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Hedonic adjustments, fake and gay?
There's been a lot of talk about a U.S. "vibecession" lately. In the last couple of years, incomes have risen, unemployment remains minuscule, the stock market is roaring, and inflation has returned to normal levels. Yet, when polled, Americans remain gloomy about the state of economy. What gives? Why aren't we partying like it's 1999?
The usual suspects are out as usual, telling us to ignore our lying eyes, pointing at charts, and saying ackchually, the economy is doing quite well thank you very much.
I don't think so.
Larry Summers, former Treasury Secretary and consummate insider, had this to say:
"We show that if we make an effort to reconstruct the CPI of Okun’s era [1970s]—which would have had inflation peak last year around 18%, we are able to explain 70% of the gap in consumer sentiment we saw last year."
18% annual inflation is quite a lot. The official number peaked at only 9%.
Of course, none of this is news. People have been complaining about inflation numbers being fake for awhile now. A can of Campbell's soup cost $0.40 in 2000, but rose to $1.23 by 2023. That implies an annual inflation rate of 5%, vs. the official number of only 2.5%. And while this is just a single product, similar patterns have held true among other immutable products like gasoline or Coca-Cola.
On the other hand, there are hedonic adjustments. Unlike a Campbell's soup can, a TV in 2023 was nothing like a TV in 2000. It's better in nearly every way. So even though a family might still spend $500 to buy a TV, the quality has increased by 10x, so the price had reduced by 90%. Or something.
You can easily see how inflation numbers get fuzzy. One thing I don't think CPI is taking into account is the degradation in the quality of services post-pandemic. The price of an HVAC repair is skyrocketing. But the quality is plumetting. Does CPI measure that? Do they measure being guilted for tips at fast food restaurants and convenience stores? Do they measure waiting in line at the pharmacy for 45 minutes because there is only one harried pharmacist on duty? Do they measure being bombarded with ads where previously there were none. Do they adjust (up or down) when TikTok becomes 5% more addictive? I doubt it.
Nor could they. I doubt any of this can be measured.
And so we return to the can of soup and opinion polls. Maybe they're not such a bad measure of inflation after all. And I think they will show what many of us feel intuitively: that the economy is doing a lot worse than the official numbers show.
People keep making this argument whenever this subject comes up and I just find it baffling. The capabilities of a $500 smart TV 23 years into the future is of no consequence or relevance to someone in 2000 who wants to watch TV. It is going to have features you don't need, don't care about, can't even imagine and have no use for in 2000. There's no lesson to be learned, no argument to be considered. And it's not like you can buy a TV for $50 today that cost $500 in 2000, and even if you buy one, it'll be useless as it isn't compatible with any present-day systems and cables.
In 1980, you could be a big-shot lawyer in a big city while only being reachable on a rotary phone and by mail. In 2000, you only needed a mobile phone as an improvement, with no smart features at all, of course. You didn't want more, didn't need more, and nobody expected you to be available all the time.
Today, however, we're surely at a point where the lowliest office worker and lowliest handyman is expected to have a smartphone with some DM app installed, because people expect to communicate with you instantly via direct messaging. Especially your shitty boss.
Technological innovation does not necessarily translate into improvements in quality of life.
I think the argument makes sense when you considered like a choice offered to society. If in the 00s we were given a choice to preserve TV quality in amber but they'd steadily become cheaper to where they're $50 today or let the price stay relatively stable but the quality improve to where they are today with far larger and clearer screens and more features then I think most, but not all, people would probably pick the second option. So when there are complaints about how we didn't get the first option as well it kind of feels a little ungrateful for all the improvements we did get.
Didn't we get the first option as well, even, for those who would prefer it? I search for "television" on Craigslist and immediately find two 30"+ flatscreens, better than what I grew up with, for $50 or less each.
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I overheard someone whispering in the men’s room stall next to mine that of the various posited factors that explain the sentiment vs CPI gap, the strongest was the cost of borrowing for the consumer, especially as it relates to housing. Maybe interest rate is the missing piece.
It could be a big part of it. Housing prices are not measured in CPI. Instead, they measure "owner equivalent rent", which is calculated by asking homeowners how much they could rent their house for (as if they would have any clue).
So, even as buying a house becomes ever more unaffordable, the CPI number doesn't reflect any change.
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I think things like this explain the disconnect between what the “experts” tell us and what polling seems to show. Another example showing the disconnect is credit card debt and savings. The health of the consumer is much weaker than thought.
