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Bart:

Reverse hedonics at work!

1. That 1983 refrigerator lasted way longer than the ones from today.

2. Same with the microwave oven.

3. Same with TVs… and virtually every other consumer durable.

And all three are basically unrepairable, so a new one must be purchased.

Of course there are productivity improvements and many innovations, but what about all the areas and products where the actual prices has gone up *when taking loss of quality and similar* into account.

Surely the solid wood dining room table doesn’t compare to the plastic veneer covered particle board?
Or how about the push-em-though-quick doctor appointments as “compared” to actually talking to the doctor?
Or noting the good improvements in cars while pretending that repair costs and insurance costs haven’t tripled as a percentage of total car ownership costs?

Lots more examples of the opposite (aka reverse hedonics) if one looks.

And then there’s the false comparison of corn vs. GMO corn. Sure GMO corn is lots cheaper… but does anyone remember the taste difference… or how about the much higher sugar (breakfast of champions anyone?) content of GMO corn.

Sure beef has gone down on an inflation adjusted basis… until one compares beef of many years ago against ‘organic’ / grass fed beef.

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Walt:

I’m currently teaching and doing home energy audits. The new refrigerators save $100 to $300 a year in electricty cost over old refrigerators. It’s a trade-off because new refrigerators last 10 to 20 years instead of 20 to 40 years like the old ones, and they are now throw away instead of repair. Still, the payback is quick. Likewise, new air conditioners and furnaces save electricity and gas over the old ones. Newer is usually better if you want cheaper to run for most appliances.

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PeakTrader:

How do you measure quality changes of mobile phones?

“In 1995, mobile phones…huge in size and with a pretty long antenna. It is similar to today’s cordless phone. It must seem real odd to us now, but back then this cell phone was the craze of the day.

2012 – No one could have imagined that in a mere 17 years, mobile phones could have made the leap from just being the alternative to landlines to becoming a computer, GPS, radio and our lifeline to the Internet, and still be able to fit in your pocket.”

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However, mobile phone service, like internet service, has become a significant household expenditure, while firms, like Apple, made huge profits:

How cell phones have changed your budget
Oct 12, 2012

“According to the Bureau of Labor Statistics, Americans only spent an average of $210 per year on cellular service back in 2001. That’s less than $20 per month.

The average cell phone bill is now more than $63 per month or $760 per year as of 2010…on an annualized basis, these figures reflect an increase of more than 15% per year from 2001-2010…annual household expenditures only grew around 2% during that same time frame.

Alongside the rise of mobile devices has come the fall of landlines, which see far fewer dollars devoted to them today versus 2001.

In recent years, many people have cut back on discretionary expenses such as dining out and clothing purchases. However, spending on mobile phone services has grown at a steady pace. As a result, mobile phone expenditures have increased as a percentage of household expenditures.”

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If I recall correctly, I paid around $20 a month 10 years ago for 500 minutes using a mobile phone that basically only made phone calls, and upgraded to 1,500 minutes for over $40 a month.

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Ron:

I don’t agree, Bart. Jon has offered one explanation, and I think there’s more.

I find newer durable goods to be more reliable than ones from years past, especially autos, and I believe the lifetime costs, including repairs, are lower, as Prof. Perry’s chart would indicate. Other than the novelty, and use as a conversation piece, what do you think is attractive about still using a 30 year old refrigerator?

Which would you prefer – an expensive appliance you repair 5 or 6 times during a 20 year life, or a much cheaper one that works perfectly for 10 years then dies?

As to food, as Jon says, it’s mostly subjective, but I’ll bet that in a properly conducted double blind taste test, you’ld be unable to identify GMO corn. I think the taste is more related to time since plucked from stalk than anything else.

The good part, is that since GMO corm IS a lot cheaper, millions of people world wide may get enough to eat who wouldn’t otherwise. You and I, incredibly wealthy by global standards, can choose to pay more for fresh picked, local “organic” corn if we prefer it.

Choice is great, ain’t it?

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Chuck:

In 1933 a dozen eggs went for .15, ham cost .15/lb., beef steak was .25/lb., coffee, .30/lb., a movie ticket was a dime, gasoline .15/gal., and first class postage .03.

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PeakTrader:

In 1933, GNP was $68 billion. What’s your point?

I heard per capita income was $750 in 1933. Median income was likely much lower.

According to this chart, when you place curser over year, personal income per capita was $372 in 1933:

http://www.google.com/publicdata/explore?ds=a7jenngfc4um7_&ctype=l&strail=false&nselm=h&met_y=personal_income_per_capita&hl=en&dl=en

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Clairpro says: ““…eat what you kill” economics…”

The top 1% eats much less than what it kills, unlike the bottom third, which eats much more than it kills.

Do you want to facilitate more or fewer “kills?”

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From article:

“The ‘success sequence’: finish school, get a job, get married, have babies…the poverty rate would be cut 70 percent.”

My comment:

The failure sequence: Have babies, with multiple partners, get on welfare and drugs, complete a GED, and eventually work at McDonalds.

