I’m trying to understand hedonic adjustments
epsilontheory.com
epsilontheory.com
Which is rather clearly a fatal error since BLS uses cost-based, rather than hedonic, quality adjustments for new car and truck purchases. [0] The author is trying to understand a process by examining an area in which the process is not applied.
[0] https://www.bls.gov/cpi/quality-adjustment/ (see ELI TA011)
The entire concept of "fixing" a metric relies on an inhuman level of self-truthfulness to not just lead you down the path of hearing only what you want to hear.
The point of metrics is that they should slap you in the face with objective reality, and improvement is just too subjective a concept.
>Interestingly, hedonic adjustments only act as deflators. Say the airline crams another seat in your row, eliminates carry-on bags and otherwise makes your flight less happy and hedonic. Does the hedonically-adjusted price of your airfare increase? Nope.
Well, it asserts that but doesn’t provide a basis for the claim, which directly contradicts BLS: “The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item.” [0]
Given that the author focus almost the entirety of his piece on hedonic adjustments discussing new car price data as illustration without ever mentioning that this is a CPI component to which the hedonic quality adjustment method is not applied, I would trust its unsourced claims not at all, and be extra sure to double check any sourced claims.
However, I'm just answering your question, not endorsing that per se. Here's some skepticism, which I am also not endorsing, just balancing and emphasizing my lack of endorsement: https://munknee.com/debunking-validity-shadowstats-inflation...
Personally I suspect the answer is somewhere in between. Arguably it's not even a well-defined question. Clearly something like inflation and deflation can exist, even across large time periods, but there may be no single number that can ever capture it accurately. I am somewhat reminded of the difficulties of trying to fix an absolute reference frame in physics, especially when trying to fix it to locations on Earth over large periods of time.
The sceptical but honest truth-seeker would discover, after months of labour that the official quality-adjusted BLS numbers are reasonably sane, maybe understated by a few tens of pct-points, and the hedonic adjustments will add about 0.5 to 1%, which is probably a reasonable estimate of overall quality improvements. That truth is so mundane that your months of labour will barely net you a Medium blogpost. Or you take a shortcut, just add 1.5 to 2%-points to the BLS numbers and sell it in a newsletter, like shadowstats...
Here's a Best Buy ad from 1998: https://www.chron.com/news/article/Best-Buy-ad-from-1998-sho...
Here's a Best Buy listing from today: https://www.bestbuy.com/site/insignia-32-class-n10-series-le...
In 1998, a 27" CRT TV was $300 in 1998 dollars. Today's 32" LCD TV is $120.
Just in nominal dollars, not adjusted for inflation, the new TV costs 40% as much as the one from 1998. Then the offical CPI says $300 1998 dollars are worth around $500 2021 dollars... so that brings us down to about 24% before making any hedonistic adjustment. [Edit: And, really, we should be comparing a 32" TV from 1998. That's not in the ad, but it is plausible to imagine it costs more than any of the 27" models. Let's call it $450 just to be conservative. That gets you to around 15% w/ CPI and no hedonistic adjustment]
But the new TV has twice as many lines of resolution, a bigger screen, better color, uses a fraction as much power, is lighter and is physically smaller. So the operating cost is lower, you can put it anywhere you want, you have a bigger and nicer picture to look at. I'm sort of baffled how someone could not agree that the newer one is very clearly better.
I suspect that if you offered most people a CRT version of today's TV, nobody would take it at even half the price. That gets you to within spitting distance of 10%.
You can perform the same exercise with other size tubes, but the result is basically the same.
Don't tell Dudley though:
>>“Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said.”You have to look at the prices of all things.”
https://www.reuters.com/article/us-usa-fed-dudley-ipad-idUST...
Let's take 50" TVs instead. I initially used smaller ones because I don't recall many people having TVs like that in 1998, but the 1998 ad doesn't have 32" TVs and the modern website doesn't have 27" TVs in stock.
50" is one size that Best Buy carried in both 1998 and today. So we can compare like for like.
