A billion prices can’t be wrong
timharford.com
timharford.com
When this project was started, we were only looking at three big markets: real estate, groceries, and general "home goods" (washer machines are an example.) Essentially, using the CPI for inspiration and neo-classical macroeconomics with the "household unit" as the center of importance, those 3 groups seemed ideal as an MVP for the project. What I worry about is how they're going to update the model and structure of the project to incorporate the intersection of globalized markets (going to the iPod example, what if some variability in price can be explained by price stickiness, or lack thereof, of labor prices in China? etc.)
Nevertheless - I'm all for the hacking/big data community seeing more of what's going on in the macroeconomics world, as I think it's just ripe with opportunity.
Glad to see actual Economists are exploring the area.
The black line is Argentine Monetary Base as reported by the Argentine Central Bank. The blue line is the BPP data, the green line is the official Inflation rate as was reported by the government at the time. Note: the left Axis numbers represent Millions of Pesos and represents the value of the black line.
Kind of difficult not to jump into conclusions.
Last but not least I did a website that mines Argentine Central Bank Data daily and produces Graphs and reports based on it: http://estadisticasbcra.com/en . It includes a public API: http://estadisticasbcra.com/api/documentation if someone wants to use the data I'm compiling.
I got interested in the question at a young age when my mother showed me a picture of a grocery store, where new york strip steak was on sale for 10 cents a pound. And I asked why it cost so much more for steak when I was looking at the picture versus when it was taken. And I got the "simple" explanation of inflation, "Things cost more now."
The real value of the work being done by Cavallo though will be later water when you have both 100 years of prices and the detailed news stream to go along with it. People have a wide variety of opinions about whether or not abandoning the Bretton Woods system had the effect on prices that some claim or if other factors were to blame.
I expect we will see truly actionable economic insights from projects like these.
Wages have averaged flat for the last 20 years "with inflation", but $1000 for medicine buys you a much better product today than the "equivalent" amount of money 20 years ago. Traditional basket of goods models tend to assume quality parity.
so does the CPI and every other inflation measure using 'hedonic adjustment' ... new BMW comes out, new price, you look at it and estimate how much is price change and how much is quality change, bigger car with air bags, voice activated GPS, self-steering and whatnot...imperfect but necessary.
The CPI, PCE, and related indices tend to approximate the GDP deflator but are generally inferior as there is no sound way to perform the hedonic adjustment or to choose baskets in the first place. Eric Weinstein has proposed gauge theory as a way to handle substitution effects but has not, to my knowledge, computed an index using it.
The weights are different (reflecting the different weight in the GDP vs. the CPI reference basket, also depending whether you refer to the implicit GDP deflator, the fixed-weight deflator, or the chain-weight deflator.)
Also, to compute real GDP you additionally have to estimate prices for a lot of things that aren't in the CPI, but might be in the PPI, import prices etc.
GDP just takes all the other stats on prices, consumption, investment, government spending, brings them into a consistent system of national accounts. Nothing generally superior or inferior, and all these stats including a hefty dose of judgment and a large margin of error.
http://www.bea.gov/papers/pdf/NABEspeakernotes.pdf
There's always someone will argue it's unsound, just as someone will argue the merits of one programming language over another, but the people who make the judgment calls are pretty well-versed in what they're doing and do the best they can.
if you think the GDP contribution of owner-occupied housing, i.e. imputed rent, corresponds to a physical quantity proportional to entropy, more power to you!
He's noted that life expectancy improved 2x more from 1900 to 1950 as from 1950 to 2000.
The whole matter of hedonic adjustment is another hairball. It omits a few elements.
Maslow's hierarchy of needs. Quality of life is most enhanced by fundamental aspects: food, shelter, clothing, and safety. You cannot build the pyramid from the top.
Quality can be measured various ways. Product lifetime, utility, repair requirements, etc. There's been shifts in multiple directions, some better, some worse.
Fungibility. Products aren't infinitely miscable collections of features. Smartphones offer connectivity but the user pays the piper in surveillance and privacy loss.
Points are that:
1. LE hasn't increased much post 1950.
2. LE at a given age hasn't increased much post 1950.
3. Where LE has increased, it's largely been in minority / underserved populations, presumably as a result of improved basic care or access.
4. QALYs show little improvement post 1950 / 1970.
Healthcare expenditures have increased greatly. They've offered little actual benefit, other than to healthcare companies and providers.
#3 Iceland for example is at 81.8, #22 UK 79.4, #33 United Arab Emirates 78.7, #38 United States 78.2
In longer time frames food has maintained value for very long time periods, but salt has dramatically dropped in value. If you compare baskets the prices that stay drown out the ones that drop off a cliff. Which makes inflation a tricky subject over very long time periods.
