Cafe Hayek - Latest Comments in Corrected for Inflation

Re: Corrected for Inflation

Half Sigma — Thu, 30 Mar 2006 05:35:08 -0000

I said that formal education is important to "society." Part of it is because laws and political correctness make uncustomary and maybe even ILLEGAL to use objective tests as a means to hire people, so college and graduate degrees are heavily relied on instead. This is a tremendously inefficient use of resources to make people spend 4 years in college and more years in graduate school just to demonstrate they have a high IQ.

Re: Corrected for Inflation

Nathan T. Freeman — Thu, 30 Mar 2006 01:21:07 -0000

Ah... "Big Mike has a BS in Economics from the Wharton School of the University of Pennsylvania, an MBA and JD from Arizona State University."

No wonder you think formal education is so important.

Re: Corrected for Inflation

Nathan T. Freeman — Thu, 30 Mar 2006 01:18:53 -0000

"explained that society only values the knowledge gained from expensive formal education."

Half Sigma, I don't know what society you live in. It's certainly not the same as mine, which has consistently valued and rewarded my knowledge, in spite of the fact that almost none of it is from formal education.

Re: Corrected for Inflation

TC — Wed, 29 Mar 2006 09:56:18 -0000

Prices go up and down for reasons (supply and demand) that have nothing to do with the purchasing power of the dollar. CPI is bogus. Some believe it understates true inflation by about one-half. The Fed is the culprit, not prices.

Re: Corrected for Inflation

Half Sigma — Wed, 29 Mar 2006 04:18:02 -0000

Nathan, your point was that people can learn stuff for free, and I didn't ignore it, I agree 100%, and explained that society only values the knowledge gained from expensive formal education.

Re: Corrected for Inflation

Nathan T. Freeman — Tue, 28 Mar 2006 22:32:47 -0000

bbartlog - "You seem to be deliberately ignoring important benefits of an actual university education above and beyond knowledge alone."

me - "Okay, maybe it's more expensive to get CERTIFIED in some area of education now."

Clearly you spent too much on your own certification.

Half Sigma, you've done a wonderful job of completely ignoring my point.

Re: Corrected for Inflation

Half Sigma — Tue, 28 Mar 2006 05:29:59 -0000

"the cost of education has never been lower."

The value that society places on a certification has NEVER BEEN HIGHER.

Abraham Lincoln was considered a great lawyer, and he never even graduated high school. Today, one needs to have four years of college plus three years of law school in order to be legally allowed to practice law, and unless you attended a top law school, good luck convincing a major law firm to hire you.

I think it's a sad indictment of society that self-learning has so little value, yet that's the case.

The cost of getting certified has never been higher, partially because formal education requires high wage labor and the cost of high wage labor is increasing faster than the rate of inflation.

Third party financing of education contributes becuase there is no incentive for a college to lower costs.

And student loans hurt the average college student more than they help, because people who have no business going to college in the first place are being saddled with debts.

18 year old kids, who society perceives as not having sufficient wisdom to drink a beer, are nevertheless given the opportunity to shackle themslves with debt that can't even be discharged in bankruptcy.

Re: Corrected for Inflation

bbartlog — Tue, 28 Mar 2006 03:47:17 -0000

Nathan -

the cost of educating yourself is indeed low now (nothing more than your time really), but then public libraries have provided similar albeit less efficient services for years. You seem to be deliberately ignoring important benefits of an actual university education above and beyond knowledge alone. First of all, the degree is a certification of knowledge which may provide a lot of value in the job market. Second, the university provides an environment for meeting a variety of people and developing a valuable social network. Lastly, it provides a venue for research and publication (try and get a grant or get published without university affiliation - not so easy).

For the rest, I would point out that as certain types of goods become cheap (manufactured widgets, information and entertainment, shipping, travel, perhaps food) there will be more money chasing the rest, so inflation in some categories should be expected - especially for goods in relatively finite supply, such as apartments in desirable urban areas...

Re: Corrected for Inflation

Nathan T. Freeman — Tue, 28 Mar 2006 03:14:18 -0000

How the hell can any of you say that education is more expensive now? Everyone of you is getting a lecture series from the chairman of a major economics department for the cost of your computer and a connection to the internet -- probably less than $75/month for those of you in the US. And you probably read the other GMU-related sites like EconLog and Marginal Revolution. You could probably spend an hour a day reading through each of these and get an undergraduate understanding of microeconomics -- certainly one that's more useful than your typical state university's BS in Econ.

