Saturday, September 21, 2013

gadgets Yglesias and Baker

Matt Yglesias says the median household is probably richer than the median household in 1989.  Oh that we have come to this.  Take the mike Matt

 Despite rising health care and education prices, we don't have fewer people going to college or seeing the doctor and we do have bigger houses, more and better cars, better food, and much better gadgets and entertainment.

Your case is very strong. The point is that neither the BLS nor the Bureau of the Census consider the increase in living standards due to new cool gadgets at all.  See DeLong on Baker arguing this is no big deal for the median consumer

When a new good is introduced, it is as if the price declines from infinity (you just can't buy it because it doesn't exist is just the same as you can buy it for infinity dollars because it doesn't exist). But the price indices assume that the introduction of a brand new good makes no difference.  Effectively they assume that there is an old good which is a perfect substitute for the new good so people are indifferent between buying the old good or the new good for it's new price.

Now it is possible to semi deal with this bias.  The price of really fundamentally new goods which have just been introduced is so high that very few people buy them (what milage does your Tesla Roadster get ?) .  Yes some people are better off, but they are few and very rich and who cares. Then the price declines rapidly.  However, the weird new rarely bought goods are not included in the baskets used to construct the indices.  This means that by waiting until the super cool but super expensive phase is over, the BLS and the Census accept a bias.  The new good has caused a non negligible change in living standards before the BLS notices it.

Baker shot himself in the foot.  He considered the case of cell phones (I'm as old as Baker and remember when they were silly status symbols for rich conspicuous consumers -- I even remember the fake cell phones with nothing inside bought by the pathetic wannabe rich as conspicuous fake consumption).

"I once debated an economist... asked him how much this oversight led to an overstatement in the cost of living for the half of the population that still didn't own a cell phone.... [R]emembering economic theory, he gave the correct answer "zero.""

Ah but is that exactly half ? If 51% don't own a cell phone *and* cell phone ownership is perfectly perfectly correlated with income, then the oversight had zero  effect on the cost of living for median income consumers (and therefore on median real income).  if 49% don't own a cell phone, then the oversight must cause an underestimate of median real income.  Since no correlation is perfect, Baker's argument that the oversight has no effect on estimates of median real income is undoubtably incorrect.

Now cell phone ownership has changed.  There are many 3rd world people who own cell phones who don't have electric current (so there are cell phone charging stations).  Figuring out a way to, say, bank with a cell phone is figuring out a way to extend services to the poor There are many people excluded from what we consider the modern economy who have cell phones.  The price of cell phones is relevant to world median income not just US median income. Baker chose a very poor example.

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