An Interesting Measure of Prices
I am trying to get some historical statistics to deal with the claims that the Great Depression saw unprecedented action by central banks. Along the way, Daniel Kuehn pointed me to this intriguing chart of the NBER’s “Index of the General Price Level for the United States”:
The constituents of the graph (and their weights) are explained here. Of course there are all kinds of pitfalls when trying to construct a single series on “the purchasing power of the dollar” going back this far, but the above chart certainly matches my intuition: Government inflated like crazy during wars, after which there would be a big depression to knock prices back down.
Oh, and Scott Sumner, according to this metric at least, there was a big surge in (price) inflation during the 1920s, making the crash later on seem obvious.
Different Kinds of CPI Bias
I am happy anytime GMU professors argue with each other, so I liked this recent post from Bryan Caplan:
An argument I’ve repeatedly had with Tyler Cowen:
Tyler: We’re stagnating!
Bryan: No we’re not. You’re ignoring massive CPI bias. We live in an age ofconsumption-biased technological change. Official numbers don’t adequately adjust for quality improvements, and utterly ignore the mountains of free stuff we keep receiving.
Tyler: How massive?
Bryan: Oh… Say 1 percentage-point per year.
Tyler: You’re crazy.
I’m hoping EconLog readers can help us resolve our impasse. How? By keeping atime diary for a day or two. For every waking hour of the day, ask yourself:1. Was my experience during the last hour noticeably better as a result of an innovation introduced from 1990-present? [Yes/No]
2. Was my experience during the last hour noticeably better as a result of an innovation introduced from 1950-1989? [Yes/No]
Ideally you’ll record your judgments as you go, but chronologically reviewing your day hour-by-hour is a reasonable substitute.
Once you’re done, code “yes”=1 and “no”=0. Then calculate your average scores, and report them on quicksurveys.
My predictions, assuming I get at least 100 responses:
1. The median response for question #1 will be at least .15.
2. The median response for question #2 will be no more than three times as high as the median response for question #1.
Feel free to share your general thoughts in the comments, but please post your results exclusively on the survey page.
P.S. To broaden the sample, please blog, Like, Tweet, etc.
I have a few problems with this:
(1) As people in Bryan’s comments pointed out, he’s certainly not getting a representative sample, by asking people to blog, Like, Tweet, etc. If Bryan were having an argument with a supporter of Che, it would hardly be fair to settle it by asking EconLog readers what they thought of the guy.
(2) Yet there’s another bias in his approach, that nobody (thus far) has mentioned in the comments. Bryan is asking people to think about innovations that have improved someone’s life. It seems Bryan thinks he’s giving the stagnation hypothesis an equal shake by allowing for a “no” answer, but that’s not the only mechanism here. One could agree that there have been innovations since 1950, 1990, etc. that made my life better from 10am – 11am today, while also agreeing that there have been changes since 2008 that have made my life worse. Yet Bryan’s approach doesn’t capture the negative changes; he doesn’t even ask about them. So of course the median replies are going to be positive, and perhaps significantly so.
This isn’t merely hypothetical. When people keep telling me that the CPI numbers show there’s no inflation problem, I think they are taking those BLS numbers way too seriously. Now I haven’t been stressing this point, because it would look like I was making excuses for why my own warnings about price inflation have missed the mark, and I don’t want to be “that guy.”
But seriously: I am not just trying to fit in with the whiners when I say that going to the grocery store, I am stunned at how much they hit me up for at the register when all I did was get enough stuff for the next 3 days. So I think part of what has happened is that packaging is a similar price as before, but less volume of product. You would think that surely the BLS number-crunchers would catch all this and adjust, but that’s only if you think people in government agencies don’t respond to incentives to fudge things a certain way that their bosses want. I’m not even saying they consciously lie, rather I’m saying there’s all sorts of knobs you can turn on the “hedonic adjustments” etc. to make the answer come out a certain way.
