The Magic Of 100%+ "Hedonic" Deflation In One Chart

Tyler Durden's picture




 

In a NYT article which perhaps was meant to boost poor Americans' spirits that despite their horrible economic plight (because, you see, the past five years of Fed monetary easing - which explicitly allowed US politicians to avoid engaging in much needed and very unpopular fiscal reform - only focused on helping just the wealthiest - sorry very much, better luck next time) things really are quite great because, through the magic of hedonics, most things are really cheaper than ever.

To wit:

Since the 1980s, for instance, the real price of a midrange color television has plummeted about tenfold, and televisions today are crisper, bigger, lighter and often Internet-connected. Similarly, the effective price of clothing, bicycles, small appliances, processed foods — virtually anything produced in a factory — has followed a downward trajectory. The result is that Americans can buy much more stuff at bargain prices.

They can.

The only problem is they don't, because while one can use hedonic adjustments all day long to make it appear that one gets more bang for the buck, one still has to spend several hundred to over a thousand for a simple television set every few years, regardless of whether it is 1080p, 4K, 3D, or any other fleeting fad.

The NYT does touch on this amusing sleight of hand used by economists always and everywhere to make inflation appear tamer than it is:

“If you handpick services and goods where there has been dramatic technological progress, then the fact that poor people can consume these items in 2014 and even rich people couldn’t consume them in 1954 is hardly a meaningful distinction,” said Gary Burtless, an economist at the Brookings Institution. “That’s not telling you who is rich and who is poor, not in the way that Adam Smith and most everyone else since him thinks about poverty.”

Indeed - because between soaring food and energy prices, and stagnant or outright declining wages (the average weekly wage this month was $24.31; the average weekly wage last month was... $24.31), and the indigestability of the iPad (a new version of which is offered every 8-12 months with new features, which somehow also makes it hedonically cheaper) America's poor couldn't care less about how "cheap" those things they simply can never afford, allegedly are.

And the other problem, and an indication of just how ridiculous hedonics really is, is shown on the chart below, which is what economists use to "justify" that inflation really is very tame.

The punchline: apparently the "hedonically adjusted" deflation in Television costs over the past ten years is over 100%.

Huh, deflation of more than 100%? How is that possible? Just read the fine print:

Data is collected from retail stores and adjusted by specialists to reflect changes in quantity offered in a product or an increase in quality. Much of the drop in prices for electronics reflects an increase in quality over the past 10 years.

Ah, so the drop in prices in not actually a drop in prices which very well may be rising... but simply "an increase in quality."

By that logic, 99% of Americans are wealthier because the US household net worth chart showing really just the wealth of 1% of Americans (those whose paper wealth is tied to the stock market) moves from lower left to upper right. Courtesy of Mr. Chairmanwoman's money printer. And if not that then, well, there is always the trickle down effect.

Isn't modern "hedonically-adjusted" economics just grand: after all, since the quality of that money in your pocket is so much higher, you are now richer. Just ignore the fact that in proportion to all the outstanding money, what you have in your pocket is now worse than a joke.

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Fri, 05/02/2014 - 15:53 | 4721564 ParkAveFlasher
ParkAveFlasher's picture

The bigger the screen, the bigger the illusion.

Fri, 05/02/2014 - 15:54 | 4721568 fonestar
fonestar's picture

Bitcoin.  The hyper-deflator!

Fri, 05/02/2014 - 15:56 | 4721576 svayambhu108
svayambhu108's picture

Biology gets expensive, electronics gets cheap. One is perfected by the system, the other is crippled by te sytem.

Fri, 05/02/2014 - 15:59 | 4721589 ParkAveFlasher
ParkAveFlasher's picture

Basically, any production or service that can be outsourced becomes cheaper.  Any production or service that must occur locally - you must educate your children, service your health, fix your car, etc - becomes more expensive.  This is the tipping point.

Fri, 05/02/2014 - 16:01 | 4721596 idea_hamster
idea_hamster's picture

"Huh, deflation of more than 100%?"

Think of it this way:  if you have a new TV made in 2005, you pretty much can't even give it away if you're Best Buy!