Is there anything you can't learn from the 'net these days? World-class thinkers in just about any subject offer up knowledge for free to anyone willing to type a few words into Google. There's tons of commentary to go with it, and it's easy to find a discussion group able to educate you on just about any topic imaginable.

Google, Wikipedia, blogs and Usenet have DRAMATICALLY lowered the cost of education over the past two decades, to the point where the most expensive component for just about anyone is the opportunity cost of the time you spend reading!

Okay, maybe it's more expensive to get CERTIFIED in some area of education now. I won't judge that. But surely readers of Cafe Hayek are smart enough to understand that "education" isn't whatever gets defined by some university administrator.

Really, argue all you want about housing and healthcare -- but the cost of education has never been lower.

Re: Corrected for Inflation

quadrupole — Mon, 27 Mar 2006 16:09:36 -0000

Half Sigma

I am deeply torn about how we do financial aid for college students today.

On the one hand, I see it leading to run away college spending and declining higher educaton productivity. I also see it encouraging young people to take on huge debts, often for degrees that don't even begin to repay those debts (does that English degree really pay back the $120k in debt plus the 4 years of lost earnings, plus the interest on them?).

On the other hand, I know a *lot* of folks who suffered from crappy parent syndrome, and made a lot of their lives because there was financial aid to allow them the opportunity.

I desparately want to preserve the accessibility of higher education, but without the productivity declines, and the deadweight loss of overproduction of underdemanded majors. I just don't know how to do it.

Re: Corrected for Inflation

Half Sigma — Mon, 27 Mar 2006 07:19:46 -0000

"The problem in both medicine and education is the third party payer problem."

This is even worse than that in education, becaues the "free money" to pay for the education is often not actually free but a student loan that can't even be discharged in bankruptcy.

Re: Corrected for Inflation

nate — Sun, 26 Mar 2006 14:01:46 -0000

What about "spring break" trips and inflation, and related trends over time?

Re: Corrected for Inflation

Chris Meisenzahl — Sat, 25 Mar 2006 17:41:03 -0000

I've felt for a while that the entire concept of keeping track of the CPI with any remote level of accuracy is simply not doable. WAY too many variables and volume of goods/services.

Re: Corrected for Inflation

quadrupole — Sat, 25 Mar 2006 13:58:04 -0000

Patrick,

It's not just the government spending that distorts medicine, it's also the government tax policy that moves most of us into third party employer provided health insurance, and the government discount requirements that inflate the retail price of health care.

Have you ever looked at your insurance statements for a medical visit/proceedure? I read mine. It shows the retail price, and then what was paid by the insurance company to discharge the bill. Typically the retail price is about 3 times higher. What this tells me is that the retail price is at least three times the market price for medical care, even at the current level of inefficiency.

The problem in both medicine and education is the third party payer problem. In both cases, it dramatically inflates costs and reduces quality. In both cases it's present because of misguided government policies. Fix those, and you'll see a race up in quality and a race down in price, just like in every other industry subject to health market forces.

Re: Corrected for Inflation

Aaron Krowne — Sat, 25 Mar 2006 11:37:31 -0000

Save_the_rustbelt:

Because if CPI was still being calculated like it was in 70s and 80s, those poor old ladies' social security checks would have to be 70% higher. You know, like, somewhere around what they need to live.

And we couldn't have that.

Re: Corrected for Inflation

Max Born — Sat, 25 Mar 2006 10:35:20 -0000

I believe what is actually measured is the median 'spending' by people on a particular good or service. In other words inflation tells you how much more you need to make to keep up with your neighbours. And in that sense, it is a useful metric.

However, it really is a bad metric to compare prices of goods and services over the years. In fact, the best way to measure the price of goods and services is to go to India or Mexico or China- especially for goods. You can find bikes that cost $40. Now that is deflation. The same bike that costed $200 in the USA 20 years ago, and costed $200 in India- now costs $40 in India. Whereas in USA, we are willing to still pay $200 for the 'average' bike so the quality shifts upwards.

Ditto for shirts, pants, skirts.