Another example: There is a Chinese restaurant that I used to go to a lot, but then I stopped because their waiters were terrible. But then I broke down and went back to them again, after at least a 6-month hiatus. I am not exaggerating, the amount of food they brought in the General Tso’s chicken was at most 75% of the previous serving, and it could have been as low as 60%. Yet they charged roughly the same price, as far as I can remember. I would be stunned if the BLS catches stuff like that.
Or how about this: We have already talked about (in a point originally noticed by Silas Barta) that the cardboard for cereal boxes is thinner than it used to be. And the paper towels and toilet paper are awful. I doubt the BLS catches that change in quality.
Or how about this: I think one way grocery stores have adapted, is a shift to more self-service checkouts and fewer employees at any given time. (Presumably the minimum wage increase has something to do with this too.) So it’s not merely that it’s more expensive to get your week’s groceries (such that you may end up going twice a week rather than once), but now you scan and bag your own stuff. And heaven forbid if you are in the store at an odd hour and want to find something; there’s no employee in the same ZIP code. No way in the world the BLS is counting that kind of thing.
It Was Necessary to Punish Moses
In my (almost) nightly Bible reading, I just wrapped up the first five books last night–Genesis through Deuteronomy. The end of Deuteronomy (Chapter 34) is pretty cool:
34 Then Moses went up from the plains of Moab to Mount Nebo, to the top of Pisgah, which is across from Jericho. And the Lord showed him all the land of Gilead as far as Dan, 2 all Naphtali and the land of Ephraim and Manasseh, all the land of Judah as far as the Western Sea, 3 the South, and the plain of the Valley of Jericho, the city of palm trees, as far as Zoar. 4 Then the Lord said to him, “This is the land of which I swore to give Abraham, Isaac, and Jacob, saying, ‘I will give it to your descendants.’ I have caused you to see it with your eyes, but you shall not cross over there.”
5 So Moses the servant of the Lord died there in the land of Moab, according to the word of the Lord. 6 And He buried him in a valley in the land of Moab, opposite Beth Peor; but no one knows his grave to this day. 7 Moses was one hundred and twenty years old when he died. His eyes were not dim nor his natural vigor diminished. 8 And the children of Israel wept for Moses in the plains of Moab thirty days. So the days of weeping and mourning for Moses ended.
9 Now Joshua the son of Nun was full of the spirit of wisdom, for Moses had laid his hands on him; so the children of Israel heeded him, and did as the Lord had commanded Moses.
10 But since then there has not arisen in Israel a prophet like Moses, whom the Lord knew face to face, 11 in all the signs and wonders which the Lord sent him to do in the land of Egypt, before Pharaoh, before all his servants, and in all his land, 12 and by all that mighty power and all the great terror which Moses performed in the sight of all Israel. [Bold added.]
Upon this reading of the Torah (first five books), two things jumped out at me that I hadn’t noticed as much during earlier readings:
(1) Moses was qualitatively above the rest of the Israelites, standing between them and God. As the last verse above indicates, there would never be another prophet who talked face to face with God, as a friend.
(2) In comparison with the rest of the Israelites, Moses’ transgression seems completely trivial. Remember, when we discussed it here we couldn’t even agree on exactly what Moses had done wrong, to warrant his punishment (of never getting to see the Promised Land to which he had led the Israelites for 40 years in the desert). In contrast, his brethren–literally, including his brother Aaron–were literally constructing false idols to worship, while Moses is taking notes on the Ten Commandments.
But now that I’m thinking about it, I think the above actually go together. In order to make sense of some of the “crazy” stuff in the Old Testament, it’s important to remember that the Israelites were literally slaves. When we try to understand why their God behaves the way He does, I think that is crucial; He has to convert their mindset.
In that context, it now makes a lot of sense to me that they would need somebody who was a fantastic leader, who came from their ranks (but yet had a different background to explain why he was so much better educated and in a sense stood apart), but yet who wasn’t perfect himself. The LORD throughout the Old Testament chastises the Israelites for their failures, “breaking them down” as it were, but He always gives them hope so that their spirits aren’t completely crushed. He is like a really really tough coach or teacher. (Or, of course, parent.)
