Saturday, January 29, 2011

CPI Bias Revisited

I disagree with Tyler's thought provoking core thesis presented in this piece.   Innovation is sharply reducing the quality adjusted prices of all sorts of major goods we consume in markets.  This raises our real incomes.  Local pollution has sharply improved in the U.S.  This raises our real "hedonic" income.

In 1962, the Internet, the Smart Phone and Facebook would have been expensive to use.  These new products have generated a huge amount of consumer surplus.  Let's see a smart young IO economist quantify that!  Yes, new cereals and mini-vans generate consumer surplus but I want an estimate of Facebook's value added. Now Tyler would say that such improved leisure doesn't appear in the income statistics but you don't have to be Nordhaus or Tobin to argue that this means that the accountants haven't measured what matters.  Recall their classic;  "Is Growth Obsolete?"

Let's turn to life expectancy;  if I'm reading this ugly Google graph correctly for the United States;

Life expectancy has increased about 8 years since Tyler's birth.  That's valuable stuff!  to an optimistic like me, that sounds like progress.

Note that Tyler doesn't mention pollution in his article.  Urban water pollution and air pollution in the United States were much worse in 1960 than now.  Think of Los Angeles smog, Pittsburgh haze then versus now.  Think of the quality of our urban rivers then versus now.

CPI doesn't reflect non-market goods.  The "price" of clean air has plummeted over time ---In the past (in 1970), you'd have to live in expensive Malibu to purchase clean air. Now you can live in dozens of Los Angeles communities to purchase such clean air.  Innovation has played a key role in mitigating the nasty issues of air and water pollution.   These examples highlight how innovation can improve our quality of life without being explicitly seen in GNP accounts.  Tyler's grandma would be quite impressed with our Green Cities. You should all read my book on this topic. You can find chapter 1 on my UCLA webpage.

Recall that CPI (consumer price index) measures inflation.  I believe that continued improvements in the quality of new goods at such a rate that there is negative inflation over time. The real purchasing power of a dollar rises.  Take a look at this paper by Robert Gordon.

What is the right market test of progress?  We need a time machine and we need to know how much you would need to be paid to get in it to live your life in the past (while knowing that you won't know who will win the Super Bowl in 2010, I can't let you change the course of history).  In symmetric fashion, for people like Tyler's grandmother born in 1905 --- how much would she be willing to pay to have been born in 1962 versus 1905?

I believe that my son (born in 2001) will have a better life than my solid (1966) life.   Expected Innovation is a major piece of my optimism.

I've met others deeply concerned about terrorism, climate change and the general U.S malaise who believe that our next generations will not have a better life than ours.