Good luck, BLS

by Russ Roberts on September 6, 2007

in Prices

The iPod will be six years old next month. The newly released iPod Classic with 160 GB of memory is $50 cheaper than the original iPod, holds 40 TIMES more songs and also plays color videos and displays photos. It is smaller, lighter and has a better battery. I wonder how the BLS takes account of the quality differences when measuring the price index and inflation.

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{ 29 comments }

Chris Meisenzahl September 6, 2007 at 12:39 pm

Excellent point.

AE September 6, 2007 at 1:26 pm

Innovation is improving quality while driving real (and even nominal) prices down. Consider early PCs, CD players, digital cameras, DVD players, TVs etc. This makes technology available to the masses and improves our standard of living.

Rex Pjesky September 6, 2007 at 1:37 pm

What might even be a larger problem for the BLS is the many other mp3 players that compete with the iPod. Companies and retailers "stager" their sales. The price the average consumer pays for a certain item is less than that item's average price.

CRC September 6, 2007 at 1:44 pm

But it gets even better than that.

The iPod nano at 4GB and $199 ($200 less) is a much better product than the original iPod with slightly less storage capacity. So now all of the people that might be makign the same amount of $ as those in 2001 have an even better, more affordable product option.

There are so many different (positive) ways to slice this. It seems that when people talk about things like salary level/growth they seem to miss this.

Dick King September 6, 2007 at 3:04 pm

I understand that there _is_ an approach to evaluating the equivalent price reduction of a quality improvement.

http://www.klenow.com/BKQ.pdf

The intuition is that at any given time wealthier people buy more of a given kind of good — and they buy higher qualities of each instance as well [for example, a poor person buys one $500 couch and a wealthy person buys two $750 couches].

Over time two things happen — there's inflation, and we learn how to make couches better. We use such learning to sell more and better couches — and the average person buys more couches and better ones, and the cited article claims that they split the advantage they take of the increased value of their couch-buying dollar by buying more and better couches in about the same manner as the wealthier people in the base year took advantage of the fact that they had more dollars to spend on couches.

The fact that the ratios seem to be the same over time can be validated because the later year has its own mix of wealthier and poorer people, just as the base year did. The cited paper claims that these ratios are relatively stable.

The one thing this technique does not allow is that you can't determine the quality-to-quantity ratio for any product that only comes in one version in the base year. Perhaps that's why Apple initially issued two versions of the iPhone and then retracted one :-) . It does allow evaluation of a product where it's not reasonable to own more than one, because an income range where some but not all people buy one instance each of a product can be thought of as buying a fractional instance each.

Of course the interest groups will never allow the BLS to apply such logic because it would reduce apparent inflation and it would be pilloried as cooking the books.

-dk

iceberg September 6, 2007 at 3:58 pm

$50 cheaper than what?

If I remember correctly, the 1st generation 5GB & 10GB iPods were priced $499 and $599 respectively.

Anyone know for certain?

kebko September 6, 2007 at 4:24 pm

I wonder about other changes in purchasing power, too. For instance, for less than about $400/year now, you can get a decent PC with decent enough high speed internet access. Whatever a family might have been spending $400/year on 10 years ago that they are now spending on internet access, it couldn't possibly have been as beneficial as this life-altering resource. So, even if everything costs the same portion of your income now as it did then, the benefits are staggeringly higher than they were then. I just don't see how you could even quantify that.

But, whenever I hear anyone in this incredible age of innovation bemoaning the stagnation of lower middle class incomes, I just want to glove slap them & say "Dummy up". It's amazing how blind we can be to reality in order to hold onto our conceptions.

True_Liberal September 6, 2007 at 5:52 pm

Truth be known, many products and services have undergone price deflation. Electronics are but one example (I view my computer as both a product and a service – a tool for both pleasure and business, and a news and entertainment service).

Maybe the most startling deflation has been airfares – The one thing I give Jimmy Carter great credit for is deregulation.

Jason September 6, 2007 at 6:00 pm

Would this not cut both ways? While we have seen quality improvments and price reduction in electronics, we have also seen a severe drop in quality of things like our food supply. And we are slowly losing even the low prices that, that reduction in quality created. Plus I would think a judgment like this would need to be weighted and I would weight food drasticly higher than electronics. I think we still come out ahead if these judgments are made, but they are far from one sided.

Brad Hutchings September 6, 2007 at 6:25 pm

Drop in quality of our food supply? What are you, 20? I'm still a young 36. I go to the store and get perfect fruit year round now. When I was in school shopping for myself for the first time 19 years ago, bananas were seasonal. Apple's were not huge and perfectly crunchy year round. "TV dinners" were still "TV dinners", not the huge variety of gourmet food that takes 5 minutes in the microwave to prepare and costs less to prepare than from scratch for 1 or 2 people.