Today's 50" LCD should be no less entertaining than a 50" CRT from 1998, right? I'm not claiming it is more entertaining, just that it isn't less. Today's 50" costs $330 at Best Buy. 1998's 50" costs $1500 at Best Buy in raw, un-adjusted dollars.
You're getting a 78% discount without making any inflation or hedonistic adjustment whatsoever. You can play pretend in fairy land and say that inflation doesn't exist... and you get to enjoy the same TV plus have spare dollars to spend on other entertainment.
Actually... maybe the the modern, cheaper TV is infinity times more entertaining. After all, a TV with nothing to watch isn't very useful. Your old TV provides little value except as a conversation piece when guests come over (if you don't enjoy free OTA content). On the other hand, with the new TV, you can spend 3x on content what you spent on the TV itself.
Also, there's a really obvious reason to think that 1998's 50" TV was not worth $1500 in raw, unadjusted dollars to the vast majority of people: almost no-one bought it at that price. In theory this principle applies to every item that used to be available with both cheaper and more expensive options but now only has the option which is more expensive: that improvement is worth less to people than the price difference when they both used to be available, or there wouldn't have been a market for the cheaper option back then.
I don't think they've gotten 1000% more entertaining, but one effect is people can have a television per room and no viewing conflicts. Back in the day we only had one television per household and you were stuck watching whatever your dad dictated most of the time.
Also, if you look at fcc historical charts (https://docs.fcc.gov/public/attachments/DA-14-672A1.pdf), check Table 3 on page 10 of that pdf, it shows expanded basic cable, or basic cable plus live regional sports, was $22.35 in 1995 and $64.41 as of 2013, but also Netflix existed by then for $7.99 a month.
I'm honestly not that sure how to feel about this. Things like assisted braking, crash zones, seatbelts, and airbags are pretty unambiguous improvements. But I'm not sure the plethora of cheap entertainment options is any kind of a net benefit, hedonic or otherwise. As a kid in the 80s, most of the time my sisters and I entertained ourselves by reading books, playing board games, building things out of legos. Maybe less immediate hedonic reward, but explicitly interactive activities made for better family bonding and active consumption rather than passive was a lot more intellectually stimulating. I can barely even pay attention to a book these days, but I still remember being 12 and the level of thought and imagination they would provoke and it was a heck of a lot more than I've ever gotten out of film or television.
I think the point of this article is that the TV you could buy for $300 in 1997 you can't now buy for $30. So the 10 times increase in quality hasn't allowed a 10 times reduction in cost of living.
We don't have liberal integrals or conservative arctangents.
Inflation is typically used for measuring purchasing power.
IDK much about CPI because I'm not from the US, but in my country the IPC index (which is similar) has a lot of massage really hurts its usefulness.
The underlying premise makes sense though. If your country got richer and everyone started buying high end variants of stuff, and the low-end variants got discontinued, is everyone suddenly worse off?
Also, the definition of a high-end variant changes over time too. For example, today a 52-inch TV fills the same price niche that a 32-inch one did, say, a decade ago but it also fills the same quality niche - you need to buy the 52-incher to get the same kind of audio and picture quality as a 32-inch set from years gone by, and the 32-inch sets have deteriorated in quality in ways that aren't necessarily visible from the obvious spec-sheet numbers.
Well, since I don't know what country you hail from, I am going to speculate, but my bet is it hurts its usefulness for you, but very probably not for the government that publishes it and uses it to demonstrate how "effective" their policies have been.
- pay less in interest on their debt - raise Social Security payments by less - inflate away the real value of the debt principal
The US gov’t has reached a record level of debt. It needs to cause massive inflation to devalue its debts, and it needs to lie about it.
The only sustainable way to run the world is to underreport on inflation using a flawed metric, which nobody is supposed to understand, such as CPI. And then let the real 8% or so inflation eat the govt debt away while the govt borrows money at <2% interest on treasury bonds.
These adjustments to CPI are not to be understood. They are designed.
