Archive for the Category Misc.

 
 

Further thoughts on “inflation”

Nick left the following comment on the previous post:

I really like this post … So I’m sorry to snark … But:

‘I concluded inflation is real.’
And
‘That’s why I keep claiming that inflation is a meaningless concept.’

Me think Econ no fit words good sometime.

What can I say?  I suppose I was thinking about this in two different ways:

1.  The BLS tries to do “hedonic” adjustments to the CPI, i.e. adjust for product quality change.  I showed that when we really did have high inflation you’d see the prices of ordinary items like cars rise very rapidly.  That’s clearly not true today.  I also showed that using what I thought was a plausible hedonic comparison (the 2014 Accord is just as good as the 1986 Legend) you could get zero inflation in new car prices, far less that the 35% assumed by the BLS.  So I’m dubious that the BLS is grossly understating inflation.  Of course I acknowledge that lots of service prices have risen faster than car prices, and thus there has been some inflation.  Even so, using the BLS hedonic approach, the actual BLS numbers seem plausible.

However . . .

2.  When I say inflation is a meaningless concept I’m suggesting that the concept is not well defined, despite the BLS’s attempts to do so.  Here’s commenter Vivian making a very good point:

Taking literally, “hedonic” means relating to pleasure. Did you get more or less pleasure from that 1964 Olds with all its trunk and leg space, steel and chrome and its muscular engine than you would from the Accord? What would it cost today, even with our advances in manufacturing technology, to reproduce that 1964 Olds with the same specs? Are hedonic adjustments confusing functionality with price (or even pleasure)?

These are all debatable questions, and for this reason I doubt the statement “there is no such thing as true inflation rate” is debatable.

In earlier posts I’ve made an argument (similar to Vivian’s and almost the opposite of my previous post)–that if you use a sort of “pleasure” criterion, then price inflation is roughly equal to wage inflation, and living standards haven’t risen at all. Thus people used to get great pleasure from crummy black and white TVs, but now someone with that TV set would be miserable, thinking about the great big flat panel HDTV his neighbor has.  He’d feel poor.  If economists really believe the CPI is supposed to measure a constant utility level, then for all we know there might have been no real wage gains in the past 100 years.  Who’s to say if people are happier than 100 years ago? All of these concepts are so slippery that I’m very skeptical of the notion that there is any “true” rate of inflation.

But my previous post was sort of saying; “if we are going to play the game of trying to seriously estimate inflation using BLS hedonic-type approaches, there is no reason to doubt their claim that inflation has slowed sharply from the Great Inflation period.”  Nice quality cars went from $3600 to $22,500 in 22 years, then to $22,105 in 28 more years.  You can quibble about the models I chose, but the overall pattern is clear.  Inflation has slowed sharply.  Or should I say “inflation” has slowed sharply?  I don’t seem to be able to make up my mind.

The Great Inflation

For God’s sake will people stop talking about inflation!  Especially you inflation “truthers” who insist the BLS is lying and the actual inflation rate is between 7% and 10%. Those are the sorts of rates we averaged during the Great Inflation of 1965-81. For those too young to remember, a little history lesson:

I was so excited when my dad came home with a red 1964 Oldsmobile 88.  That was a car for upper middle class Americans.  We were only middle class, but lived in an upper middle class house, because my dad was smart.  The car was actually used, but almost new.  He used to say a car lost 15% of it’s value the minute it was driven out the door of the dealer.  Now when I go look for late model used cars the dealers ask more money than for a new model. Here’s the car (which sold for $3600):

Screen Shot 2014-09-09 at 8.15.01 PM

Now let’s flash forward to 1986.  The Japanese cars are in style, and the first upper middle class Japanese car on the market is the Acura Legend, which sells for $22,500, more than a six-fold increase in 22 years. It was voted Car of the Year. That’s what high inflation feels like.

Screen Shot 2014-09-09 at 8.18.52 PM

Now let’s go up to the present.  I’m not quite sure what model would be comparable to the Legend, but the Accord is made by the same company, and is slightly larger.  Here’s a picture of the Accord:

Screen Shot 2014-09-09 at 8.22.44 PMI’m pretty sure the Accord LX is better than the Legend LS in almost every way you could imagine.  It’s price?  Brace yourself, because 28 years is even more than 22 years. Surely the price of cars has risen more than 6-fold in the last 28 years. I’d say around $200,000.  Nope.

OK, $100,000.  No.

$50,000?

Actually it’s $22,105. (The link has all the specs.)

Cars have gotten cheaper over the past 28 years.

In nominal terms.

(The CPI says car prices have risen about 35% in the past 28 years–I don’t believe that.)

BTW, wages of factory workers rose from just over $2.50 an hour in 1964, to about $8.90 in 1986, to $20.68 today.  Put away the tissue paper, the middle class is doing fine.