I guess what I’m saying is that at a 10k foot view the economy looks good and that’s what is reported. But when you start digging in, there are holes.
I'm wondering when the effects of the student loan payments restarting will hit.
On one hand, it should slow inflation. On the other hand, it should slow growth.
Its going to have a direct impact on a particular segment of the population, though.
They're going to feel more a pinch, which will indeed reverberate out, but it'll be their belts that will have to be tightened.
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Because the inflation of 2021-2023 followed an extremely prolonged period of very low inflation, people continue to think of prices as historically high in a unusual way. If a burger that was $6 in 2010 was $7 in 2019, $9 in 2022 and $10.50 today, it will take a long time for things not to feel unusually expensive.
I am not convinced people in previous economic booms were always as happy with the economy as it seems in hindsight. The famous truth of belles epoques is that few acknowledge they’re living through them at the time, only in memory.
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I think a huge part of this is the repeated lying. Just after the pandemic, when inflation started up, everyone was screaming from the housetops that this was a very temporary thing, a blip and due to pent up demand as the economy restarted. And during the pandemic as well, people were told not to notice that the economy wasn’t working right. So trust in officials and their statements of “the economy is just fine” have plummeted.
The other thing that’s happened is that our economy has bifurcated into the elite and the rest of us. The pandemic sped this up massively, but it’s been this way for some time. So there are two economies: one for the rich and elites for whom food costs and housing costs are trivial, and one for the workers struggling to make rent and buy food and after necessary expenses has nothing left. If you’re struggling, even after inflation related wages, to survive even after downgrading your lifestyle beyond the pain point, inflation is very very real to you. And given the struggles the economy for regular people is in the toilet. I’ve seen replies to stories about inflation not being real that detail the kinds of things that people have given up. Restaurants are simply no longer an option for a lot of people. They’ve canceled all their streaming services because they can’t afford them. They coupon and buy off brands or lower quality products, or simply do without. There’s a not insignificant portion of households that can no longer afford meat. But these are the peasants, and they aren’t to be listened to. If you’re rich, none of this matters to you and the economy is just fine. You might laugh about the cost of soup, but it’s not a lifestyle adjustment for you.
Real incomes for the lowest earners have risen much faster than real incomes for higher earners. Higher earners are noticing that the cheap servant they used to pay to deliver their doordash is earning more money.
It's not real income Maiq is talking about but discretionary income. If over some period of time your real income increased by 50% but your apartment rent and groceries doubled and and your student loan repayments restarted after being on 3 years of forbearance your DI is likely down significantly.
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I thought this link was going to be the recent muckracking shakedown of HVAC contractors from Asterisk Magazine. The claim is that HVAC as an industry is uniquely fucked in ways that other skilled-labor services aren't. I don't know enough about HVAC specifically to evaluate that claim, but having worked in other highly-regulated skilled labor contractor industries, the failure modes the author mentions are quite familiar to me.
The core problem is that intelligent, skillful, educated, motivated people don't want to do manual labor in non climate-controlled conditions. By the time you get someone trained and up-to-speed to competently execute the job, they're gone. You might get people to do it for six-figure salaries, but if performance metrics aren't legible to all parties, there is little incentive to burn profit margin on that.
I'm not sure exactly what effect the pandemic has had on all this. Sure there were layoffs and job-shuffling in 2020, but that was almost 4 years ago now. One thing I have noticed (admittedly small sample size) is that people who were in college during covid cannot be relied upon to know any specific knowledge one might expect someone with such a degree to know. They are still more generally intelligent than candidates without a degree, but very little learning seems to have happened 2020-2021.
Well, duh, any statement becomes true if you add that many qualifiers. When and where did intelligent, skillful, educated, motivated people ever want to do hard manual labor?
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I am an HVAC tech, although in a niche, not what the article is talking about. And while there’s plenty of lazy technicians working for contractors who don’t give a shit, the quality of HVAC equipment has also declined precipitously, mostly due to government efficiency standards putting extra gewgaws on the machine that supposedly reduce energy use but in practice just break a lot, but also because the supply chain issues mixed up parts supplies and lots of manufacturers haven’t managed to route back to the same quality of parts they used pre-pandemic.