That's not true. Macron in France was elected ( was second in the first round, and against the far-right candidate, which was profoundly terrible and got destroyed in the big debate, in the second round, where everyone flocked to him to avoid the other winning; so take "winning" with a grain of salt, although his party did win 50+ in the parliamentary elections a month after the presidential ones) on a platform of reform to make business easier, stabilising the budget, cutting unnecessary or overextended government expenditures, privatising some government-owned enterprises and investing the leftovers ( without a deficit) at improving the economy, work prospects for young people, startups, key industries, etc. Considering his work history in banking, then an advisor to the previous president, and later financial minister, doing roughly the same things, it wasn't just empty talking.
Of course that went away when the pandemic hit, and he said multiple times, and i quote, "whatever it costs". It would have been fundamentally stupid on his part not to go back on his platform and leave everything go bankrupt and broke.
Huh, what? Promises to balance the budget or run a surplus are practically a cliche at this point.
I mean that was pretty much the 2010 Tory platform, and they won?
Next up, “the people would never elect a scientist to office?!?!?”
So, in other words, the only way to govern is through demagogy ... what a terribly cynical view of the world.
I also believe it's historically inaccurate. I know of at least two countries for which it is: Singapore and Switzerland.
And rightly so. If you understand how money is created, you WANT your government to continue rolling its debt. Money supply is a 0-sum game.
Yes, they'd be arrested for not meeting safety standards. But assuming we changed the law, would people want to buy it?
Would it be better or worse than a second-hand modern car at the same price?
Cars don't come with airbags or even seat belts because consumers demand them, they do so because its the law. That's not to say safety features are a bad thing, just that their omnipresence isn't due to economic forces.
The difference would be so huge that I'm not convinced this question isn't rhetorical.
Features that were high end or cutting edge in 1990 (progressive power steering, power windows, air conditioning, power adjustable seats, traction control, cruise control, airbags) are ubiquitous on all but the very cheapest cars nowadays. Features that we take for granted (Bluetooth integration / in-dash maps, automatic headlights, non-awful automatic transmissions, non-awful stereos) didn't even exist in 1990. Certainly from a safety perspective, probably from a luxury and convenience perspective, and possibly even from a performance perspective, a $9000 second-hand car is better than any car from 1990.
So, if someone put a new car on the market for $18,000 with the (lack) of features of the 1990 ford mustang, the poor reliability, louder interior noise, no bluetooth, dim/unsafe headlights, it wouldn’t sell. It wouldn’t sell because you can easily purchase a used 2015 Ford Mustang in good condition for this price. Approximately 0% of buyers would prefer a 1990 mustang to a 2015 mustang.
Cars have added an incredible amount of value staying at or near their inflation-adjusted prices in the last 30 years. wireless audio, navigation, safety features, performance / efficiency tradeoffs, reliability are all miles better.
Combine these features with very low interest rates and increased interest in financing, and actual prices are similar-to-better today on a monthly basis.
A new 5 liter mustang costs maybe like $36k right now. Average mortgage rate in 1990 was 10% (!). Assuming car loans were 12%, then a 5 year financing of a $9,500 car would have been $211 per month in 1990 dollars, or $422/month in today’s dollars. New mustangs can be leased for as little as $300/month, purchased for $400-650/month.
So, these prices are not wildly out of line with 1990s era prices. And, maintenance costs are vastly lower as well. All that to say, Tata motors is doing less well than tesla, toyota or ford, and I think that’s likely to continue.
Meanwhile, that $20k buys at loss less food, healthcare, education, house, etc which is why "today's dollars" are worth less and why it's fair to say cars got cheaper in inflation adjusted terms.
Yep this was my point. We can see if the CPI is being calculated correctly by comparing cars which had the same price in each year and see if they really are about as good as each other. Whether you want to call this 'inflation for cars' is just semantics.
(The original article says a Mustang in 1990 cost $9000, but I've also found sources for $10000 and $20000 so you might be right on that point.)
$9,000 for a used car gets you the safety improvements, but perhaps not the new car reliability, even adjusting for 30 years of quality improvements.