Fri, 05/02/2014 - 16:09 | 4721638 maskone909
maskone909's picture

record high beef prices bitches

 

                                                
       
                                                                         
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Fri, 05/02/2014 - 16:15 | 4721658 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

New and used cars have almost decreased 20%? Are they fucking joking?!? There has to be a punchline somewhere we're missing.

Fri, 05/02/2014 - 16:19 | 4721672 Al Huxley
Al Huxley's picture

Absolutely - that Toyota Camry that cost you 25K in 2000 now runs you 40K.  .8 * 25K = 40K.  Whats the matter, you gonna believe your calculator/spreadsheet?  Fuck man, the Orwellian NWO is going to be hard on you.  Just remember, War is Peace, Slavery is Freedom.

Fri, 05/02/2014 - 16:27 | 4721709 Joe Davola
Joe Davola's picture

Can I haz some more of that GM Cobalt quality?

Fri, 05/02/2014 - 16:43 | 4721753 James_Cole
James_Cole's picture

Last paragraph:

“If you handpick services and goods where there has been dramatic technological progress, then the fact that poor people can consume these items in 2014 and even rich people couldn’t consume them in 1954 is hardly a meaningful distinction,” said Gary Burtless, an economist at the Brookings Institution. “That’s not telling you who is rich and who is poor, not in the way that Adam Smith and most everyone else since him thinks about poverty.”

Isn't that the point of the article?

Fri, 05/02/2014 - 16:50 | 4721780 svayambhu108
svayambhu108's picture

The future will be hi on tech, low on life. Buy life, sell tech. :D

Fri, 05/02/2014 - 16:53 | 4721793 0b1knob
0b1knob's picture

I have set before you life and death, blessing and cursing: Therefore choose life. [Deuteronomy 30:19]

Fri, 05/02/2014 - 17:03 | 4721808 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

If bureaucrats could accurately quantify value, then we would all have Marx and Mao under our beds.

This is like betting on a runner who can't tie his/her own running shoes.

Fri, 05/02/2014 - 18:32 | 4722136 LetThemEatRand
LetThemEatRand's picture

I've got my money on that South African guy with the metal legs.  No shoes to tie.   His only mistake was not deciding on prosthetic skis and and target shooting.  He would have killed it.

Sat, 05/03/2014 - 14:26 | 4724136 AldousHuxley
AldousHuxley's picture

bureaucracy controls masses through powers of policy and procedures. He who dictates power (lawyers in the government) is king.

 

strategy of american economy was to inflate like crazy and hide inflation to citizens by offshoring consumer goods manufacturing which effectively exports inflation to foreign countries so that Chinese factory workers get the blunt of inflation's negative effects.

However, certain unexportable (at least not yet) services like childcare, education (zero sum reputation game), primary housing, government monopolies like military, police, paper pushers, lawyers get inflation adjusted income and relatively get wealthier than the productive class working in productive industries.

 

some lower end services (non-managerial) are kept in check from inflation by importing labor (illegal aliens, H1B tech workers, construction workers, imported doctors in small towns)

 

Now, why does US elites have to do all of this to counter inflation??? Because they need to erase bad gambling debts. Wall street is whom they employee to execute this, but in the end wall st. workers are workers in the end. Real elites are well hidden from the public. THEY are the real public enemy. Enough money to live well, but greed turns nation's economy into a ego trip game.

Sun, 05/04/2014 - 11:58 | 4725852 TruthHunter
TruthHunter's picture

'

"This is like betting on a runner who can't tie his/her own running shoes."

??? I'll still put my bet on Forrest Gump!

Fri, 05/02/2014 - 17:27 | 4721925 RiverRoad
RiverRoad's picture

Yup:  bread, circuses and Obama phones.

Fri, 05/02/2014 - 16:52 | 4721784 0b1knob
0b1knob's picture

The only way that television prices could decline over 100% (which is what the chart shows) would be if people were being PAID to take televisions.

Charts are just a way of presenting lies in an obfuscated way.

Fri, 05/02/2014 - 17:01 | 4721816 James_Cole
James_Cole's picture

The only way that television prices could decline over 100% (which is what the chart shows) would be if people were being PAID to take televisions.