Deflation is happening all around us. And at Wal-Mart, and in India and China. We just choose, for good reason, to move up the quality ladder.

My 2c. Inflation adjsuted. :)

Re: Corrected for Inflation

liberty — Sat, 25 Mar 2006 07:18:09 -0000

>OKAY. I pick my small city. Camarillo, CA pop 68,000. Please draw me concentric circles until you find a 2br, 1ba 900sf house on a 6000sf lot anywhere for $40k. I'm thinkin' you might get a outlier somewhere in Montana.

You didn't exactly take me up on my challenge. You picked one small city - I said most, not all. California is notoriously expensive. Get some housing prices in a few small cities from 1970 and compare to the median income in 1970. I will do the same for 2006. If I cannot find houses as cheap in 2006 compared to 2006 median income, of equivalent quality then you win.

BTW, if you really think that your city is a typical example of housing prices today then you need to get out more. I live in NM and I know for a fact that I can find you bigger nicer houses here and in the midwest and the south as well as places like Montana for under 40k.

Re: Corrected for Inflation

spencer — Sat, 25 Mar 2006 05:52:49 -0000

While I agree there are problems with measuring inflation, not all the problems are in one direction. For example, the Boskin report found that the main reason the CPI overstated inflation was housing.

So they suggested that the previous measure of home prices and interest rates be replaced by the home owners equivalent rent.

This measure acounts for 23% of the CPI as compared for 22% for goods excluding food and energy -- the segment where most quality improvements occur.

Probably the best single measure of home prices is The House Price Index (HPI) published by the Office of Federal Housing Enterprise Oversight.

so if you compare what it reports for home prices compared to the CPI home owners equivalent rent measure you get interesting results.

Annual % change

............HRI.........CPI

2000 .......6.9.........3.0

2001 .......7.9.........3.8

2002 .......6.9.........4.1

2003 .......6.8.........2.4

2004 ......10.8.........2.2

2005 .....13.2........ 2.3

This certainly suggests that the corrections to the CPI following from the

Boskin Commission have moved in the other direction of causing the CPI to understate

inflation.

My point is that you are taking all the arguments on one side of the argument that in and of their selves are valid arguments

and ignoring all the arguments on the other side of the argument that are just as valid.

For example one of the things that happens in healthcare is the redefinition of procedures. Medicare and the insurance companies will say that they are going to pay $x for a given procedure. So what do the doctors do. They split the exam or procedure into two steps so they can get paid the $x for the original procedure and bill for another sum for the new procedure that use to be part of the old procedure. But the inflation data does not capture this drop in quality.

Re: Corrected for Inflation

save_the_rustbelt — Sat, 25 Mar 2006 05:24:44 -0000

Those poor people should just shut up, crawl into the attic and prepare to drown. They can take their mountain bikes with them.

We have plenty of real economic problems, so why spend so much time proving that poor old ladies aren't really poor?

Re: Corrected for Inflation

Aaron Krowne — Sat, 25 Mar 2006 04:48:24 -0000

Don Lloyd has it. Hedonic adjustments are a way to sneak in a "cost of survival" CPI, rather than a cost/standard of living.

There are two components to this problem. As I understand it, the two effects one wants to account for are:

1) quality/capability increases at the same price point (e.g., bikes with more gears and shocks)

2) down-substitutions to inferior goods (e.g. steak to hamburgers)

I agree with Don that if you account for #1, you are measuring something, but it really has nothing to do with the price index. Capabilities add to quality life in a very hazy way, and we are probably better off just assuming that technology will cause progress and leave it at that.

To be more explicit, it doesn't help me much that mountain bikes are advancing, because I bought my last bike nine years ago (ack!) and I can't purchase something like that on a routine basis. However, the cost of more routinely-purchased goods *does* matter to my bank balance. Further, if all bikes now include technological advances that have a nonzero cost, I do not even have the option of buying what would be a cheaper replacement for the older bike I have now. So there is a sort of conflation here that results in making the CPI look better than it is.

Trying to account for the downward-substitution, however, is more insidious. Taking the hamburger example, if you can no longer afford your weekly steak and instead must buy hamburger, how in the world can this be considered comparable? Clearly some loss of value has occurred here, and the clear proximate cause is rising prieces for the same set of goods.

