Sunday, October 1, 2006

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The CPI bias at work in Burger King

For the past six weeks or so there' been an egaging, intermittent blog debate about CPI bias. That is, to what extent has technological innovation improved standards of living so much that the effects are understated in measuring year-to-year or decade-to-decade comparisons of the U.S. economy -- and whether, concomitantly, inflation measures lke the Consumer Price Index are overstated.

The debate is less about whether CPI bias exists, but how big it is, whether its effect diffuses across all income strata within the economy, and its political implications. See this Megan McArdle post for the libertarian take, and this Brad DeLong post for the social democratic take.

My take is similar to Megan's, but I haven't blogged about it because it can be very difficult to articulate the extent to which technology has converted what used to be luxury goods into normal goods.

And the I opened my son's BK Kids Meal....

The toy in my son's meal was an Open Season-themed radio. Not just an ordinary radio, but one that hooked around the ear, making it look like a kids version of a cell phone earpiece. The battery is included. You can take a gander at it by clicking here and then clicking on "Toys".

Thirty years ago, when I was a child, this would have been a $20 ($68.71 in 2006 dollars) birthday gift that would have made me the coolest kid on the block. It is now an afterthought, a free, promotional gift as part of a $4.00 kids meal that is affordable to 99% of all American households.

If that seems hard to grasp, here's another way of looking at it -- I predict that by the time my son is my age, Burger King will include the equivalent of an IPod Nano in every kids meal.

Does the CPI incorporate some of the effects discussed in this parable? Certainly it does, in the form of the declining cost of radios. Does it incorporate all of them? No -- the increasing sophistication of the toys contained within kids meals is not included.

Readers are invited to submit other examples on a par with my son's kids meal as examples of how previously exotic technologies have become practically throwaway commodities.

posted by Dan on 10.01.06 at 02:12 PM


At the area waterpark they sell one-use waterproof cameras.

posted by: Jammer on 10.01.06 at 02:12 PM [permalink]

Calculators -- a scientific calculator that cost $250 when I was in college is a giveaway item now.

Long-distance telephone calls -- calls that used to cost several dollars a minute are now free and unlimited with a $25/month Vonage plan, and not just within the United States, but also to Mexico, Canada, UK, Ireland, France, Spain, and Italy.

Broadband Internet -- we're in the middle of the transition to free or nearly free universal broadband access, with the multiplication of free WiFi hotspots and citywide free WiFi networks. I stayed at a hotel last week that charged $15/day for Internet access; this week I'm in a hotel that costs less and gives highspeed access away. We know which way prices are going.

posted by: Gary Imhoff on 10.01.06 at 02:12 PM [permalink]

Letters: the cost of stamps and paper and envelopes and all that might have risen, but the cost of sending a letter is now exactly zero cents.

Travel: gasoline costs a lot, but how much does one have to spend to travel 100 miles? With air-conditioning?

Newspapers: how much did it cost to read The NYT, the WaPo and the WSJ every day if you lived in the country? Even if you pay for the content online, how much does it cost now?

Medicine: there's lots of stuff that used to be treated with surgery and can now be treated with pills.

Copying: how much did it cost to make five copies of your dissertation, 50 years ago?

posted by: Cisco on 10.01.06 at 02:12 PM [permalink]

Just another example of China exporting deflation??

posted by: aruna urs on 10.01.06 at 02:12 PM [permalink]

But let's put these changes in a different perspective by trying to apply some weights.

Currently cell phone services have a weight in the CPI of 0.587%. In 1998 their weight was 0.059%.

This means a 10% drop in the price of cell phone service now has the same weight as a 100% drop had in 1998.

In 1946-48 when I was in the first -second grade my family did not have a phone. We got our first telephone in 1948. Now, which was the larger increase in standard of living -- my family getting a party line in 1948 or someone getting a cell phone in 1998?

I do not know, but there has always been changes in technology that was not fully reflected in the data. The real question is was there a sudden change in the inability of the data to capture these changes in the late 1970s so that the sharp slowing of real percapita income growth that emerged around this time is incorrect? In other words, has the data become more inaccurate in recent years then it use to be?

posted by: spencer on 10.01.06 at 02:12 PM [permalink]

Will this comment also have lines through all the text except the first line? Will it also be posted at 2:12 PM? This seems to be a recurrent problem, or is it just me?

posted by: lee on 10.01.06 at 02:12 PM [permalink]

I too am trapped in 2:12pm, or AM I?!?!

posted by: Bob on 10.01.06 at 02:12 PM [permalink]

DVD players are dirt cheap. My wife is a teacher and the one in her classroom just got stolen. She bought a new one for $40. The last VCR I bought was more than twice that much

posted by: Doug on 10.01.06 at 02:12 PM [permalink]

Don't forget laptop computers. My parents paid $1500 for a mid-range laptop for me for college a little over six years ago. Now, a mid-range laptop from Dell is around $700, and it is fantastically better in every way than my original college laptop. If you want to spend $1500, you can get a truly amazing machine, and if you want to spend whatever $1500 dollars in 1999 would be in 2006, you can get virtually anything you want.

posted by: I'llbeyou on 10.01.06 at 02:12 PM [permalink]

My robot (Scooba) that cleans my floors cost $350. How much is never having to buy another mop (or Swiffer) and never having to use it worth, CPI-wise?

posted by: mrsizer on 10.01.06 at 02:12 PM [permalink]

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