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The mention of Manual J calculations in that article reminded me of the recent Technology Connections video about how lazy HVAC industry practices lead to companies selling oversized heaters to homeowners, which will become a problem if we switch over to electric heat pumps in the future (since oversized heat pumps will short-cycle, eating into the efficiency gains they normally have). (ETA: Not to mention customers getting ripped-off by being sold more expensive units with more heating capacity than they really need.)
Some anecdata: a local plumbing/remodeling company likes to advertise their quality service over the skeezy competition, to the point where I wonder if many of the blue-collar trades aren't actually rife with workers who will do what's quick and cheap over doing what's correct or desirable. (See also: this Kontextmaschine post about how the working-class used to live and work back in the heyday of American manufacturing.)
Rivethead is a phenomenal book by the way. I've never seen a clearer picture of what life was like for an American factory worker before full globalization.
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I think this is an interesting topic. I try not to believe in conspiracy theories much, but sometimes complex systems can take on aspects that seem like conspiracy. One thing I'm wondering about, and I'm not sure if anyone would really know the answer here, is what incentives do the experts who are telling us that everything's great have for telling us that? What incentives do they have for telling us that things are not great?
Here would be some guesses, but they're really just guesses. I know nothing about these systems and positions, and I don't even know who the "usual suspects" are, besides the Treasury Secretary and/or former Treasury Secretary who you listed above.
Incentives for telling us that things are great:
Incentives for telling us that things are bad:
Any other incentives people can think of?
I think it's kinda "I want to get Biden reelected", but as a kind of epiphenomenal second-order effect. Even if you are not a leftist ideologue, you may perceive that your superiors / friends / funding board members are leftist ideologues, and you suspect you will get more social capital (or actual capital) if you tell these people what they want to hear, so you cherrypick your metrics in order that they show what these people want to hear, and, lo, "Statistics show the economy is doing great actually".
There was an opposite-valence situation in the UK a year or so ago, where the economic indicators were good but all the leftist journos were going "How can the economy be good under this Conservative Brexit government, they must be gaming the metrics somehow"?! Perhaps the civil servants who staff the Treasury Department / Office of National Statistics are just good at statistical brown-nosing, whatever country it is and whatever party's in power.
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Completely uninformed speculation, but could it just be a holdover from when inflation was extremely high? Cost of living went up faster than many could adjust to; they never got used to it. And it's still going up! The fact that people don't notice the deceleration could be attributed to confirmation bias. Whenever they notice that something has gone up in price, it's "See, the prices really are going up still! And they would have me believe I'm imagining things." They're probably better at noticing price increases now too, anecdotally quite a few people in my circles track them more deliberately than before.
It's similar to how critics of the establishment sometimes allege that announcements that "Inflation has gone down" are misleading. I personally am not misled, but a small part of me might be unconsciously translating "Inflation has gone down" to "Inflation is under control", which it doesn't feel like it is, because prices still seem unreasonably high.
As for why we would be especially prone now to such a post-inflation vibecession, maybe it has something to do with the fact that millennials, who have outsize influence on the vibe economy (on social media), saw the highest inflation rates of their lifetimes through most of 2021, all of 2022, and the first half of 2023, and at least through the remainder of 2023 inflation stayed well above what they'd typically experienced in the preceding 15 years.
I think one thing about inflation that I don't see people factoring in is that the wage growth that is usually a part of it usually lags behind. But another part is that it usually doesn't just happen for free. It doesn't happen that your boss one day up and decides to give you a 10% raise unprompted—especially if you are highly replaceable. So the everyman experiences inflation in a much more tactile way. It isn't the case that the growth of their savings slows as the appreciation of their assets quickens and it all kind of vaguely evens out with plenty of liquid lubricant to ease the whole thing, like it does for someone like me.
To the guy working retail, inflation is that months-long period of time where everything gets prohibitively expensive and they either have to fight their boss for a sizeable raise they probably won't get and then go looking for a better job where at best they have to spend months of extra effort (of which they likely do not have in large supply) relearning a new job and settling into new routines only to at best vaguely catch up to where they were before.
This, to put it simply, sucks—and it's likely the case based on the bad vibes that this adjustment period isn't over. It also may very well follow a resentment period. I don't know where stuff like this would show up in highly coarse macroeconomic numbers, and my guess is that it probably doesn't.
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Yeah, the context window for inflation is pretty long.
The yogurt I like went from $1.29 pre-Covid to $1.49 to $1.69 to $1.89 and then finally $2.29. At some point I might accept that $2.29 is the new price. But it's going to be a few years.
At this rate we'll all be millionaires soon!
