Productivity increases are only so when they result in an increase of desired consumer goods purchasable at prior prices.
As I commented in my last piece, I’m scraping the bottom of the barrel as I come to the end of this series. ?I’ll keep this short. ?The concept of hedonics has some value as it tries to adjust price indexes for quality improvements. ?Where it goes wrong is equating technical improvement with usefulness. ?With products where technology is improving rapidly, often hedonic improvements cannot be measured, because the prior product is no longer being sold. ?If it were being sold, it would provide significant information about how much people value product improvements. ?As it is, sometimes economists try to estimate improvement in value off of technical improvements.
A computer that is twice as fast, with twice the RAM and twice the storage, is not twice as valuable. ?To the degree that hedonics takes shortcuts ?to estimate value, it overestimates how much value is added by technological improvement.
Before I start this evening, anyone who can point me to people with little or no emotions, or Asperger’s disease, who are good investors, could you send me? a link?? I am not looking for Michael Burry stories.? I am looking for articles that are more general.
I was chairing a pension board meeting for my denomination recently, when the representative from Morgan Stanley mentioned the positive change in the GDP figures.? I winced, and said to myself, “Doesn’t sound right.? How can the economy be doing well when energy and food are running up in price?”
So, when I got home, I looked at the 4Q “Final” GDP figures.? After a little while I realized that we are facing the same phenomenon as we did back in 2Q 2008, when I write the piece, Another Look at Preliminary Second Quarter GDP.? Let’s start with the definition of Gross Domestic Purchases, which I think more closely tracks the way average Americans feel than Gross Domestic Product does.
Pretty simple — GDP minus net exports equals Gross Domestic Purchases.? The trouble is that import price increases increase real GDP relative to real GD purchases.
Note well: IPD stands for implicit price deflator, which is a comprehensive measure of inflation.? Also, figures may not add due to rounding, timing differences, and errors in revisions.
In 4Q 2010 real GDP rose 3.1%, while real Gross Domestic Purchases fell 0.2%.? Why? Energy and other import costs rose which depressed the price indexes for GDP versus Gross Domestic Purchases.
Over the long haul, the two series are close to equal, but when they diverge, they tell a story.? The current story is that average consumers in the US are doing badly, while those benefiting from high corporate profits, and increasing exports are doing well.
In general, I am not impressed with statistics collected by our government, or how they use them.? But it’s useful to understand what they mean — to understand the limitations of the statistics, so that when naive/conniving politicians use them wrongly, one can see through the error.
Before I close for the evening, I’ll give one more example: the use of core CPI as a more reliable indicator of inflation than the unadjusted CPI.? From first principles, I already know something is wrong here, because if you want a more stable estimate of central tendency than mean, one can use a trimmed mean (Dallas Fed), or a median (Cleveland Fed) — you don’t toss out a whole class of data inside your calculation simply because it is more volatile on average.? and with respect to food and energy, yes, they are more volatile, but also over the last three, five, ten, and twenty years, inflation in food and energy has been higher than that of the core CPI.? For those who want to paint the inflation picture as happy, it is more convenient to paint that picture using the core CPI, which is a bogus concept.
We could go on with other intellectual weaknesses of the CPI — substitution effects, owners equivalent rent and hedonics, none of which are theoretically wrong, but which are applied wrongly, and lead to an underestimate of inflation.? If you have access to RealMoney, you can consult my article there.? Also, statistics vary by income level — those that are poorer spend a greater proportion of their income on food and energy, making the concept of the core CPI even worse for those less-well-off.? Or, as the guy shouted to William Dudley as Dudley misused the concept of hedonics — “I can’t eat an IPad!”? Statistics, even if properly done, reflecting the average income, will not necessarily represent the median person, much less the lowest quartile.
Just be wary with statistics, and those who use them.? Many have an axe to grind, including me, and will pick and choose their statistics at whim to suit their case.? I try to be fair — these are gripes that I have developed with the statistics over the last decade — my tune has not changed here.? They help to explain why goods and services price inflation has been restrained in the face of an exceedingly easy monetary policy.? Or, look at the asset inflation engendered, which does not enter into the Fed’s inflation lexicon.
Be wary.? Look at a broader range of statistics, and take apart the existing statistics.? Don’t just take the pronouncements of our government at face value.? They are experts in saying what is technically true, while implying what is false.? Be wary.
Inflation is a vague concept, because the term stretches to do duty in multiple areas: wage inflation, consumer price inflation, asset inflation, and monetary inflation, to name a few.? I agree with what Milton Friedman said that inflation is always and everywhere a monetary phenomenon, but where I differ is that monetary inflation may express itself in terms of inflation in the prices of goods and services, or in asset inflation.? Where inflation chooses to manifest itself depends on the balance of savers vs. spenders in a country.? Monetary inflation plus saving equals asset price inflation.? Monetary inflation plus spending equals goods and services price inflation.
As for the last week, I have a few articles to bring to your attention on inflation:
Baby Boomers need to think about purchasing power risk in their old age.? This doesn’t mean overdosing on stocks, but it does mean considering investment classes that are correlated with inflation, like TIPS, floating rate bonds, selected commodities, and stocks of companies that produce them.
I’m on record that I don’t like the way that the US government calculates goods price inflation.? From the way that they deal with owners equivalent rent, to the substitution effect, to hedonics (correct in principle, but they don’t do it right), to plain mismeasurement of the proper basket of goods, and the concept of core inflation, they mess things up.
Barry Ritholtz and I agree on many things.? Inflation is one of them.? These two articles express much of what I think about what is wrong with the measurement of inflation.? Far better to use a median (Cleveland Fed) or trimmed mean (Dallas Fed) to eliminate volatility than to exclude food and energy.? Food and energy are crucial to our lives, and they have been running at higher rates of inflation.
Inflation is growing in many areas of the world, including those that finance our current account deficit.? Buying our bonds rather than letting their currencies rise, encourages inflation in their countries, while suppressing it in the US.? There will come a day when they float their currencies, and then inflation will return to the US with a vengeance.? When that happens, call Chuck Schumer to thank him for his vigilance on the Chinese exchange rate, not.
