Tuesday, August 22, 2006
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There's more than one way to measure economic prosperity
Following up on recent posts about economic inequality and Wal-Mart, it should be noted that Virginia Postrel has a great column in Forbes about how government figures likely underestimate the welfare gains among the bottom half of the income ladder:
Nowadays, candid and intelligent people--not to mention partisans--tell us that the average American's standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.Which brings us to Wal-Mart:
Price indexes also haven't kept up with changes in what consumers buy and when and where they shop. Wal-Mart's share of the U.S. grocery market is more than a fifth and is growing. Wal-Mart and other superstores charge up to 27% less for food than traditional supermarkets, estimate economists Jerry Hausman of MIT and Ephraim Leibtag of the Department of Agriculture. But the BLS doesn't factor those lower prices into its inflation estimates. It simply assumes that Wal-Mart's price reflects worse service, and ignores the savings.posted by Dan on 08.22.06 at 12:59 PM
Credit expansion anyone? People living beyond their means?posted by: msj on 08.22.06 at 12:59 PM [permalink]
According Postrel's own argument, lower income people are better off BECAUSE OF INCREASED PURCHASING POWER AT WALMART, not because of real wage growth. Now we can argue about whether that really does constitute real wage growth, but the improvements at the high end are clear, unambiguous and huge. The point that the "gloom-peddlers" are making is that the gap is growing. How can anyone dispute that?posted by: OpenBorderMan on 08.22.06 at 12:59 PM [permalink]
The fact that income inequality has been especially growing along urban/rural lines, and that most economists live in coastal cities or nice college towns makes me wonder if their perceptions are skewed.
Crystal Meth must be a "super luxury good"! The booming real income in rural america is freeing up buying power to for people to maximize "their utility" by consumeing massive amounts of meth to cope with all the "opprotunity"posted by: centrist on 08.22.06 at 12:59 PM [permalink]
I find it hard to believe that Wal-Mart is 25% cheaper than the grocery store without a significant sacrifice in quality...
The supermarket business exists on pretty razor thin margins to begin with, and although they do pay a fair bit more (ok, they are mostly union, but that, at most, is still no more than 2x the labor cost of Wal-Mart, and they've been knocking that down, and labor can't be 1/3 the cost of groceries, can it?), and the distribution costs really aren't much different.
So where is the savings coming from? Is Wal-Mart cutting down the suppliers that much more?
Or is the price difference between a Wal-Mart and, say, FoodCo (one of the "low income specializing" supermarkets), not much? But when you compare Wal-Mart with a Safeway, or say, Pavilians, the price difference becomes more significant?
posted by: Nicholas weaver on 08.22.06 at 12:59 PM [permalink]
Hmm, I went to Best Buy this weekend. What's that guy trying to say about me?posted by: Norman Pfyster on 08.22.06 at 12:59 PM [permalink]
Nicholas Weaver says:
"I find it hard to believe that Wal-Mart is 25% cheaper than the grocery store without a significant sacrifice in quality..."
The study cited by Postrel says there IS a significant sacrifice in quality---but not a 25% sacrifice. As long as it's less than 25%, then the official government bean counters are missing something.
I know most people are going to believe whatever they want to believe--they're loyal to the views of the peer group rather than to the evidence--but FWIW, there's a lot of evidence that consumer durables and food are getting vastly cheaper in quality-adjusted terms.
Example: Greenspan believed that this was a real problem in our most important service industry: Medicine.
"...the [officially measured] level of real gross product per hour for medical services....declined between 1990 and 1999....This is implausible...."
You can't measure changes in real wages unless you can measure changes in the price of stuff that regular people buy--stuff like the cataract surgery Greenspan has spoken about repeatedly.
So most studies of wage inequality are worth much less than a Saturday afternoon spent watching people come out of a Wal-Mart. Just imagine what those people's parents bought at the K-Mart back in the 70's, and you'll be on the path to wisdom....posted by: Garett on 08.22.06 at 12:59 PM [permalink]
The problem: We have the deflators in price/quality from Wal-Mart, we have the deflators in computer service life (gone up now that "Groves Giveth and Gates taketh away" is no longer true). Likewise deflators in terms of quality on some durable goods (A $15k Honda today is vastly better than a $15K cost-adjusted Honda 10-20 years ago).