If Moses had never screwed up, or if he had screwed up but God never punished him, that might have made the rest of the Israelites completely despondent. But if generations of them looked back on their history, and realized that even the great and mighty Moses screwed up such that he was denied entry into the Promised Land, then that would help them accept their own sins but get on with their lives and try again.
I Really Tried
So Daniel Kuehn didn’t understand what Peter Klein was getting at when Klein wrote this:
Both the Austrian and neoclassical approaches to demand begin with an ordinal preference ranking. But the understandings of marginal and total utility are completely different. For Menger, marginal utility applies only to discrete units of a homogenous stock of a good. The fourth apple is allocated to a lower-valued use than the third apple, and so on. The law of demand follows from the fact that additional units of a homogenous good are used to satisfy lower-ranked ends. Note that for the Austrians, the term “marginal” applies to the units, not the utilities. “Marginal utility” is the total utility of the marginal unit, not the marginal utility of a unit. There is no larger concept of “total utility,” of which marginal utility is a little slice. [Emphasis from Kuehn.]
So I tried to explain–twice–in the comments, with this kind of analogy:
Daniel, I’m using “friendship” because that was the best example I could come up with, when teaching, of something that people believe in as an ordinal thing, but that sounds funny as a cardinal thing. So: it makes perfect sense to rank people according to the friendship you feel toward them. You can have a best friend, a 2nd-best friend, and so on. You could even say stuff like, “If some of my friends had to die in a plane crash, I would prefer that the group of XYZ survived instead of ABC” etc. So you can ordinally rank people in terms of friendship.
You could also say stuff like, “Am I better friends with my 8th best friend or with a stranger?” That makes sense.
But it doesn’t really sound right to say, “Suppose I have my 1st through 7th best friends at a party, and then the 8th best friend shows up. How much did my total friendship go up? That’s what I mean by marginal friendship.”
So if you can at least see [t]hat that just plain sounds funny, then you can try to get Klein’s point about marginal utility. It’s not that the stuff you are saying in these comments (and your original post) is wrong, it’s that it’s meaningless (if utility isn’t cardinal).
And here is what I got for my troubles:
==> Daniel kept observing that if we assume utility is cardinal, then it makes sense to talk about utility as if it were cardinal.
==> Brad DeLong mocks the Austrians for holding such nutty views on utility.
==> Nick Rowe mocks the Austrians for not realizing that every economist agrees with them on utility.
Forget this, it’s time to catch up on more episodes of Breaking Bad.
Amanda BillyRock Goes to University…Mises University
I’m still trying to get my right audio channel to work, and she apparently has the ability to speed up time itself in her videos:
Does Anyone Deny That There Were Unprecedented Credit Stimulus Policies During Hoover Administration?
Here’s something I want to pin down. In my book on the Great Depression, I quote Lionel Robbins saying (I think in 1934) that central banks around the world had tried unprecedented measures to stimulate a recovery through cheap credit, and that this was a complete reversal of traditional central bank doctrine.
Then Daniel Kuehn gives us this quote from Hayek (“The Fate of the Gold Standard”) in 1932:
Although there can be no doubt that the fall in prices since 1929 has been extremely harmful, this nevertheless does not mean that the attempts made since then to combat it by a systematic expansion of credit have not done more harm than good. In any case, it is a fact that the present crisis is marked by the first attempt on a large scale to revive the economy immediately after the sudden reversal of the upswing, by a systematic policy of lowering the interest rate accompanied by all other possible measures for preventing the normal process of liquidation, and that as a result the depression has assumed more devastating forms and lasted longer than ever before.
Lastly, FT Alphaville has a neat post out showing a bunch of commentary in the NYT from 1929-1933 (HT2 Krugman). A few of the people in there are complaining of what they consider to be unprecedented (not necessarily their term but it fits) credit stimulus.