EX: Food and land in ancient Mesopotamia has value in our modern economy. Clay tablets are kind of meaningless, and pottery is really hard to judge.
Basically, I completely agree that it is tricky, and traditional hedonistic adjustments really are pretty poor approximations.
As to clothing, I have bought cotton clothing that barely survives a single wash. Sure it's cheap, but it's like they started designing clothing to look good in your closet if you never wear them. It feels like your choices are 50 loads for 60$ or 2 +/-2 loads for 5$.
PS: The sad thing is even orange juice has gotten worse. Fresh or frozen makes little difference they both suck.
* "The Undercover Economist" - http://amzn.to/1sCImVw
* "The Undercover Economist Strikes Back" http://amzn.to/24bIFT3 - this one's about macroeconomics.
As well as various others. One thing I like is that they're mostly fairly neutral - he's really trying to explain the thinking, rather than beating you over the head or espousing one position.
There were conspiracy theories floating around in the 2007-2010 time-frame (and still may be) that the published BLS numbers were being manipulated for political reasons (much as in Argentina), and it's reassuring that there's some confirmation that they weren't.
i.e. compare and contrast:
Argentina: https://research.stlouisfed.org/fred2/series/MYAGM2ARM189N
USA: https://research.stlouisfed.org/fred2/series/M2
The USA's money supply has a doubling function of 2x decade, while Argentina managed something like 12x 2006-2016.
The people who were predicting hyperinflation in the 2007-10 timeframe for the USA were predicating the banking system's behaviour based on the regulatory framework in the old gold standard regimes, and not under the newer Basel capital controls. Which is not to say that you can't get hyperinflation with Basel, but you need to do a little more than just inject asset money into the system.
Compare and contrast with the UK for example (M3, because no standard definitions etc.):
https://research.stlouisfed.org/fred2/series/MABMM301GBM189S
The UK btw, doesn't have a formal central bank reserve percentage (it has fairly minimal liquidity provisions which are the same thing, but still). Economics needs to wake up and realise it does not understand how the monetary system actually works.
But there are a lot of other economic indicators that you need to consider outside the money supply when talking about aggregate demand. Look at interest rates as one example, which are a proxy for how expensive (highly demanded) money is, and ask yourself why they are at an all-time low and stagnating at the ZLB, with short-term rates even going negative in some countries.
It's also worth remembering that an edison phonograph would have probably been useable for about 60-80 years if kept in good condition. Good luck getting 5 out of the Nano. But yeah, collecting a billion prices and forgetting about each after a pairwise collection is a brilliant choice.
Also, you aren't likely to go for a jog with your phonograph, and I suspect if you left the nano in a box for 60 years it would probably be fine (minus maybe the battery).
It's a difficult problem to reason about because our own perceptions are anchored to what we know. You couldn't have had a modern home air conditioner at any price in 1891. Ten billion dollars couldn't have bought you the computing power of a MacBook Pro in 1950.
The quantitative and qualitative gap between successive generations of computing technology is many orders of magnitude beyond what any other technology has ever experienced in human history, and the generations themselves have happened orders of magnitude faster too. I don't even know how you compare these things in economic terms because the baseline equivalence between products is nonsensical to start with.
That's exactly my point. Nonetheless, traditional econometric analyses do exactly that, arbitrarily creating multipliers (hedonic adjustments, e.g.) which normatively make assignments as to what a consumer "should" value in a product. These assignments often throw out important considerations, merely because they're 'difficult to calculate'.
With an outside view of the past couple of centuries -- an iPod Nano is basically magic.
My point being, I think we're often not amazed enough at everyday technology. I can't imagine Edison seeing a Nano and saying "well, what about durability?"
Why would anybody care about the audio playing device in terms of 60-80 years? Especially in this age, in which technology is rapidly improving. I very specifically do not want to be using a 2005 iPod in 2050.
My digital music files are good forever in theory. They're made of bits. All I need to do is occasionally move them to new cheap hardware and maybe back them up in the cloud for practically free. I could store ten copies of my music library for $50 on usb sticks or similar, and replace it every year just for fun, without being concerned for the expense. Lots of ways digital files can be lost or destroyed? Sure, and they're still radically more secure (go make a dozen copies of your record albums) and easier to keep than physical records. The sole annoyance with digital media, is that I have to re-back it up very rarely, which takes a matter of minutes.
My refurbished iPod Nano (4th Gen) has been in continuous usage as my cars' music device (hot summers, cold winters) since March 2010.
The only time it's not in there is when I sync it with new music.
Still works great.
If you treated an iPod Nano and an Edison phonograph the exact same way, the Nano would outlast the phonograph easily.
And the NAND cells? The storage mechanism is the result of an electro-chemical reaction. In time the charge potential between the storage states will succumb to entropy.
So what breaks on the Nano? Everything. And what breaks it? Time.