Matt Yglesias says the median household is probably richer than the median household in 1989
by Robert Waldmann
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 http://delong.typepad.com/sdj/2006/09/the_meaning_of_.html
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 http://www.cgap.org/about. 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.
star crossed with Robert’s Stochastic Thoughts
I still wonder if the new technology is balanced by the increased risks of modern life. For example, a 401K plan is much worse than a defined benefit pension, and is much less likely to make any difference in one’s retirement. How many extra cell phones or powered car windows compensate for this? Similarly, more people go to college, but more people start their careers with large debts that cannot be dismissed in bankruptcy, so they defer home purchases, starting businesses and so on. Do larger houses or granite counters compensate for this? It’s similar with health care.
If you are going to make hedonic adjustments, they have to work both ways.
I had difficulty following this post. I even went back and read the Brad DeLong post in an attempt to clarify this one. What is the argument? That people live better today because they have more gadgets? The cost of living has dropped, because the cost of gadgets has dropped? I will grant that computers and cell phones are necessary today. Cell phones are especially important to people who are homeless or who rely on public transportation. However, most of the cost of living is rent, food, transportation, health care… I don’t see that any of these have become cheaper. Do I think my life is better with computers and the Internet? Yes. Has my life become more affordable, because of the Internet? Not that I can see. Would I starve or become homeless, if I did not have a computer? No. But if local rents keep rising, or if the cost of food goes up a lot, I might have a problem.
Thanks Eleanor. Sometimes economist are so wrapped in theory they lose site of what is really important to just stay alive.
So Matt is saying it’s ok to chain the CPI for SS? Idiots!
Technology moves on, always has, always will. To try to make an argument that such consistancy with life some how means people are “richer” or “wealthier” suggests that such a truth of living is a unique time specific event. That is, technology, human’s perpetual creativity has unque and defined moments in time.
The opposite would be that our creativity applied to our risks of living is not the norm but instead stasis of life’s risk is the norm and applied creativity is an accident of time.
To agrue that we are wealthier today because we have improved stuff that allows us to live with less risk or more productivity denies the fact that we have always lived with stuff that reduced risk and improved productivity that at the time was just as valuable and thus we were as wealthy. It also denies that there was and always will be the ability to divide the population into 20th’s percentiles based on their wealth and income.
I mean, Matt’s argument is really reaching to make the pig look like a swan.