.
I have no idea how you sensibly combine those two very different areas into one inflation / deflation number.
Posted by: Sol at Jan 17, 2008 4:37:10 AM
But why does it take 2 incomes and a pocket full of credit cards to live a middle class life, nowadays?
I know we get some nicer stuff: cable, computers, better groceries, bigger houses. But it generally takes 2 people to achieve this. Is it twice as good? Do the kiddos benefit from being with day care providers more (of the waking hours) than with parents?
Posted by: burger flipper at Jan 17, 2008 5:43:48 AM
To say that inflation is overstated because you get more for your money today as opposed to 100 years ago conflates inflation, a monetary policy factor, with essentially non-policy factors- technology and innovation and evolving division of labor that increases productivity.
Sometimes I hear people talk about the cost of a loaf of bread or some other commodity as a better comparison. I think an appropriate, or rather, interesting, measure of inflation would be how much of a "man-hour" is purchased per dollar.
If we want inflation to mean something, it should measure what we want it to measure, money. Not innovation, dwindling resources, etc.
This is not a new labor theory of value, just a more realistic measure of inflation. I couldn't have bought this laptop in 1900 for any price, so the inflation rate over the past hundred years for it is meaningless. But the average man-hours of skilled labor spent building steam engines should be roughly comparable.
Posted by: Andrew at Jan 17, 2008 6:55:15 AM
One other thought.
Sure, we live better today. But there are also items that are considered essential to modern living that couldn't be had in past decades, no matter what the price. Cars, computers, college educations, etc.
Sure, my computer is faster today than ten years ago (in theory anyway, I don't think it is in fact, but Vista's another story) but I couldn't run the programs that I need to run today on the old computer, if for no other reason than the constant waves of compatibility issues crashing against my shore of technological resistance.
This "innovation" adds to the overall cost of living of the average person, another potential input for "real" inflation.
Posted by: Andrew at Jan 17, 2008 7:04:01 AM
"In other words, you need to compare whether you'd like to spend $10,000 of today's dollars from your wallet right now in the 1900 catalog, or $1,000 dollars from the wallet you'd have in 1900 in the 2008 catalog."
OBVIOUSLY, you'd take your today's dollars and buy Sears stock in 1900!
Posted by: Andrew at Jan 17, 2008 7:09:55 AM
I agree that this is conflating things. If certificates of deposit have negative returns when adjusted for inflation, will new goods still compensate? I have less purchasing power in general, but if I can buy a better iPod or computer I'm OK?
That might depend on who I am.
I do think hours labor, in the quintiles, to earn basic things like rent, food, clothing is the way to go.
Healthcare inflation ... double digit growth in costs without double digit growth in life expectancy?
Posted by: odograph at Jan 17, 2008 7:29:48 AM
Healthcare...yuck!
Basically, what would you not pay for even the most miniscule chance of survival?
The answer to that question, I think, is what explains healthcare inflation.
Desperation, ignorance, salesmens' (i.e., doctor's) perceived authority, and the rush to judgment from artificial emergency blinds people to rational decision-making in healthcare. Third-party payment hides the direct cost to the consumer. Ugh.
Posted by: Andrew at Jan 17, 2008 8:33:50 AM
But why does it take 2 incomes and a pocket full of credit cards to live a middle class life, nowadays? I know we get some nicer stuff: cable, computers, better groceries, bigger houses. But it generally takes 2 people to achieve this. Is it twice as good?
Maybe because you've internalized the definition of 'middle class' life as meaning "what you can buy with 2 incomes and a pocket full of credit cards"? Seriously -- what you're asking is, "Why do I have to work the way everybody else does to buy the things that everybody else has"?
But if your ideal is the life of the 1950s with a 800 square foot Levittown tract house and a stay-at-home housewife, that option is still available. And as an extra bonus, you can keep the MP3s and DVDs and other electronic items that are so cheap it doesn't make any sense to do without.
But I also think you're operating under a false assumption if you think that families are working much harder now that in the past. As it happens, I've been re-reading Witold Rybczynski's Home, (which is a brilliant little book), and one of the things that's clear there but that you're not taking into account is that a hundred years ago, being a 'non-working' homemaker was truly an arduous full-time job (unless you had a maid -- in which case it was an arduous, full-time job for her). No washing machine or clothes dryer, no dishwasher, no vacuum cleaner (you hauled the rugs out to beat them), no refrigerator or freezer (frequent shopping), a furnace and stove that needed to be stoked by hand, clothing that was likely homemade (and pressed with 10 pound flatirons that you heated on that hand-stoked stove). Oh, and probably no indoor plumbing (which really doesn't sound that bad until you think -- no indoor plumbing in January).