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I'm really confused at why this is supposed to be compelling. Can't you say this about any two things that changed by roughly the same size?
But maybe that's because I'm confused by what the units on "user sentiment" are in this tweet. Without that, it's not even clear why you'd expect "user sentiment" to be linearly related with inflation — if the gap between inflation metrics was higher, would he be saying this explained 110% of user sentiment?
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I saw some statistics lately suggesting that the vast bulk of job growth has been for recent immigrants. American citizens are actually experiencing a mild job loss. I'd wanted to write a top-level about it, but I had no computer at hand.
These numbers long ago became a political game, and they're gamed. Small differences add up and make all the difference.
I remember long ago when one hurdle to Obamacare passing was CBO releasing an estimate that Obamacare would raise the deficit. (Or was it OPM?) So Obamacare's drafters rewrote a bunch of details so that estimated savings for Americans could be taken as evidence of fiture savings in spending. There was probably some pressure behind the scenes, and the next official estimate showed Obamacare lowering the deficit. But the policies were all the same.
This stat is pushed around in various right-wing and conspiratorial circles online but it is fully explained by the fact that natives are older than immigrants and are aging out of the workforce. Unemployment among prime working age native adults is near historic lows and their workforce participation rates are very high.
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This is a good point: what does a white American care if recent Indian and Chinese have raised median wages? It factors in zero to their lived experience, except perhaps in a negative way. Since 2018, white wages have decreased, Hispanic and black have increased, and Asian has stayed the same (after a considerable increase since 2012).
https://www.pgpf.org/sites/default/files/income-varies-widely-across-racial-and-ethnic-groups-in-the-united-states.jpeg
Furthermore, although these numbers are adjusted for inflation, if inflation itself is undercounted...
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Yes, this is true.
Another thing that's happened is that the bottom quintile of workers are actually seeing much higher wages while the middle class stagnates. This makes sense as nearly all of the bottom quintile is doing useful work while many in the middle class are not.
What's the result of higher wages for the working class? Answer: the middle class feel much poorer. But it's actually quite nice for those willing to work with their hands (increasingly immigrants these days).
Saudi Arabia solves this problem by importing hordes of immigrants with zero rights. Then they use government funds to give the native-born cushy do- nothing jobs. We're halfway there in the U.S. but of course a native-born West Virginian and an illegal immigrant have basically the same rights nowadays. Also, we'd have to import a billion laborers to get to Saudi Arabia levels.
Obamacare has been a disaster.
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I remember back in 2008, the great recession, there were all sorts of conspiracy about inflation and how the government was rigging the official numbers. There were various efforts to come up with alternative measures, eg "shadowstats," but none of them came to much. I haven't seen anything like that this time, just a lot of grumbling from people who "feel" the economy is bad despite the official numbers looking good.
Maybe inflation just isn't something you can measure definitively? So much depends on what you choose for that hedonic adjustment. EG: https://www.nber.org/digest/20239/correcting-quality-change-when-measuring-inflation
Like, if I enjoy going out to eat at restaurants and collecting old cars, the inflation rate has been absolutely horrible. But for buying consumer electronics and gasoline, it's not bad at all, or even negative. Rent completely depends on your location. And some of the "improvements" are kind of subjective, like, do you really want a smartTV that requires a wifi connection and a subscription? Some people do, some don't.
Maybe we could come up with a personalized inflation rate, depending on your location and lifestyle?
I think this is pretty much it. The more I've been exposed to the problem, the more I've come around to the idea that measuring inflation is every and always a harder problem than you think. This remains true even after you've updated to thinking that it was harder than you thought before. I listen to a lot of EconTalk, and it comes up there time and time again. Best of Econtwitter just referred to the original Summers statement with, "file under: measuring inflation is always even more complicated than you think." You just have to make an obscene number of choices in the process, and they're kind of always having to deal with new products in an ad hoc way.
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For anyone reading this be aware that shadowstats is extremely fake and gay.
https://www.fullstackeconomics.com/p/no-the-real-inflation-rate-isnt-14-percent
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Oddly, inflation during the financial crisis was probably much lower than the official numbers. Back then, you'd see a nice-looking white person with no tattoos or obvious drug habit working at McDonald's. Service was very good. Lines were short. I flew to Hawaii for $250 and stayed in a beautiful vacation rental on the beach and it wasn't expensive.