Really, if you like good food, it is now cheaper to eat out and take home the extra for next day's lunch than prepare food for yourself. You can go to Outback and get a perfect steak today that hands down would beat a Morton's steak from 20 years ago.

I'm stunned Jason. Just stunned.

dave smith September 6, 2007 at 7:58 pm

Drop in the quality of the food supply?

Ha!

John September 7, 2007 at 12:29 am

The quick answer is that the BLS quality adjusts. Take a look at any computer CPI or PPI; it plummets. In fact, it keeps having to rebase computer series because the series approach zero too fast. The CPI for PCs was at 100 in Dec 97 and is now down to 9.601 even though the average PC isn't 9.6% of the cost of a 1997 PC.

Now if your argument is that you don't trust the BLS to quality control correctly as in your linked post, I guess that's a different issue that I can't speak to.

kurt September 7, 2007 at 3:55 am

But this whole CPI thing is a charade not? Why should the CPI measure quality? It is just an equation counting transactions for some sample of the population. It isn't even a good tool to measure inflation, as consumer valuations cannot be magically "averaged."

LowcountryJoe September 7, 2007 at 8:02 am

so! Writing about the quality improvments for an item in the "basket of goods" is not nearly as important as discussing the very real inequalities between the haves and the have-nots. Many people in this overly polluted country are in such dire poverty, that the chance to purchase an iPod is way down their list of priorities and just does not matter.

You shameless and heartless libertarians get yours while exploiting the labors of the downtrodden in your quests to have your precious gagets at cheap prices, while I, for one, will insist apon questioning consumption.

True_liberal September 7, 2007 at 8:13 am

Dire poverty?

Visit a few African and Asian countries and you'll quickly recalibrate your "dire" yardstick.

What passes for poverty in this country would acquire a new adjective in Zimbabwe or Mozambique. There, American "poverty" would be called "luxury".

Brad Hutchings September 7, 2007 at 10:07 am

That takes the cake LCJ. I know WIC recipients who have iPods. Maybe you're talking about people with beards who ride around in horse-drawn carriages? Yeah, I bet none of them have iPods, or a flatscreen, or a Wii.

spencer September 7, 2007 at 11:14 am

You do not have to wonder.

Give them a call and they will be more then
happy to explain their methodology.

When you know how they do it you can come back and explain what is wrong with what they do.

But just writing a post implying they ignore these issues is an extremely biased posting.

You might also check on the weight of iPods in the index. It is probably something like 0.001% so even completely ignoring the quality improvement in the iPod would not have a significant impact on the reported inflation rate..

Jim McAlister September 7, 2007 at 11:49 am

This is another instance that serves to illustrate the falacy of assuming stasis in comparing economic statistics. I have repeatedly forced my econ classes to think through two issues that are rarely taken into account by the government statisticians and NEVER by the "wealth gap" demogogues: One, that the information/value content of products in even a relatively free market will trend upwards; in other words, "a house is not a house is not a house" or "a computer's not a computer's not a computer" — the bang for buck for a given product in terms of features and functionality is on an upward trend. So it's not just that more people own houses or cars or computers, but that they own BETTER houses, cars or computers. And without the wealthy "early adopters" to help capture the development costs of the next generation product, this increase in value slows, which DOES create a wider gap. Second, it is possible to experience greater "wealth" (defined in most people's minds as lifestyle) even if my income doesn't rise, as long as my purchases produce a better, fuller lifestyle.
I'm with LCJ. The census bureau collects this income/lifestyle data, and they don't have a dog in the hunt. The info is what it is and what the data say is that we have the richest poor people on earth, in terms of the lifestyle they lead. "No brag, just fact." Last time I checked, WIC was as good as income to the recipients, yet it doesn't show up in the statistics, further calling them into question. Nor, by the way, does the enormous tax burden on income earners get subtracted from their income by the statisticians, which would further narrow the gap. My old grandpappy used to say, "Son, don't eat the seed corn." To those socialists in the crowd, it would pay to remember this wisdom. In most of the world and for nearly all of history, the "haves" and "have-nots" have been so by edict and force. Here is it by choice, conscious or not, except for the "poor indeed", those who are physically or mentally disabled.