Posted by: Slocum at Jan 17, 2008 8:46:20 AM
on the other hand, surrounded by your new Sears goodies, you'd starve and freeze to death trying to spend your 1908 food and fuel budget.
Posted by: dsquared at Jan 17, 2008 9:49:10 AM
Allan Meltzer recommended this as the best illustration of the phenomenon:
http://www.dallasfed.org/fed/annual/1999p/ar97.pdf
Posted by: Chris at Jan 17, 2008 12:02:20 PM
Slocum,
Excellent point about the housework-- I actually read Harford's 2nd Slate excerpt right after this post and it coincidently talked about the same thing, in passing. 30 years ago (per Harford), the average man was putting in 50 hours in the salt mines and the women about 40 in the household. Personally, I'd be quite content with a little house, but doubt I'd want to send the future kiddos to the schools (and possibly neighborhoods) they're tied to. I've yet to buy a cell phone. I don't think I really define middle class living as being able to purchase what everyone else has. My definition is more a life where provision of food, shelter, good education, and health care are a given without putting in too much more than 40 hours a week.
I'm a lazy ass who parlayed a talent for standardized testing into a decade of collegiate pinball, bouncing around from top tier liberal arts to community college and military service. Now I'm just sorta dreading the grind I've set myself up for with a library degree and wishing I had a time machine so I could go to Rice for mathematical economics instead of Carleton for intramural b-ball and drinking.
But I still certainly concede your main point. Even by my definition, the middle class life is attainable even on a single income if you choose smartly your housing market and career.
And thanks for the tip on the book. I'll add it to the (ever expanding) list and try to squeeze it into the some of the 148 hours a week I'm not at work.
Posted by: burger flipper at Jan 17, 2008 8:55:47 PM
"If you are spending a million dollars (in either 1900 or 2008), there is very radical deflation."
I think TC has missed the boat here. I think a million is much to be preferred to a million now.
You'd miss the improvements that better technology has given us, but there would be plenty to make up for it. One obvious point, at least to me, would be the much higher relative status you'd have in 1908 - and don't all of these happiness studies tell us that is what is really important to people?
Give me $1,000,000 in 1908 and to hell with the Sears catalog. I'll retire to Lake Como and spend my time reading and traveling. I'll miss the cinema and music of the past 100 years but with most of the other arts - literature, fine art, classical music, theatre, gardening - most of the good stuff will be available. I'm not convinced that people with $1,000,000 in 1900 ate all that badly, either.
(If I am allowed to retain my 2008 consciousness, I will be especially gratified by my superiority in ethics to those loutish folk that lived in the past - what a fine master to my servants I will be).
Posted by: anon/portly at Jan 18, 2008 3:38:12 PM
Eating: if you had a $1,000,000 in 1900, you probably ate pretty well, but as SInclair, etc. showed in their muck-raking tomes, for those lower on the incoem scale, food was a crapshoot that could lower your lifespan and enjoyment of life considerable, of course, you could argue that this may even hold true today considering the latest research that chows that e coli contaminatiosn can cause you health problems for years after the incident. But I would suspect that overall food is of better average quality for most Americans today than it was in 1900.
Making comparisons on the cost of living, even in the same era amongst different sections of the same country is fraught with many problems. Comparison with past doubly so. Though, items like the Big Mac allow at least "better" comparison in that you are comparing at least apples wiht other types of apples (if I may).
A better comparison might be to wath programs like "Manor House" where a family agreed to live by 1900 technology. They found it very difficult, even those who were of the "privileged class". Not only was the style of livign worse, but the social customs enforced by the economy were stifling.
Never forget, the greatest cause of the sexual revolution was the automobile.
Posted by: R Gregory at Jan 23, 2008 1:28:20 PM
@BurgerFlipper: Did women enter the workforce because they felt that a middle-class lifestyle couldn't be supported without their non-home labor? Or did they enter the workforce for other reasons (e.g., feminist empowerment)? Basically, are middle class families dual-income because middle-class things require two incomes to purchase, or is it the other way around? Say you and I are both burger flippers. If you and I are bidding on a middle-class house for our wives and kiddos, and my wife is a homemaker and your wife is an electrical engineer, who buys the house?
Posted by: mrpinto at Jan 26, 2008 10:06:20 PM