Obviously this is true. But what if you like living indoors, having the necessarily certifications for employment, or going to the doctor? This, I think, is where inflation has really hurt. I left this out of my first post because it's a little messier. In 1983, the CPI was changed in a big way, no longer using house prices but instead asking homeowners how much their house would rent for. In a lot of ways, this change makes sense, but it means that CPI no longer reflects housing unaffordability.
And of course, a person could get a good job in 1983 with a high school diploma that now requires a college degree. That shift increased the cost of the "necessarily education" basket of goods from zero to approximately one gazillion. Also not measured in CPI.
Maybe all of this should have been included in the original post but I thought a narrower one about service quality would be more accessible. Not a huge fan of the 10 page essays we get here quite often.
Not intended as a point of argumentation, but man, as someone that already owns a house, no longer has need of certifications to generate income, and doesn't go to the doctor, it's interesting to notice just how sheltered I am from some of the things that have spiked substantially. I wonder whether differentials in exposure to these goods drives perceptions of inflation to a noticeable extent.
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Well, for me personally, I'm still living in the same house, with the same employer, and blessedly good health. So I haven't really had any inflation at all in those measures. But yes, that's all going to suck for some people. On the plus side, some people can take advantage of remote work to go live somewhere cheaper. It's one of those things where the "average" just doesn't mean much.
And I appreciate the concise post. I also "TLDR" when I see some of the ridiculously long post here. I blame Scott...
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Relatedly, does CPI measure shrinkflation? Like some of the items in a commodities basket are obviously measured by size, but questions like ‘how much is a loaf of bread’ are partially disguised by loaves of bread getting smaller.
Doesn't the USDA have standards for what counts as what? Granted, I'm only assuming so, because recently, I bought some Boar's Head-brand yellow mustard that proclaims on the label "45% less sodium (compared to USDA standards of prepared yellow mustard)."
It's usually not very strict, otherwise you would hear about things like subway's breads being classified as cake from the US instead of just the EU.
I wasn't necessarily thinking along those lines (though that is how it works re: taxes and such), I was thinking more like "what's the US-standard dimensions for a loaf of bread?"
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Adjusting for shrinkflation is done in the "quality adjustment" step.
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Hmm... Good question. You'd have to dig deeper into the data. My guess is that they can handle it in some cases, but not others.
The further you get away from "12 oz can of Campbell's soup" the more fuckery is possible. It truly is garbage in, garbage out. And I think, for the record, they are doing their best. It just gets so complicated so quickly.
https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflation-and-its-impact-on-inflation.htm
Yeah, makes sense. I believe that the people making the numbers are doing their best and avoiding obvious failure modes. If the "family size" cereal shrinks from 64 oz to 48 oz, I'm sure they can handle that.
If the hotel stops making your room up every day, I doubt they factor that in.
If my accountant takes 5 days to respond to an email instead of 1 day, I know they aren't making hedonic adjustments.
The idea that things should stay the same price is inherently flawed anyways.
We are constantly making vast technological and logistical improvements to just about everything. We seem to assume that all price changes are caused by inflation or deflation when, in a properly functioning economy, everything but services should be steadily getting cheaper.
Of course. But nearly 80% of the economy is services.
Let's say the quality of my TV gets slightly better (4k to 8k) but I can't talk to my doctor on the phone anymore. Has my life gotten better or worse?
This is Baumol's cost disease in a nutshell. The things that can be improved have been improved and now we're left with services which depend on the average quality of the American worker - which is clearly decreasing in many sectors.
In some ways, we're a victim of our own success. The low hanging fruit has been picked.
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Yes, that is about how much the money supply increased in 2020-2022. Global mass hysteria has consequences; implying the governments (and the personnel who were those policies) responsible for that fuckup would ever let that show in the official figures.
Look at the retirement metrics for tradespeople (also, death toll being confined to the old means many Boomers who inherited personality matrixes that put them in these fields got enough inheritance to retire on, since that's generally how their Depression-era parents operated specifically for that reason). We spent the last 30 years refusing to train any to replace them and continually raising taxes on them (insurance, etc.) so the existing ones wouldn't be replaced. (The legal immigrants aren't bring trade certifications with them and the illegals ones aren't allowed to even have them, obviously.)
Yeah, I think the numbers show that a lot of Boomers retired early due to Covid. The stock market bubble helped too. Hell, I know a guy who Yolo'ed into Tesla and is retired now in his early 40s. Nearly two decades of low interest and debt-funded stimulus has created massive distortions.
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