But we also have deliberately ignored INFLATORS, such as CPI only being based on rental housing, not purchased housing (rather than a basket of both).
Someone should construct a table of as many of these as possible, so we can start to estimate the true effects across different sections of the income range.
Gasoline was also down around $1.00-$1.50/gal both during the dotcom boom and thereafter. IMHO that was a bit of an unnatural state of affairs. Does anyone think it will go back to $1.00/gal ever again? $2.00? Much below $3.00? That will make a huge difference over time.
Crankyposted by: Cranky Observer on 08.22.06 at 12:59 PM [permalink]
" "Anybody who thinks things are getting worse should go to Best Buy and notice the type of people who go to Best Buy," says economist Robert J. Gordon of Northwestern University."
This statement is so idiotic that I hardly know how to respond. Quite apart from the problems (as anyone in Econ 101 will tell you) of using anecdotal samples, we know there's been a great flood of cheap money driven by home equity and the like. That reservoir is largely played out.
posted by: erg on 08.22.06 at 12:59 PM [permalink]
I know most people are going to believe whatever they want to believe
Most authors too, apparently.
The walmart prices could only effect the cpi to the extent that shopping at walmart increased over the time period in question.
When you look at consumption rather than earnings data, and correct for changing household sizes, and correct for nonwage benefit growth, and make hedonic adjustments to the quality of goods, and calculate the effect of buyer substittution toward better deals, and correct for the vast increase in variety available to the consumer, and correct for the shift of people to "supervisory" positions not covered in the surveys...the picture of our economy looks a lot better than the raw figures constantly bandied about.posted by: srp on 08.22.06 at 12:59 PM [permalink]
The issue of absolute living standards is separate from the issue of inequality. As for the idea that somehow people on the coasts are living high on the hog while people in the interior suffer, in fact real incomes (as conventionally measured, without any of these corrections) are less regionally dispersed than they used to be. And it's a lot easier to live on a modest income in places like Dallas, where houses are cheap, than in the blue states.posted by: Virginia Postrel on 08.22.06 at 12:59 PM [permalink]
OK, you have all made me feel so guilty that in order to do my bit to rectify this horrid econimical problem, I will take a 35% pay cut effective immediately. That should help reduce the wage inequality gap.
Sorry if my sarcasm dripped on your new shoes from Wal-Mart.posted by: Useless Sam Grant on 08.22.06 at 12:59 PM [permalink]
... Now we can argue about whether that really does constitute real wage growth, but the improvements at the high end are clear, unambiguous and huge. The point that the "gloom-peddlers" are making is that the gap is growing. How can anyone dispute that?
Overall, I am disinclined to take these people too seriously.posted by: rosignol on 08.22.06 at 12:59 PM [permalink]
One of the key problems with the CPI is that it tracks a basket of goods. What it doesn't track is the utilization of retail channels in purchasing the goods.
Hence if good X in the classic retail channel increases by 20% in a given year and declines by 10% in the discount retail channel, there is a net increase of 10% for the price of that good that then feeds into the CPI basket as one component of that basket, weighted according to the theoretical consumption of that good in the basket.
The fact that the volume of sales in the classic retail channel declines by 30% and the discount channel increases by 35% - for a net increase of 5% for the weight of the consumption of that good - is completely ignored by the CPI, which distorts it even more than it already is being distorted. Calculated this way, you'd have a hedonically adjusted rate that would reflect the way people actually buy the stuff, not a theoretical. The data can be collected - and is collected - by sales tax and computerized inventories, sanitized by aggregation.
My modest proposal is that we junk the CPI as we know it - not that many really do outside of the statistical and economics community - and replace it with hedonically adjusted consumption grouping: that multiple baskets are created (for single urban dwellers to extended rural families) so that anyone can approximate the statistic with their situation. The results of the most recent census would be the basis for this new statistic, and it would allow for the creation of a new CPI that is based on the demographics of the most current census.