My favorite car was a 1976 powder blue Olds Cutlass with a T-bar roof, whitewall tires and white bucket seats:

Screen Shot 2014-09-09 at 8.47.42 PM

It was a $6000 dollar car, but I bought it used for $3500 in 1981. That’s actually a 1977, I don’t have a picture of my car.

Hmmm, I thought they were a bit better looking than that.

And no, I did not have a “Landau roof.”  I do have standards.

PS.  OK, I cheated a bit by using a Wikipedia photo of the Legend, which isn’t too flattering, and a very pretty official Honda web site photo of the Accord.  But I’m not kidding, I’d rather have the Accord, even for the same price.

Millennials have no idea how lucky they are that they can just go out and buy a Honda Accord, brand new.  On a middle class income.

That BMW you always dreamed of?  Back in 1970 they looked like something made in a Soviet factory.

PPS.  Labor intensive service prices have risen much more than car prices, and high tech goods have fallen dramatically in price.  There is no such thing as a “true rate of inflation,” but there’s also no reason to assume that inflation has not averaged 2% in recent decades.  It’s just as reasonable as any other number the BLS might pull out of the air.

Surprising?!?!?!?

Tyler Cowen linked to this (from the WaPo):

What’s really surprising, however, is that Democrats did not take this opportunity to up the ante on the Republicans by proposing to phase out corporate welfare in all of its forms, including Ex-Im. In the unlikely event that Republicans had accepted the challenge, it could have freed up tens of billions of dollars every year that could be used to reduce the deficit, cut taxes, invest in infrastructure or restore cuts to vital domestic programs. And if Republicans had declined the offer, that would have exposed their effort to kill the bank as the cynical and hypocritical ploy it appears to be.

We never grow up

Adam Ozimek has an interesting post on merit:

The answer is of course that the murkiness Freddie sees exists in all these areas. And yet, should we not praise good behavior? Should we stop praising honesty because, like work ethic of someone who finished med school, we can’t in a rigorous way distinguish when honesty is just a product of how they were brought up?

I would say no, in both cases we should praise the achievements and think of them as such. To me it is simply common sense we should praise honest people. I would say the same applies to those with economic and intellectual achievements, but to folks like Freddie that is not the case. Much like I don’t know how to explain to someone why telling the truth is praiseworthy if they don’t see it, I can’t really explain to Freddie why having a good work ethic or the other characteristics that help make someone economic or academically successful is praiseworthy if he doesn’t see it. I can only draw parallels and ask what the differences are.

But what I do think should be visible to all is that holding aside all of these philosophical difficulties, praising moral behavior and having an economic system that rewards the creation of economic value is instrumentally valuable. A world that praises charitable behavior despite humanity’s widely differing propensities for it means we have more charitable behavior and are all better off, including those without such propensities. And a world that rewards the creation of economic value despite humanity’s widely different propensities for it means we have more economic value and are all better off, including those without such propensities.

In other words, Freddie’s socialist dream is a bad idea even I can’t convince you it’s also immoral.

I think I do know how to explain to someone why telling the truth is praiseworthy, and it isn’t “common sense.”

It’s a mistake to differentiate between how someone was “brought up” and how they are treated as an adult.  Being well brought up means being praised when you do good and criticized when you are bad.  That process never ends.  I’ve been criticized a lot over the past decade, and I’m in my late 50s.  The criticism has probably made me a better person, and has certainly changed my behavior in certain respects.  When commenters/friends/family criticize me, they help “bring me up.”  Ditto for when they praise me.  In other words, criticism and praise have instrumental value.

Ozimek is criticizing a post by Freddie deBoer, which ends as follows:

The long-term project of those who decry the role of unearned advantage in human society should not be to try and parse who is most and least privileged. The project should be to deny the salience of “merit” as a moral arbiter of material security and comfort. The very notion of just deserts– the notion that some people have legitimate accomplishments that we must celebrate because they represent “merit,” whatever that is, distinct from their privileges– is what has to die. There is no space where privilege ends and legitimate accomplishment begins. There is, instead, a world of such multivariate complexity that we can never know whose accomplishments are earned and whose aren’t. Instead, we should recognize the folly of tying material security and comfort to our flawed perceptions of other people’s value, and instead institute an economic system based on the absolute right of all people to food, shelter, clothing, health care, and education.

Unlike 99% of libertarians, I agree with much of this paragraph, except for the last half of the last sentence.  I wish he had ended his post as follows:

Instead, we should recognize the folly of tying material security and comfort to our flawed perceptions of other people’s value, and instead institute an economic system based on maximizing aggregate utility. That system is called capitalism.

I also slightly disagree with deBoer’s comments on merit.  I certainly don’t think we “must celebrate” the success of billionaires, but I do think praise is appropriate for the sort of good behavior that has positive external benefits.  It’s worth mentioning in the media that Bill Gates spends his wealth on charity, not 500 foot yachts.  Not because Gates needs our praise, or even “merits” it in the common sense meaning of the term.  Rather we should praise him because poor kids in Africa need his mosquito nets.