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Americans aren’t blaming government enough for driving-up the cost of living through taxes (my California State Tax alone is thousands of dollars each year) and regulation (particularly, driving-up prices in health care, education, and energy), along with wasting trillions of dollars, including in the housing crisis.

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It’s not only taxes, at the state and local levels, it’s also fees, fines, fares, and tolls.

And regulation:

The Regulation Tax Keeps Growing
September 27, 2010

“The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008…new policies enacted in 2010 for health care and financial services will increase this burden.”

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Over-regulated America
The Economist
Feb 18th 2012

“A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee.”

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http://www.aei-ideas.org/2012/10/access-to-the-good-life-for-low-income-americans-comes-from-the-miracle-of-the-marketplace-especially-manufacturing/#comments

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PeakTrader:

The worst part of the economic train wreck is in front of us, from the fiscal cliff, expiration of the Bush tax cuts, Obamacare taxes, inflationary Fed, regulations, the Alternative Minimum Tax (which now affects 30 million Americans, i.e. the middle class, because it hasn’t been indexed to inflation), a recession in a depression, etc., while we continue to pile-up trillions of dollars in debt, which may soon lead to another downgrade.

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The U.S. economy remains on life support from an additional $1 trillion a year in federal spending (compared to 2007), endless quantitative easings, and generous imports.

Without that assistance, the decline in living standards would accelerate quickly.

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Hydra, there’ve been only four major economic revolutions in human history: Agricultural-Industrial-Information-Biotech.

There will be hundreds more, and there’s lots of work to be done.

The potential speed of economic revolutions are constrained by resources, e.g. labor and capital.

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http://www.aei-ideas.org/2012/11/the-us-economy-is-now-producing-2-2-more-output-than-before-the-recession-but-with-3-84-million-fewer-workers/#comments

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PeakTrader:

There has been a slow decline in U.S. living standards over the past few years.

The decline will soon accelerate quickly.

We’ll buy fewer and smaller goods (including houses and autos), compared to a few years ago.

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Some people confuse changing tastes and preferences with inflation.

Americans can afford rib-eye steaks; they may prefer to buy Starbucks coffee, Ben & Jerry’s ice cream, protein drinks, etc. instead.

U.S. living standards improved dramatically over the 1982-07 economic boom, which can be measured by the increase in housing per square feet, the quantity, quality, and size of autos, the explosion of shopping malls, etc..

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If the economy recovered, U.S. per capita real income would be over $5,000 a year higher, and the still unfolding global train wreck would’ve been avoided.

The Fed would be completing a tightening cycle, of the money supply, and federal budget deficits would be shrinking rapidly.

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Bart, when I was in college, I rented a large one bedroom apartment with wooden floors and a view of the mountains in a nice neighborhood very cheaply.

My rent was unchanged the entire six years I was there.

Housing prices fluctuate, including when interest rates change. Yet, monthly payments can remain unchanged too.

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morganovich:

peak-

that is not a measure of price level. price level is what things cost in the market today. inflation is the change in that level from a prior period.

what you are describing is cost of living. that is not the same as price level.

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PeakTrader:

Morganovich, so, if my monthly housing payments remain at $1,000 a month for 30 years and inflation rises 2% each year, there’s no deflation?

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Ron:

The answer is no.

Assuming you are talking about a mortgage payment and not rent.

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PeakTrader:

Then, inflation is overstated.

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Or, it could mean consumers who don’t have fixed monthly payments, e.g. a mortgage or car payment, have higher inflation rates, in an inflationary environment.

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Ron:

You are conflating the price of a car or the cost of housing with the fact that you have borrowed money to purchase those things. Those prices are historical, and don’t change over time. The price of a fixed rate loan was fixed at the time you borrowed. Later changes in the value of the dollar don’t change the price you paid.

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PeakTrader:

Ron, the point I was trying to make is the purchasing power of a new house is not solely determined by its price change.

Also, if 75% of your income, for example, goes into fixed monthly payments for a house and a car, then your inflation rate (i.e. on the other 25% of purchases, if you spend all your income when inflation is rising) is lower.

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http://www.aei-ideas.org/2012/11/more-on-the-surge-in-october-home-sales/#comments

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PeakTrader:

Morganovich says: “if rib eyes get more expensive, they take them out of the consumption basket they use and replace them with flank steak…this causes them to understate inflation.”

Common Misconceptions about the Consumer Price Index
BLS

“When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?

No. In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can “live with” by reducing their standard of living.

This is incorrect: the CPI’s objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.

The BLS is not assuming that consumers substitute hamburgers for steak. Substitution is only assumed to occur within basic CPI index categories, such as among types of ground beef in Chicago. Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.

Furthermore, the CPI doesn’t implicitly assume that consumers always substitute toward the less desirable good. Within the beef steaks item category, for example, the assumption is that consumers on average would move up from flank steak to filet mignon if the price of flank steak rose by a greater amount (or fell by less) than filet mignon prices. If both types of beef steak rose in price by the same amount, the geometric mean would assume no substitution.

In using the geometric mean the BLS is following a recognized best practice for statistical agencies. The formula is widely used by statistical agencies around the world.

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI.