So here’s my question: Do any of today’s Keynesians deny this? Obviously you think that these measures were woefully inadequate, in light of the shortfall in Aggregate Demand in the early 1930s. But I’m asking, do you agree with Robbins, Hayek, and the random Joes writing letters to the NYT, who at the time were claiming that the central banks of the world were fighting the downturn differently from how things were handled in previous crises?
Note well, I’m speaking here in absolute terms, not in a Sumnerian view whereby the Fed–by definition–has been “tight” the last few years because NGDP is below trend. Rather, I’m asking (for example) if it’s true that central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises?
NFL Referee Lockout and Private Law
This is a message I just sent to an email List, which I thought some of you might enjoy too:
Just a thought for those of you who teach and discuss private law with your students: It seems to me that the NFL lock-out is a great opportunity to talk about private legal systems and how laws really can be “objective,” and that there is definite skill in applying a known legal framework. In other words, if it’s obvious to NFL fans that the old refs applied the rules better than the new ones, it would be equally obvious which judges were better at applying the commonly-recognized legal principles in an anarcho-capitalist world.
Of course, you will get a wiseguy saying, “And the rich capitalists keep the bad judges in place so they can make more money, just like in your wacko world!” Then you thank the wiseguy for his thoughtful comment, and explain why the mechanisms Rothbard described would actually allow for more competition blah blah blah…
Potpourri
I’m almost giddy for tonight’s Potpourri. I don’t know if I’m in a good mood and see the creativity and courage out there in the blogosphere, or if my blogging peers are all having a good week. In any event, here goes:
==> Paul Krugman recently wrote that the US was doing pretty good during this crisis, thank you very much, and it was all because of the stimulus that Obama had delivered. I was going to flip out and cite chapter and verse of Krugman saying it was a dirty right-wing lie to say that Obama had grown government, that in fact we’ve had the worst austerity under Obama since the Huns revised library privileges etc., but Bob Wenzel made the point much better.
==> Tyler Cowen is as baffled by the TIPS market as I am. (HT2 the svelte von Pepe.) You know, a lot of people make fun of Tyler for never giving a straight answer. But, it occurs to me that maybe he just voices the inner doubts that most people bury.
==> Speaking of Tyler, he brings to our attention Glenn Greenwald’s discussion of a new NYU/Stanford study on the US drone war. Unfortunately I think this is the kind of thing where an opponent of drone warfare is going to be dazzled by all the information, while someone who supports the program is going to dismiss all of the “liberal whining.” Ah well.
==> Why am I suddenly linking to Tyler, you ask? Isn’t it illegal for Rothbardians to even visit MarginalRevolution? Am I really that hard-up for anti-drone-warfare bloggers that I’ll reach out? No, it’s that I’m hard-up for allies in the War Against Sumner. (Yes, I had toyed with jokes about Obama adding Sumner to the secret kill list, but none was in good taste.)
==> This guy at The Atlantic can’t bring himself to vote for Obama, even though he hates Romney. (HT2 Daniel Kuehn) Good for you, sir. If only more voters would draw a line for themselves. Hey Republican conservatives: Are you really confident in sending Mitt Romney to DC to roll-back ObamaCare? Does that really sound like a good plan?
==> How bad is Obama on foreign policy? Well, the United States and Afghanistan are having a diplomatic dispute because the Afghan constitutition doesn’t allow for the indefinite detention of prisoners, which is how our government handles these sorts of tough cases. People have cited this (Tom Woods, Lew Rockwell, and probably others by now), but I encourage you to actually click through to the New York Times article itself. It is simply Orwellian.
==> Speaking of Obama the warhawk and Mitt Romney, David R. Henderson makes the case that Romney will lose because he is incredibly allowing Obama to pose as the peace candidate. Also, he quotes Clint Eastwood’s “empty chair” talk and it sounds like good stuff. (I never saw a second of it, but from the reactions I was hearing people were making it sound goofy.)
==> In lighter news, Brian LaSorsa takes the fight to Krugman.
==> Noah Smith puts more effort into making fun of the geeconosophere than even I do. He’s never finishing that PhD.
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