They are, if you wanted to get rid of an old (crt) tv in a responsible manner you'd have to pay someone to recycle it - lots of places offer this service.  

Not that that's what the chart was saying. 

Fri, 05/02/2014 - 20:31 | 4722487 PT
PT's picture

Okay, let's call their bluff.  If I want a brand new car but built exactly like a '70s car, how much would it cost me today???
If I want a brand new CRT TV right now, built exactly like a '70s TV, what is it going to cost today?
If I want a brand new record player, build exactly to '70s standards and using '70s technology, what is it going to cost today?
Dear Ford, please build me a brand new XB Falcon.  Dear Phillips, please build me a brand new '70s TV and Hi-Fi system.  P.S.  Please build in the same factory and country that you built in in the '70s.

And I still call BS on the "cheaper housing" line on that chart.   Find me a mortgage that costs less than half the minimum wage.  Ha ha ha ha ha ( and not the funny type of hahahaha). 

Time to drag this one back up.  Approx one hour, the first six minutes are boring (skip if you must):
http://www.youtube.com/watch?v=akVL7QY0S8A 

Sat, 05/03/2014 - 01:19 | 4723060 James_Cole
James_Cole's picture

ParkAve said it above:

Basically, any production or service that can be outsourced becomes cheaper.  Any production or service that must occur locally - you must educate your children, service your health, fix your car, etc - becomes more expensive.  

Not sure what you're on about with the 'built exactly like the '70s' points.  

Sat, 05/03/2014 - 04:36 | 4723188 ParkAveFlasher
ParkAveFlasher's picture

I get it.  Build me car with an interior like a living room and a trunk the size of Rhode Island, now, in Kalamazoo.  Vinyl does sound better.  There was a time when ALL food was "organic".  Clothe me with the same quality garments as my cohort in 1913.

Sat, 05/03/2014 - 14:31 | 4724146 AldousHuxley
AldousHuxley's picture

consumer goods are cheaper because they offshore manufacturing. 

cheap consumer goods and fake food keep the masses happy and status quo to perpetuate.

but what allows middle class to challenge the upper class (home ownership, retirement security to allow take more business/career risks, education, healthcare to continue working) increased with inflation to keep them far away from billionares who are now double digit billionares.

Your $500k house might now be worth $1M, but IT IS THE SAME DAMN OLD HOUSE....meanwhile your children won't be able to afford same living standards (as long as you have more than 1 child) AND rich got far more richer than doubling of wealth.

Sun, 05/04/2014 - 12:06 | 4725880 TruthHunter
TruthHunter's picture

If you factor in the wages of the Chinese slaves building the cheap TV's, is the

hedonistic deflation still accurate? It's definitely less affordable for themcompared to

American factory workers in the 70's.

 

 Economic analysis should include the sphere of those effected.

In the 70's the chinese weren't even part of this economic calculation.

Sat, 05/03/2014 - 07:18 | 4723237 PT
PT's picture

The '70s point is this:  If modern cars have a paper discount written on their prices due to improvements over the years then give us the option of buying the car without any of those improvements so we can realise the paper gains as real money saved in our pockets.  If we can't realize the gain then the deflation argument is phony.  (Not that we don't already know that.)

Also

Try sitting on the bonnet of a '70s car.  Now try sitting on the bonnet of a new car.

 

 

EDIT:  Or, in short:  Let me realize the paper gains in the real world.  If I can't convert the paper gains to real money, then those paper gains don't exist.

Another thought:  Cars are said to be cheaper because of improvements.  Meat is said to be cheaper due to substitution - you stop buying beef and buy cheaper mince.  Don't these two methodologies contradict each other?  Where's the hedonic adjustment for beef devolving to mince?

 

Sat, 05/03/2014 - 14:34 | 4724152 AldousHuxley
AldousHuxley's picture

substitue metal with plastic and you have cheaper cars.

 

but the real question is, is your commute to wage slavery plantation any shorter???

 

key performance metric should not be how comfortable the ride is nor max speed of the vehicle, but how much time and gas a new car will save you. 

 

Otherwise it is like arguing that a women's luxury hand bag is on sale now .