On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

A recent article by BLS economists estimated that the hedonic models currently used in the CPI outside of the shelter and apparel areas have increased the annual rate of change of the All Items CPI, but by only about 0.005 percent per year.”

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PeakTrader:

Bart, you need to look at all prices, not just a few, e.g. the total cost of a turkey dinner rather than the cost of one or two items (the CPI reflects a general price level):

What’s the average cost of a Thanksgiving meal?
November 21, 2012

“The average cost of a 10-serving Thanksgiving dinner will cost $49.48 this year.

With the United States having experienced its worst drought in decades this summer, there has been concern about rising food prices.

Yet the price of a Thanksgiving dinner in 2012 increased just slightly from its cost of $49.20 in 2011.

In fact, of the 11 items calculated by the AFBF for the dinner, eight got cheaper compared to last year, while only two became more expensive. The price of one — a 1-pound celery and carrot relish tray — was unchanged at 76 cents.

Although the cost of a 10-person Thanksgiving dinner this year barely changed from 2011, it is significantly higher than in 2009, when it was $42.91 and $43.47 in 2010.

Anderson says wholesale prices were rising during the most recent global recession, but retailers didn’t have the pricing power to pass the costs to consumers.

“Consumers were just incredibly cost-conscious during the recession,” Anderson said. By 2011, however, the economy was on strong enough footing that retailers began raising prices.”

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Right, when there are bargains, you buy. When there aren’t bargains, you don’t buy.

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I stock-up on Skippy, Planters, or Jif peanut butter when it goes on sale, e.g. 50% off.

One or the other seems to go on sale at least once every three months.

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It should be noted, health insurance, paid by employer, and Medicare, paid by government, are compensation, not consumption, paid by consumer.

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Bart, when employers pay, consumers don’t.

When foreigners pay (through a permanent or long-run trade imbalance, which allows lower U.S. taxes), U.S. consumers don’t pay.

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Also, it should be noted, many Americans pay fixed monthly housing payments, or their houses are paid-off, and pay fixed monthly car payments, with low interest rates, until their cars are paid-off.

So, there’s no inflation there.

Moreover, it seems, many retired Americans are well-off, e.g. receiving Social Security and retirement income (capital gains on Treasury bonds increased substantially).

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Many goods are just better, just cheaper, or better and cheaper. So, there’s also deflation.

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Gold is a ridiculous measure of the CPI. Gold was $250 an ounce in 2000.

Purchasing power increased, because nominal income rose faster than inflation.

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Some people make lots of false assumptions about the CPI:

Common Misconceptions about the Consumer Price Index
BLS

“When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?

No. In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price.

Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can “live with” by reducing their standard of living.

This is incorrect: the CPI’s objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.

The BLS is not assuming that consumers substitute hamburgers for steak.

Substitution is only assumed to occur within basic CPI index categories, such as among types of ground beef in Chicago.

Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.

Furthermore, the CPI doesn’t implicitly assume that consumers always substitute toward the less desirable good.

Within the beef steaks item category, for example, the assumption is that consumers on average would move up from flank steak to filet mignon if the price of flank steak rose by a greater amount (or fell by less) than filet mignon prices.

If both types of beef steak rose in price by the same amount, the geometric mean would assume no substitution.

In using the geometric mean the BLS is following a recognized best practice for statistical agencies. The formula is widely used by statistical agencies around the world.

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI.

On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

A recent article by BLS economists estimated that the hedonic models currently used in the CPI outside of the shelter and apparel areas have increased the annual rate of change of the All Items CPI, but by only about 0.005 percent per year.”

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BLS methods - Here’s an example:

http://www.bls.gov/osmr/pdf/st070120.pdf

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Bart, the article reflects how the BLS works to provide unbiased results on price changes, whether they’re seasonal, structural, or cyclical.

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It’s easy to assume the CPI understates inflation when you’re looking at little information.

When I moved from Colorado to California, one of the first things I noticed was high-quality, and low quality, steak was much more expensive.

Also, I recall being surprised fish (salmon, in particular) was much more expensive in California than Colorado.

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Morganovich, here’s some BLS data. Why don’t you create better models than the BLS or BPP (Billion Price Project), or collect your own data (there are plenty of prices out there):

http://www.bls.gov/cpi/cpid1210.pdf

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Geoih says: “Large groups of economists regularly aggregate completely unrelated prices, based on the subjective valuations of individuals, and state manipulated money, and proclaim the all-wonderful CPI to the world.”‘

Basically, you can say the same thing about the “State highway/transportation agencies” that built the Interstate Highway System.

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Bart, State highway/transportation agencies don’t publish their accounting worksheets, and neither does the accounting profession.

Products and prices aren’t hidden. No credible source has been able to prove the BLS understates inflation.

I’m sure there are lots of people who believe we never landed on the moon or Obama has done a great job on the economy.

What does that prove?

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Those charts say nothing about an unbiased consumer price index or the general price level.

You’d get more complete and more accurate information following the BLS methodology, including taking statistically significant surveys.

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http://www.aei-ideas.org/2012/11/addressing-the-myths-and-misconceptions-about-the-cpi/#comments

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