Sunday, June 10, 2018

When Economists Turn Hedonistic

More sensitive viewers might want to look away. Sometimes economists get kinky, too (when they talk about oligopoly, but that's another story).

The Canard About Falling Incomes: Don’t believe the government’s consumer-price index, which is obsolete by Andy Kessler of The WSJ. Excerpts:
"As consumer items got more feature-rich and complex, the BLS simply couldn’t note the absolute price of, say, a microwave oven. So the bureau came up with the indulgently named hedonic quality adjustment, defined as “decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes.”

It’s a better measurement but still inaccurate. Here’s a thought experiment: Think about your car’s automatic emergency braking, sometimes known as precrash or collision avoidance. It has been an increasingly popular option in recent years. By 2022, it will be standard on most cars. Some silicon sensors and a few pieces of code—today it costs maybe $50 to produce. But what’s it worth?

Let’s do a little hedonic decomposing of our own. Before these sensors, you would have had to hire a person to ride shotgun and constantly watch for potential collisions and slam on the brakes for you. In 2016 the AAA Foundation for Traffic Safety estimated the average driver spends almost 300 hours a year in the car, logging more than 10,000 miles. Paying someone even $10 an hour to stare into traffic means that over five years, collision avoidance is worth nearly $15,000. Double if you want someone to look out the back window, too.

Does this show up anywhere in the consumer-price index? Of course not. One of the most lifesaving features has dropped in cost by three orders of magnitude in less than a decade. To the BLS, it’s practically nonexistent."

"By the time the BLS puts something new in the CPI basket, it’s already cheap, so it misses the massive human-replacement price decline."

"But the CPI absolutely doesn’t take today’s technology-infused lifestyle and work backward to show how much more expensive it would have been in 1973."
In related news "it took the average worker 10 minutes to earn enough money to afford a Happy Meal in 1979. Today it takes that worker just 6 minutes of work to afford one." See Happy Meals Are Now Even Happier by By Alexander C. R. Hammond and Gale Pooley of HumanProgress.

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