Inflation Deniers See Nothing!


Matt Yglesias, world-bestriding colossus of political pontification, still says there's no inflation. I'm surprised Yglesias – who takes special meetings with Treasury Secretary Tim Geithner and is able to repeat Federal Reserve wish lists with remarkable specificity, down to Chairman Ben Bernanke's fond standing request for an official inflation target – hasn't gotten the new talking points: Even Bernanke admits that notable price inflation is real but "transitory." 

Yglesias, however, won't even give that inch, urging increasingly hamstrung Americans to eschew food and just consume high tech. Here's his rebuttal of Niall Ferguson's argument that you can't actually eat an iPad:

But you also can't send email from a banana or watch streaming video on a bag of rice. When electronics, communication technology, and entertainment get cheaper then you have more money left over for bananas. 

Also resolved: Yglesias is lactose intolerant and walks to work. Now are you convinced? 

By singling out Ferguson (who last I heard of him was urging America to act more like an empire and would, I think, be a natural ally to a beltway bright boy) for abuse, Yglesias misses some of the value in his own example. Mobile phones are almost a textbook deflationary widget. But focusing on the cost of devices (which falls rapidly – a pattern common in hardware not supported by the U.S. government) while ignoring how much money is being paid on data plans (which since 2004 have increased substantially in terms of carrier revenue and share of total carrier revenue), is stacking the deck. 

This doesn't mean users on balance are paying more for the same or less for mobile telephony now than they were in 2004, for the simple reason that a 2011 phone adds value that didn't exist back when watching video on a phone was still uncommon. (In my experience it's not really an everyday thing even now, outside of TV commercials.)  

But those damn Americans, it turns out, almost never respond to stimuli the way the models said they would. As a recent Fed study noted, most people haven't even made big changes to their real and financial holdings since the correction began in 2008. Two-thirds of U.S. mobile users are not using mobile internet at all. You can condemn anti-Stakhanovite consumers for not grabbing the real benefits of the substitution effect. But the purpose of CPI voodoo is to get an accurate measure of the cost and value experience of the average American. 

Whoever the average American may ultimately turn out to be, the substitution effect favors people who can afford to swap out items in the basket, including the one item many people prefer to swap out right now: The Dollar. Some of Yglesias' commenters have noted his argument's intellectual bias against lower net worth people – and thank Zoroaster some lefties still believe their loyalty is to the poor. 

But I propose a wider definition of the problem: CPI is voodoo. To believe WashingYork can get an accurate measure of price experience that is meaningful to any American, let alone every American, is to believe in a flat earth. And only Thomas Friedman still believes in that. Where's Thornton Melon when we need him?