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PeakTrader said...

Walt, when the Ford Model T becomes a Ford F-350, after the Information Revolution explodes in 1982, how do you control for quality?

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VangelV doesn't understand there was a "structural break" in 1982 called the "Information Revolution."

The BLS lagged in making the appropriate adjustments to the CPI, and continues to lag, although not as much after making some adjustments.

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After 1982, there was not only disinflation (instead of accelerating inflation), there was also accelerating quality improvements (instead of slow quality improvements).

If you recall, Greenspan in the '90s believed inflation was overstated. So, he allowed more accommodative monetary policy, which resulted in even stronger disinflationary growth.

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Hydra, it's difficult to control for quality, because much of it is subjective.

Some quality differences can be quantified (in theory), e.g. between an older and newer truck.

Gas mileage, pollution, time & money saved on maintenance, extended life, etc. can be measured.

However, the sum of owner satisfaction is difficult or impossible to measure.

So, we don't know if a 1984 truck is more expensive or cheaper than a 2010 truck in today's dollars adjusted for quality differences.

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The methodology used to measure inflation in the 1970s was appropriate.

However, after 1982, the methodology became increasingly inappropriate and adjustments had to be made.

The adjustments were late, which increasingly overstated inflation, until (conservative) adjustments were made to reduce the overstatement.

It's inappropriate to use today's methodology to measure inflation in the 1970s, because it's two different economies.

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How do you measure the quality difference between a typewriter and a personal computer? (including the subsequent quality and price improvements of a PC compared to a typewriter).

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In 1985, the original basic price of a Ford F-350 was $12,000.

In 2011, the basic price of a Ford F-350 is $36,000.

Between 1985 and 2010 purchasing power decreased roughly 50% from inflation, while purchasing power increased over 50% from per capita real income growth.

In 1985, $12,000 was equal to $24,000 in today's dollars, while per capita real income rose from $29,000 in 1985 to $44,000 in 2007 (i.e. increased $15,000 after inflation).

So, it's possible, all the quality improvements of a Ford F-350 over the past 25 years was free.

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VangelV, I think, Greenspan gets too much blame or too much credit.

The U.S. had a spectacular structural bull market from 1982-00, and then a spectacular cyclical bull market (in a structural bear market) from 2002-07, resulting in twin asset bubbles, which created enormous real wealth.

Much of the twin bubbles were fueled by record-breaking capital creation of U.S. firms and massive foreign capital inflows (which also lowered interest rates, reducing monthly payments for Americans).

Of course, the asset bubbles were also fueled by demographics, since the 80 million Baby-Boomers (born between 1946-64) began to enter their "prime-age" years in 1982 (35-54, and the 55-64 age group is the second most productive group, based on education, training, and experience).

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And, regardless of what happened in the past, a severe recession could've been avoided in 2008 or a V-shaped recovery could've been achieved in 2009.

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VangelV, almost everything you say is contradicted by the data.

And, if you don't believe the data, the huge improvements in U.S. living standards is revealed in 1970s television shows, e.g. Kojak, where you can see how Americans lived and worked in the 1970s compared to today.

In regards to the past few years, idle resources need not remain idle. Those dramatic improvments in living standards can continue indefinitely, although at a somewhat slower rate, since the 1982-07 period was one of the greatest eras of U.S. prosperity.

You can thank Greenspan later.

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Morganovich says: "greenspan changed the cpi calcualtion so that it would read lower and the dgp deflator so gdp would read higher... nothing actually changed."

Sure, the budget surpluses were just a delusion.

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PeakTrader said...

Bruce Hall in the prior post said: "The $0.30 per gallon of gas in 1964 is equivalent to $2.19 ... no comparison."

U.S. per capita real GDP was around $20,000 in 1964 compared to around $47,000 today.

http://research.stlouisfed.org/fred2/series/USARGDPC?rid=204

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It's difficult or impossible to measure quality changes, although it may be easier to estimate a decrease in quality than an increase in quality.

The BLS takes a conservative approach.

I stated before:

In 1985, the original basic price of a Ford F-350 was $12,000.

In 2011, the basic price of a Ford F-350 is $36,000.

In 1985, $12,000 was equal to $24,000 in today's dollars, while per capita real income rose from roughly $30,000 in 1985 to roughly $45,000 in 2007 (i.e. increased $15,000 after inflation).

So, all the quality improvements of a Ford F-350 over the past 25 years was free.

Moreover, interest rates are much lower today than in 1985.

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Larry says: "but if you took this chart and subtracted out the lower costs goods that came from China, India, etc... what would the chart look like?"

