Hey, What’d I Miss? OTE Summary, 12/17 – 12/26

December 26th, 2012 at 9:59 pm
  • Rounding up some economic views that served us poorly in 2012.
  • Laying out some more polemics on the chained CPI:  a rough typology/continuum of the positions on this policy change.
  • Asking why the Fed is the only game in town targeting unemployment, and delving deeper to explain why it would be weird if they weren’t.
  • Considering a potential debt-ceiling showdown.
  • Last but not least, a roundup of fiscal cliff posts:  analyzing potential deals here and here, contemplating what happens if (when?) we go over the cliff, looking at what’s at stake in the midst of Congressional theatrics, contemplating Boehner’s choice and explaining why his Plan B was BS, noting that an elevated unemployment rate is waiting for us on the other side of the cliff, and providing some Christmas Eve fiscal cliff insight.

Musical Interlude: featuring a very catchy tune by Cher Lloyd, inspired by my kids who would rather listen to pop radio than Morning Edition.


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One comment in reply to "Hey, What’d I Miss? OTE Summary, 12/17 – 12/26"

  1. Tom says:

    The CPI is not really a price index anymore. The hedonic adjustments are somewhat justifiable … As long as the consumer accepts the quality improvements as something they want to have. The deflation that is apparent in computer prices is mostly a function of getting (a lot) more computer per dollar, and not so much because average prices paid are that much lower than 20 years ago. The price per pixel of a flat screen TV is much lower than 1, 3, and 10 years ago … But how many people do you know that forked over $1000 for an “idiot box” a generation ago?

    Assuming that consumers will actively switch to cheaper substitutes when their preferred goods and services have become more expensive underscores the difference between the CPI (which should already be known simply as a “cost of living index” and not a price index, because it requires a consumer to be actively involved in seeking more goods and services for her dollar) and the chained CPI, which apparently allows substitution at a higher level than before. Currently, it is assumed that if one type of Apples has risen in price, the consumer would substitute something that hadn’t risen as much. The new index apparently assumes that consumers would switch between beef and chicken in order to maximize his purchasing power.

    Clearly, a consumer can benefit from enlightened substitution and seeking to maximize her utility, but shouldn’t the savings relative to a fixed basket be properly recognized as a payment for the time and resourcefulness needed to do so? How much substitution is acceptable, and where does one draw the line? Seems to me you could have decades of low inflation if more and more substitution is allowed. Is a Harvard MBA worth more than one from Wharton? If the former raises the price more than the latter, would you switch?

    Also, the “quality” (hedonic) adjustments seem to be almost entirely to recognize more value and thus less inflation. But many items today seem to be less sturdily made, even if the features may compare favorably with legacy products. If BLS focuses only on features of new production and not durability, we may be underestimating inflation.