Sun, 05/04/2014 - 12:09 | 4725898 TruthHunter
TruthHunter's picture

If you factor in the entire cost of a vehicle as time spent(working or driving)

we get surprisingly close to horse and buggy speeds.

Sat, 05/03/2014 - 16:41 | 4724421 neidermeyer
neidermeyer's picture

I can tell you that the turntable that I bought new in the 1980's for under $150 with a decent cartridge sells used on eBay for over $1000 ... but you can buy a Sony DVD player (that will also play your cd's) at WalMart for $19.96

 

 

Sat, 05/03/2014 - 07:03 | 4723202 Dr Benway
Dr Benway's picture

The chart does not show that TV prices have declined over 100%, hedonically adjusted or otherwise. Nor does it say used car prices have declined 18%.

Tyler and everyone else here seem to have missed a key part of the chart, where it says the percentage point is relative to the 23% overall change in prices over the time period.

So, it's around 110-23=87% decline in prices for TVs, hedonically adjusted, due largely to adjustments for better TV technology. Still very ridiculous. And around a 5% increase in used car prices.

Fri, 05/02/2014 - 22:10 | 4722762 A Nanny Moose
A Nanny Moose's picture

Think of how much cheaper it all would be without currency destruction.

Fri, 05/02/2014 - 16:21 | 4721678 ProtectiveFather
ProtectiveFather's picture

The cars are nominally 150% more expensive, but they're 170% better, hence 20% decrease. Lucky you.

Fri, 05/02/2014 - 16:26 | 4721701 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

I feel so much better knowing someone can pull 170% out of their ass to tell me things aren't as bad as they seem.

Fri, 05/02/2014 - 16:49 | 4721779 Wait What
Wait What's picture

"tell me things aren't as bad as they seem"

hasn't that been the whole project since 2009?

forget real growth, forget structural adjustment, just spin everything to look like 'recovery' and 'things are getting better' and you've summed up the objectives of the Central Banks, the Obama/Abe/EU administrations, and all of their superior/subordinate organizations.

the hard part is going to be spinning the collapsing 2014 economy, with all its hedonic, seasonal, and NEW GDP adjustments into anything but the 2nd leg of a depression. as we saw today, baffle 'em with bullshit seems to work just fine.

Fri, 05/02/2014 - 17:35 | 4721957 RiverRoad
RiverRoad's picture

So is it hedonics or ebonics???

Fri, 05/02/2014 - 18:15 | 4722080 TheSecondLaw
TheSecondLaw's picture

If I have learned one lesson in business, it's this:  Turnover is vanity; profit is an opinion; cash flow is a fact.  Hedonic shmah shmah. The cash at my disposal is decreasing and I'm working just as hard as I was ten years ago.  I don't give a shit what the economists say.

Fri, 05/02/2014 - 19:23 | 4722316 Clycntct
Clycntct's picture

I was taking notes and by my count that's 3 things.

Just saying.

Fri, 05/02/2014 - 20:34 | 4722496 PT
PT's picture

Hedonically adjusted, it is one thing!

Fri, 05/02/2014 - 22:16 | 4722781 A Nanny Moose
A Nanny Moose's picture

When all else fails, destroy the language.

Sat, 05/03/2014 - 14:41 | 4724166 AldousHuxley
AldousHuxley's picture

don't just destroy the language, celebrate the destruction.

rappers are billionares now. English teachers have welfare.

Fri, 05/02/2014 - 17:04 | 4721830 Steaming_Wookie_Doo
Steaming_Wookie_Doo's picture

I notice they didn't bother to compare gasoline prices from 1954 to today, or any energy costs at all. And for all those "hedonic" items, they consume lots of power, lots of expensive batteries, etc. But those prices would kind of mess up their graph even further.

Hmm, if they compared my 1990 corolla with a new one, I don't think they've gotten even 20% better. Certainly not on gas mileage. Yup, just checked Toyota's website-- 28/37 mpg-- which is what I'm getting. Maybe there are 20% more useless geegaws inside (will burlwood door inlays *really* improve things?).

Fri, 05/02/2014 - 17:10 | 4721854 Citxmech
Citxmech's picture

Oh - I hear that the energy we have today is better too:  120vac and 240vac instead of old-timey 110v and 220v.  The gas now has fancy detergents and ethenol in it unlike the old toxic leaded stuff.  Even our coal power-plants now run on that new "clean" coal instread of the old dirty dusty stuff.    