Such debates are not the realm of abstract pontification. With energy pushing prices to rise across the board, I now find myself having to drink orange juice from concentrate because "real" orange juice is too expensive.

Somewhere under all the layers of manipulation, there's a real CPI moving up sharply, and you can taste the difference.

Re: Corrected for Inflation

Patrick — Sat, 25 Mar 2006 04:46:57 -0000

I agree with quadrupole here. While I mentioned earlier that the mountain was not just cheaper than in 1990 but much cheaper the "healthcare and education is higher" mantra. But of course, with government involved in education there isn't the same incentive to make the system more competitive. In healthcare both the government and poorly run (a la public) institutions erode the efficiency. Case in point, my wife went in to a local hospital for outpatient surgery. Before the surgery she met with her doctor who completed a standard pre-op medical form (allergic to any meds, have any of the following diseases, meds you are taking, ever experienced reaction to anaesthegia,etc.) When we got to the hospital and checked in they ask her the same questions again and filled out the form, then the pre-op nursing team got her prepped and ask her the same questions on an identical form, the anaesthia guy did the same followed by the surgeon-that's the same set of forms 5 times. They were all paper forms so each of them had to be typed into different computer systems, separate bills and reports sent out to the insurance company, etc. Instead of a single automated system that passed the patient info from doctor to facility to surgical team they did it the hard way. That alone probably costs in excess of $500 for a $2,000 operation. On the back office side post-op God only knows what other inefficiencies were happening. The HIPPA rules seem to cause barriers in passing info on this seamlessly but password protection and data encryption would make compensation easy. Healthcare itself is locked in a overly complicated and bizarrely uncompetitve cycle. Less government and more patient control would help but no eliminate the problem. Still, healthcare is not a good example of inlfationary measure-it's just not in the system with the rest of economy.

Re: Corrected for Inflation

quadrupole — Fri, 24 Mar 2006 20:50:52 -0000

It's important to note that the health care and education are becoming tremendously more expensive because the government has basically broken the market. If you look at the sectors of medicine that are subject to market pressures (like laser eye surgery) you see exactly what you see in other areas of the economy: prices decline, quality increases. If you look at some of the movement going on around online charter schools, you are seeing rapid productivity growth in education beginning to come up.

Housing is an interesting question. I think there are basically two things going on. First, as Elizabeth Warren noted, there is a huge bidding war on for good schools. Since this has been pushed into the housing market (because our government has broken the education market), resulting in strange, inefficient pricing. Second, since land is finite, and some areas to live are more desirable than others, the cost in the highly desirable areas is rising fast. A previous poster did note that if you were willing to live in less desirable areas, you could find affordable housing. But many folks (including me) would prefer to pay more (if they are able) to live in a nicer neighborhood. That's a quality choice, just like choosing a nicer mountain bike.

Re: Corrected for Inflation

Morgan — Fri, 24 Mar 2006 18:46:32 -0000

Robert:

I've found exactly what you're looking for, only it's twice the square feet, twice as many bedrooms (make one a home office?), and $7,100 cheaper than your budget.

And it's not in Montana - it's right here in sunny Moberly, Missouri! Now granted, the night life isn't much...

Re: Corrected for Inflation

Robert Cote — Fri, 24 Mar 2006 14:15:08 -0000

In most small cities you can still buy a house for $40k 2006 dollars.

OKAY. I pick my small city. Camarillo, CA pop 68,000. Please draw me concentric circles until you find a 2br, 1ba 900sf house on a 6000sf lot anywhere for $40k. I'm thinkin' you might get a outlier somewhere in Montana.

Cheapest SFR on realtor.com today; http://tinyurl.com/kn4ab

$445,000.

Even Taft is $80,000 and up.

Re: Corrected for Inflation

liberty — Fri, 24 Mar 2006 13:58:33 -0000

>Going up in price: housing, healthcare, education, the very basic stuff you need.

I will only add that although housing has gone up in price in many areas, I know that the median house cost is generally only higher because people spend a much smaller portion of income on food, appliances and other necessities (because they are cheaper) and so choose to spend more on - much nicer, larger - houses.

In most small cities you can still buy a house for $40k 2006 dollars. This price, inflation adjusted or compared against median income (avoiding the inflaton debate) is very very cheap. I challenge anyone to compare the house that you could get in 1970 with the house you could get today for the same percent of the median income.