With, of course, public changes in the baskets over time between the census (censii?) so that there aren't any big jumps every 5 or 10 years.
Johnposted by: John F. Opie on 08.22.06 at 12:59 PM [permalink]
I'm about as far from Marxist as one could be, but it doesn't take a Marxist to see the inherent problem in the growing gap between working class and wealthy. Go to a 3rd world country and see what it means in the extreme case. It is definitely something to avoid.posted by: OpenBorderMan on 08.22.06 at 12:59 PM [permalink]
The problem with this focus on traditional goods is that it misses the largest costs in life. So most poor people have a TV now, therefore there not really poor, right? Well, why skip out on the TV when doing so wouldn't even get you a month's rent? Health care costs have been growing faster than incomes lately, which means that if you're at the bottom and your income is growing more slowly as inequality worsens, it gets harder to afford health care every year. That's even if your income is, in fact, growing faster than inflation. The same is true of housing costs in most places, as well as the cost of higher eduacation. These are the other costs of living that are ignored by price indexes. So if it is in fact becoming harder for most people to afford these things, (and you surely couldn't argue otherwise) is it really not at all valid to say things are stagnating for those not at the top?posted by: Eric L on 08.22.06 at 12:59 PM [permalink]
This is not about equality of outcome, but equality of opportunity.
I am saying that activists ought to quit harping on how it's terribly unfair that people who used to wear hand-made cloting are now buying off the rack because another group of people went from buying off the rack to wearing hand-made suits.
The situation of everyone described in the scenario is improving, yes? The only quibble is that they're not all improving at the same rate.
That is a case of outcomes.
The third world has so many problems- from corruption to incompetent governance to lack of infrastructure to illiteracy to disease- that the notion that 'income disparity' is the underlying cause of it all should be laughable.
It seems like the underlying reason income disparity is a concern is because the old belief that there is only so much wealth to go around. Therefore if someone has a lot, someone else has little.
I put much more stock in Adam Smith's ideas about wealth creation than I do in Marx's notions of how wealth should be allocated or managed.posted by: rosignol on 08.22.06 at 12:59 PM [permalink]
I'll try one more time to clarify where I think we differ, because I think it's important to be clear. I would agree that income disparity is a natural and healthy outcome of capitalism. As a capitalist, I am in favor of it.
For example: I don't have the same opportunities as, say, the children of Bill Gates, but I don't see how the opportunities those people will get diminishes the opportunities avaliable to me in any measurable way.
It's even concievable that if Bill's kid founds a business even a tenth as successful as his father's, the economic growth resulting from his success could actually increase the opportunities avaliable to me... so why should I object to this? He's not depriving me of something, and he's not costing me anything, so what is the problem?
I am amazed that there are people over the age of 23 or so who haven't figured this out.
It will be interesting to see how the Chinese government handles the transition from startup mode to sustained growth, and deals with the business cycle.
I suspect they're going to make a mess of it.posted by: rosignol on 08.22.06 at 12:59 PM [permalink]
think the cause is primarily the growth in world trade, which results in a lower value for most types of labor.
Such shallow reasoning. Globalization has nothing to do with the skill level of the labor involved. It has everthing to do with its accessiblity to competition. Unskilled and low-skilled labor doesn't compete globally so your children are much more likely to be doing that than skilled labor, or they would if we also weren't allowing uncontrolled illegal immigration.
Hence if good X in the classic retail channel increases by 20% in a given year and declines by 10% in the discount retail channel, there is a net increase of 10% for the price of that good
My cousin used to work on the CPI. He told me his job was to call businesses all over the country and ask them about particular goods they sold, the prices and volumes they sold at. That was well over 20 years ago, since then he retired from that job and his reserve officer status got activated so he's gone to becoming a regular airforce colonel. Are you telling us that the method to compute CPI has regressed this much in the last 25 or so years?
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