I think it would sell rather well so long as it had Bluetooth.
I'm not convinced of that. Reliability has definitely been trending upwards. 100k miles used to be considered a high-mileage car, but now a car model that didn't regularly make it to that distance would be considered defective.
In 2040 no one will buy a mint condition '2020' vehicle because it won't include a defibrillator, IV fridge, and stowable gurney.
The people buying their own cars would probably still be around, as there are people buying their own horses today.
I think we (the consumers) have also been conditioned hedonistically upwards (for lack of a better term) in the last 30 years, as in we wouldn't probably transport our family anymore in a car with no airbags or very few airbags, to say nothing of the crash-test characteristics of new cars compared to cars made 30 years ago.
So, to answer the question, because we (the consumers) have also changed we wouldn't probably purchase as many new 1990 Ford Mustangs or Honda Accords at $9,000 or $12,000 (meaning half the price for the latest models) as we have bought 30 years ago if said models would have costed $4,500 or $6,000 (meaning half their price at that time).
But, nevertheless, I think there is a sweet spot between our new hedonistic expectations (we want airbags now) and a fairer (meaning cheaper) price.
I would have an issue playing Red Barchetta in it, because of the poor color matching, but I'd still do it.
Take toilet paper as an example, since most Americans find this a necessary object for if utility. Lets say the cheapest roll of toilet paper has 100 sheets cost $1. One day, the toilet paper company decides to reduce a roll to 90 sheets, but claims the new toilet paper is softer and of a better quality. The pointy heads at the FED may very well decide that increased quality and added softness of the sheets means that the new, smaller roll is of equal value to the older, larger roll. Through a hedonic adjustment, no inflation will be reflected to have occurred. But to the guy trying to wipe his ass, he is getting 10% fewer sheets for the same money. He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices.
Now lets take a look at the cars, since they were cited in the article. CPI data has cars as unchanged. The author of the article shows how actual prices tracked hourly earnings. However, the author looks at average hourly earnings, which are skewed due to the vast majority of wage gains going to the top wage earner. So let's take a look at the median numbers. Using the example from the article, a Honda cost ~$12,000 in 1990 and ~$25,000 - more than 100% increase in real price. Median household income went from $59,966 in 1990 to $78,500 today, a rise of ~31% over the same period of time. The same Honda that cost ~1/6th of median household income costs ~1/3 of median household income 30 years later. The need for workers to get to their jobs (unfortunately for them) remains constant.
Similar real price comparisons between the costs of things people actually need to survive (food, transportation, healthcare, insurance, education) and median wages will reveal similar discrepancies, so its not all too surprising that people hold official CPI numbers in such low regard. But at least TVs are cheaper.
That's true.
> He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices
This is 100% wrong. I don't think anyone should be surprised that professionals who have thought about these things a lot were long aware that a hedonic adjustment is not appropriate for all things. Toiler paper does not get any quality adjustment (hedonic or otherwise) in the CPI calculation.
When I bought my current house in 1995 I was paying 6% for the mortgage (in the UK), if I was buying now I'd be paying 1.5%.
What is your source? Here I see it going from about $30,000 to $69,000.
If we'd measure inflation like we did in the 80s, it would easily come out 1% higher, meaning the real GDP growth is 1% lower than currently reported. So several economies would be considered in a recession for years insead of showing low growth.
I'm not saying that the way inflation is measured is wrong. But most data depending on the official inflation rates is a lot less accurate than you might think.
Maybe such an index already exists? It looks like CPI is switching to this kind of price adjustment for some categories but it seems like the data is readily available for basically all consumer goods; Are stores reluctant to share the volume and price of goods at the individual UPC level?
How do you hedonically adjust access to all the world's information and entertainment and instant communication with anyone anywhere? How do you hedonically adjust the difference between Covid with and without biotech. How do you hedonically adjust 2-hour delivery of every product imported from anywhere? How do you hedonically adjust Pacman to Halflife Alyx?
The BLS FAQ:
https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...