The evil that men do

Tyler Cowen linked to an excellent observation by Ross Douthat:

The point is that as a society changes, as what’s held sacred and who’s empowered shifts, so do the paths through which evil enters in, the prejudices and blind spots it exploits.

So don’t expect tomorrow’s predators to look like yesterday’s. Don’t expect them to look like the figures your ideology or philosophy or faith would lead you to associate with exploitation.

Expect them, instead, to look like the people whom you yourself would be most likely to respect, most afraid to challenge publicly, or least eager to vilify and hate.

Because your assumptions and pieties are evil’s best opportunity, and your conventional wisdom is what’s most likely to condemn victims to their fate.

Saturos sent me a post that discusses (among other things) how the group that formed to promote free speech on campus eventually become the most powerful opponent of free speech on campus.

I’m also reminded that the group that fought hardest for monetary equilibrium in the 1970s (the hawks) became the group most forcefully promoting monetary disequilibrium in the 200os.

And that the group that fought hard to engage the US in the fight against fascism in the 1940s (those opposed to isolationism) became promoters of fascist regimes during the Cold War.

And the group that fought for liberal reforms in the 1800s eventually began promoting eugenics.

And the group that formed to promote the liberation of women ended up promoting laws against prostitution and pornography.

I just got back from a Mont Pelerin meeting in Hong Kong.  I was on the panel discussing the “The Coming Inflation Threat.”  Of course I said that there is no inflation threat.  After the meeting a young person from Australia told me that among his generation of classical liberals the general view is that “If they can’t have an Austrian world, their second choice is a Scott Sumner world.” Naturally I was flattered, but of course if it ever happened then at some point I’d become a force for evil in the world.

PS.  The conference was excellent—much better than I expected.

PPS.  We may not have a Scott Sumner world, but Saturos sent me a post showing that at least I am on the map.  Indeed 4 economics blogs made the map.  Three certainly belong there—about the fourth I have  .  .  .  no opinion.

PPPS.  This seems relevant to the post:

There is a single characteristic, I argue, that defines and unites the cognitive community that you and I share if you are reading this (the community of nerds). These days we often identify as rationalists, skeptics, or atheists, interested in cognition and cognitive biases; we are likely to eat LSD at Burning Man. We read analytic philosophy, science fiction, and LessWrong. We are intelligent, socially awkward, and heavily male. Is there a good name for that?

Lucid Dream

Intelligence and social awkwardness partially explain many of the patterns of our community, but neither is the characteristic I have in mind. This characteristic may be explained by analogy to lucid dreaming (incidentally, a common interest of our members). Dreams ordinarily fool us; despite their incoherence, we accept them as fully real while we are in them.

With effort, over time, you can get in the habit of performing “reality checks” during waking life: trying to push your fingers through solid surfaces, perhaps, or to breathe with airways closed. When asking, “am I dreaming?” and testing coherence becomes enough of an aspect of everyday reality, you may start performing reality checks in dreams, too. If you are successful, your reward will be an insight denied to most people: knowledge of the fact that you are dreaming.

Dreams demonstrate that our brains (and even rat brains) are capable of creating complex, immersive, fully convincing simulations. Waking life is also a kind of dream. Our consciousness exists, and is shown particular aspects of reality. We see what we see for adaptive reasons, not because it is the truth. Nerds are the ones who notice that something is off – and want to see what’s really going on.

Our People

Communal belief – social reality – and the sacrednesses that it produces are precisely the powerful layers of distortion that we are likely to notice (and hence have a chance at seeing through). We are less able than normal humans to perceive social/sacredness reality in the first place, and to make matters worse, we are addicted to the insight rewards that come from trying to see through it even further. Autism is overrepresented in our community; depression, too. Autism is associated with a reduced ability to model other brains in the normal, social way; this failure carries even into modeling the mind of God, as autism is inversely linked to belief in God. The autistic person is more likely than the neurotypical to notice that social reality exists; we might say the autistic person gets a lucid dreaming reality check for the great social dream with every inscrutable (to him) human action he witnesses.

Mild depression removes pleasurable feelings from everyday life; it interferes with a mechanism for sacredness-maintenance distinct from the theory of mind path autism blocks. Meaning is deconstructed in depression; social connection is weakened. Ideas and things that for normal individuals glow with significance appear to the depressed person as empty husks. The deceptive power of social and sacredness illusions is weakened for the depressed person (as are certain other healthy illusions, such as the illusion of control). This is not necessarily a victory for him, as self-deception is strongly related to happiness; the consolation of insight may not make up for the loss of sacredness in terms of individual happiness. The characteristic that distinguishes us is not necessarily a good thing. Our overdeveloped, grotesque insight reward seeking is likely maladaptive, and is probably not even doing our individual selves any good. Extremists – those most capable of perceiving social/sacred reality – are happiest.