/sarc.

Fri, 05/02/2014 - 22:24 | 4722806 daveO
daveO's picture

Less is more! The new Obama catch phrase. Just like Carter wearing a sweater and telling everybody to lower their thermostats.

Fri, 05/02/2014 - 18:23 | 4722104 Antarctico
Antarctico's picture

Hmm, if they compared my 1990 corolla with a new one, I don't think they've gotten even 20% better.

To be fair, newer Corollas (the last couple body styles) have made huge gains in safety and crash worthiness. They are structurally better at protecting their occupants, have ABS brakes standard, and come with multiple airbags. This is true of pretty much all modern subcompact cars these days.

 

...will burlwood door inlays *really* improve things?

Burlwood door inlays totally improve things, especially when they are made of swirly looking molded ABS plastic.

Sat, 05/03/2014 - 08:05 | 4723292 new game
new game's picture

just for the record; 2002 corolla was last year they had independent suspension on all 4 wheels! 2003 on, they became fully  americanized with bling and shit that can fail. abs, bags ect, all mandated shit by insurance lobby! noticed rates on car insurance-another scam. fuck all this, just adds cost and weight. american cars are a fucking joke compared to how i would order my car if i could... hold the bags and gizmo's. you cant even buy a 5 speed corolla anymore. fuck toyota, the new gm. honda still has 4 whl independent susp. on the civic. honda, the last surviving quality car left standing...

Fri, 05/02/2014 - 17:06 | 4721836 orez65
orez65's picture

"The cars are nominally 150% more expensive, but they're 170% better, hence 20% decrease. Lucky you."

In 1969 I could buy a brand new Ford Mustang for $3,000.

I just had my Chrysler Jeep REPAIRED (power steering pump, alternator and front end) for $3,200.

"Fiat money" is the root cause of all that ails the US.

Fri, 05/02/2014 - 18:33 | 4722139 Antarctico
Antarctico's picture

I just had my Chrysler Jeep REPAIRED (power steering pump, alternator and front end) for $3,200.

That $95-plus hourly rate will screw you every time. The front end work is probably more than most people can do in their driveway (you need special tools, a floor jack and axle stands, plus you still need a shop to do the alignment), but a power steering pump and alternator is pretty straightforward to do at home -- not hatin', on you, just saying is all. :)

Fri, 05/02/2014 - 20:43 | 4722515 PT
PT's picture

I don't know about orez65 but it really helps if you can afford a garage and you don't live in an apartment complex with shared parking.  It's nice to think you can leave your tools for a minute and come back and find them still there where you left them.  Just another spanner in the repair yourself / get a mechanic decision-making process.  (Often I'll pay a mechanic on the grounds of "Well, it'll take me ten hours to fix that but the mechanic can do it in one, therefore the mechanic is cheaper".  I'd rather do and learn myself, but space is a big issue for me.)

Sat, 05/03/2014 - 11:40 | 4723604 Edelweiss
Edelweiss's picture

  @orez65, holy shit that's a lot of coin for a little work.  The parts were likely less than $1,000. I've lost touch with how much it costs to have a car worked on.  I became my own mechanic 17yrs ago because I couldn't afford to have the work done.  Now I do it because I can.  If you have some space, the inclination, and a few hundred to spend on tools, do it yourself!  This spring I'm replacing both front wheel hub assemblies, both strut assemblies, upper and lower ball joints, sway bar links, etc. for <$800 in parts.  Invest in your own skill set, and you won't regret it. 

Sat, 05/03/2014 - 06:46 | 4723246 PT
PT's picture

ProtectiveFather: I want to buy one of the cars that are NOT 170% better so I can get it 150% cheaper.  (Yes, yes, it really means 60% cheaper but given the govt's grasp of mathematics, I'm sure my measure will keep things consistent and in the spirit of their stats.)

Fri, 05/02/2014 - 16:28 | 4721711 Joe Davola
Joe Davola's picture

Thanks to cash for clunkers, used car prices went through the roof.

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