Steve September 7, 2007 at 12:31 pm

When possible, I always like to see wealth/income disparity statistics presented as a difference in years, not dollars. For instance, instead of saying that the 25th percentile household has 52% of the income of the 50th percentile household, characterize it thusly:

The household in the 25th percentile of annual income in 2007 lives like the median household in 19xx. When economic growth is strong, often the difference in years is well within a generation. If you were alive and the median person in 19xx, you probably think you didn't have it so bad, and people living like that today aren't to be pitied. Obviously this isn't possible in a lot of cases, but I think it blunts the effect of denouncements of income inequality.

Steve September 7, 2007 at 12:36 pm

In other words.

Instead of focusing on income disparity, ask an advodate of government wealth distribution to name a year in which the median family lived a lifestyle that wasn't impoverished.

Usually it's a year so far back that the vast, vast majority of Americans income exceeds the year they name.

Jim McAlister September 7, 2007 at 1:02 pm

While I'm at it, Kurt, you bring up the old saw that the rich exist at the expense of the poor. Again, that's been true in most of the world and for nearly all of history, but not here, where there are NO immutable classes.

When you talk about "exploiting the labors of the downtrodden in your quests to have your precious gadgets at cheap prices", I have two observations: (1) most of the "downtrodden" simply don't labor very hard or very well, if at all. They remain downtrodden because they don't progress, and they don't progress because they don't apply themselves to progressing (and didn't think it was important to acquire the basic fundamentals for progression when they had the opportunity in school). They often are unreliable employees, as well, and seldom stay on any job long enough to create any "equity". They pay the price for their prodigality and failure to invest in themselves. And don't tell me that "society" caused their ills. That's like the guy who's known about the correlation between smoking and health problems since he was old enough to understand language blaming the tobacco companies for his smoking-related health problems.
(2)you reference "cheap prices", which is precisely what mass production produces, on better and better products. I wonder if you would consider the fact that historically, the "haves" have been the ones for whom products have been created, while the "have-nots" have been generally relegated to "home-made". In fact, sumptuary laws often made it illegal for them to have the products of the artisans. Now, on the contrary, the BULK of production is FOR "the masses" — we "downtrodden" produce the products that we ourselves consume at ever lower prices because of the productivity stemming from specialization, cooperation, and the capital investments in better tools of production. And, as an added benefit, far more artisans can now make a living from the wealthy, who prefer the "hand-made" and "exclusive", and can buy more such because of their savings due to mass production.

LowcountryJoe September 7, 2007 at 2:01 pm

I really did intend to add a sarcasm tag to my post above but forgot. Anyone who has read my prior opinions would have known that the above comment was to be read as though my tongue were firmly pressed inside the cheek (mouth's cheek, wise guys).

Jim McAlister September 7, 2007 at 2:54 pm

Just an item to think about, True Liberal, in regard to the food supply and food prices: it is government intervention in the market for the exclusive benefit of domestic producers that accounts for the majority of the increase (or lack of decrease) in food prices. This comes in the form of tariffs which add purely political costs to the produce of foreign farmers (including many very poor ones in developing and third-world nations), or which simply props up prices for uncompetitive commodities, as well as the misguided push for biofuel subsidies by the farming establishment, which raises the prices of any corn-based product (and is causing severe misery for third-world tortilla eaters), and other products that utilize either corn sugars or corn oils in the manufacturing process, while doing little to provide fuel on an economic, or even an environmentally sound, basis.

Flash Gordon September 7, 2007 at 3:12 pm

One area where quality has been dramatically improved is automobile tires. Car tires cost about the same relatively but last four times longer and are much safer than 40 years ago.

shawn September 7, 2007 at 4:09 pm

lcj…when i read your post, I was like…what? muirgeo v.1.0 rebirthed? (since the new muirgeo is much less….'downtrodden masses' focused.

Sarcasm: the thing that doesn't exist on the internet.

Brad Hutchings September 7, 2007 at 4:59 pm

Wow LCJ, you got me. I feel like a caller to the now-dead Phil Hendrie Show. Classic, dude. I am not worthy. <grin>

True_liberal September 7, 2007 at 5:05 pm

JM, right on!

The sugar lobby in this country (sugar import quotas/tariffs) is preventing the economic use of sugar-based ethanol, which could be produced more efficiently than corn-based ethanol.

Do you think the corn lobby favors repeal of sugar tariffs? Like, no way, dude…

Jim McAlister September 7, 2007 at 10:08 pm

Removing government from the equation would reveal whether ethanol fuels were truly economically efficient, which I doubt.

Bob Dobalina September 9, 2007 at 4:31 pm

It is probably something like 0.001% so even completely ignoring the quality improvement in the iPod would not have a significant impact on the reported inflation rate.

At least an order of magnitude higher, I'd suspect. 5.4 billion in annual iPod sales over a 13 trillion GDP.

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