I think, it's important to note offshoring low-end manufacturing freed-up limited resources for more high-end manufacturing and emerging industries, which resulted in higher paying jobs, lower interest rates, and lower inflation.

Living standards can rise indefinitely. It's a question of how quickly or slowly we want to move into new economic revolutions.

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Jet Beagle said...

morganovich: "food is much worse (not organic, full of chemicals, less nutritious)"

I think that's a statement of opinion, and not a fact. Based on what's important to me, the quality of food is far superior to what was available in 1964.

First, food from the 1960s was full of chemicals. The chemicals have changed, but I do not believe for the worse.

Second, the food available at urban supermarkets is today far more varied than what was on the shelves in 1964. Very few organic foods were available back then. Exotic vegetables and fruits were just non-existent.

Third, prepared meals of today available in the frozen food sections are far supeior to the few Banquet and Swanson TV dinners of 50 years ago.

Were you buying food in 1964, morganovich?

morganovich: "brands like j crew that were once synonymous with durable quality now mean "wear it 3 times and it's shot"."

Oh, please! Are you honestly saying that you continue to purchase clothes which only lasts through 3 wearings?

The $16 Wrangler jeans I buy from Walmart last for years. I've bought Hanes crew socks at Walmart that I've worn 50 or more times.

I own a Banana Republic shirt I've worn 15 times a year for the past decade.

Not sure what you do to wear out clothes so quickly, morganovich, but my experiences are exactly the opposite of yours.

morganovich: "gasoline is worse (lower energy content due to ethanol)"

I disagree. Gasoline produced at today's refineries is superior to what was produced 60 years ago. MTBE has replaced lead as an oxygenator. Top Tier gasolines introduced in recent years, such as Chevron's Techron gasolines or Shell's Nitrogen Enriched gasolines, have been proven to keep engines cleaner,

Your argument is not about the quality of gasoline, but tather the fact that government does not allow consumers to purchase just gasoline at the pump.

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Walt G. said...

"If everything is cheaper, where does all the money go?"

I have three color TVs with bigger than a 50-inch screen and central air conditioning. I grew up with one 19-inch black-and-white TV, and we used a window fan in an open to cool off.

I have two cell phones, a corded land line with two other cordless phones, a wireless lap-top computer, two desk-top computers, amd two blue-tooth hearing aids to tie all this together. I'm high-tech, and I'm wired. It's cool. To those who yearn for the 1960s, stick that in your 1960s if you want me there with you.

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PeakTrader said...

VangelV says: "Why doesn't the housing price explosion of the early 2000s show up on this chart? And if it doesn't just how accurate is the methodology that produces it?"

If your house doubles in price, your monthly mortgage payment is the same.

Or, you may refinance at a lower rate to reduce your monthly payment, or take out some equity for consumption or investment (e.g. home improvements).

Many people who bought houses at high prices, sold them at even higher prices, unless they bought at the top.

When the market crashed, employment crashed, not monthly payments.

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PeakTrader said...

Obviously, there remains inflation bias from those who assume inflation is understated.

You can show them a circle 360 ways and they'll still tell you it's a square (and even say something about "circular thought").

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And there's deflation for seniors too:

Drug prices will fall sharply as patents expire
July 25, 2011

"The cost of prescription medicines used by millions of people is about to plummet.

The next 14 months will bring generic versions of seven of the world’s 20 best-selling drugs, including the top two: cholesterol fighter Lipitor and blood thinner Plavix.

The magnitude of this wave of expiring drug patents is unprecedented.

Generic competition will decimate sales of the brand-name drugs and slash the cost to patients and companies that provide health benefits.

The new generics will slice copayments of those with insurance. For the uninsured, who have been paying full price, the savings will be much bigger."

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Blockbuster-drug prices to drop as patents expire
July 25, 2011
LA Times

"In the next two years, six of the 10 top-selling drugs will lose their patents, meaning other companies can make the medications and sell them at a huge discount, perhaps up to 80% off."

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A lot of people oversimplify a large, diversified, and dynamic macroeconomy.

Even economists can't figure out the economy.

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http://1.bp.blogspot.com/-nKXCAxSUMkQ/Tv4OzXZqX8I/AAAAAAAAQng/oapAfnoxBgw/s1600/bpp.JPG

Krugman: If inflation were much higher (or much lower) than reported, you’d expect to see a big divergence between the independent index and the official stats. But you don’t (see chart above).

http://www.blogger.com/comment.g?blogID=28997633&postID=5508676753376395639

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Krugman also stated on March 28, 2011 (Billion Price Preview):

"Funny how all the people screaming about runaway inflation after a few months of rising commodity prices didn’t scream about runaway deflation when those prices were falling."