Hedonist Bean-Counters

Sure, it's twice as expensive… but it's three times better, so you're saving money! No, it's not a feeble sales ploy, it's accounting fun with "hedonics" at the Bureau of Economic Analysis, and hedge fund manager Bill Fleckenstein explains. (Hat tip: Amy Phillips)

Comments

[Jeff Smith]

It is rare for a Hit and Run post to make me
grumpy but this one does. Quality improvements
are real things. My current computer, which
cost about $2000, is a lot better than the
Kaypro II I paid $2000 for in 1982. Duh.

To ignore hedonics is anti-intellectual posing
worthy of the Nation or the Weekly Standard,
not reason.

Jeff

[NoStar]

This form of hedonism feels good only to the bureaucrats.

[Brad S]

The best insight from that article was at the end: "All currencies, not only the American dollar, but all currencies, always go down, mainly because of democracy. The voters will vote for a person who is going to spend too much, and so you have to expect all currencies to go down."

Truer words about government spending have never been spoken. Basically, government overspending devalues money. Wanna know how to pay off trillions of dollars of national debt? Make the dollar worth a relatively smaller amount of real value. It's common sense, really...

[Russ]

Jeff,

the problem is not in acknowledging that computers have improved. The problem lies in accounting for it.

You spent $2000 for a computer in 1982, but presumably, the computer of today should be 2^14 times "better" (according to Moore's Law).

Does this mean that the computer's $2000 price tag should be scaled down to about 12 cents?

Obviously not. Instead, the government statisticians "scale up" the economic value of the goods in question in order to create a more pleasant picture.

We could say the people spent 5% less on computers this year than last year, but those computers were worth 25% more, so we'll call it 20% industry growth. That'll make the GDP figures look good. It'll also overstate the significance of industries with falling prices and overstate the impact of industries with rising prices, thereby making the CPI numbers more attractive as well.

What more could an incumbent politician ask for than big GDP growth and small inflation data.

Well, good employment numbers might be a start, but I'm sure we could get the BLS folks to do a bit of tweaking.

[Jeff Smith]

Russ

Thanks for your thoughtful reply. Let me make
two quick counterarguments.

First, you can by a Kaypro II on ebay for $9.99.
I just looked. I submit that $9.99 is closer to
$0.12 than to $2000.

Second, while I will not argue that the national
statistical agencies do not respond to political
concerns, I will argue that they are separated
from them to a much larger degree than most
government agencies. Partly this is due to the
deliberate design of the institutions and part
of this is due to the fact that people at the
BEA (and other parts of Census and the BLS)
have more than just politics in their utility
functions. There is a lot of back and forth
between the agencies and academia, and making
up numbers for political purposes is a very
good way to lose your street cred (and thereby
reduce your salary and the quality of the dept
you end up at when you go back) in academia.

While the motivation for adjusting the CPI for
quality changes is in part political (I think
mainly because it reduces mandatory cost-of-
living increases in expensive transfer programs
such as social security), it came partly from
academics who just wanted to make the measures
better. Moreover, the mechanics of the adjust-
ments have occupied a lot of very smart minds
without strong political axes to grind.

Jeff

[joe]

Russ, the "Chevy" example he gave, which he singles out as being a particularly salient illustration of the problem he's complaining about, posits that if spending on Chevys goes up 40%, but people are getting 40% better Chevys, then hedonic analysis would call that flat growth.

That doesn't exactly fit in with your theory that hedonics is an attempt to paint overly rosy pictures, does it?

[Douglas Fletcher]

Kaypro, weren't those the computers with the amber display screens? God, did I get headaches from those. I'd pay $9.99 for one just for the joy of throwing it off a cliff.

If instead I threw 3 of them off a cliff, would that increase the hedonic value of the act?

[Jason Ligon]

I don't get the problem, either. It seems awfully similar to depreciating assets on a ledger. The value of depreciation isn't just entropy, it is decreased demand due to innovation. I think if you have to count it that way on the one hand, it would be inaccurate to pretend that you are buying the same truck 20 years later on the other.

[max power]

Joe, I think you've got it backwards. In your example, hedonics would say that, while the price of Chevy's had gone DOWN 40%, spending on Chevy's had gone up 80%. Both rosier than the real-life situation, in which Chevy prices stayed flat and spending only rose 40%.