November 30, 2004

NOTHING EVER GETS MORE EXPENSIVE ANYMORE:

As flat-panel televisions pile up, prices may come down (Eric A. Taub, November 30, 2004, The New York Times)

>While hanging a television on the living-room wall may have captured the imagination of American consumers, it has yet to empty many pocketbooks.

That may soon change as a glut of liquid crystal display flat-panel televisions, called LCDs, enters the market, a result of a boom in new factories.

According to several manufacturers and analysts, the prices for LCD flat-panel televisions will drop in the next year, falling by as much as 30 percent by the end of 2005. The prices of plasma flat-panel televisions are also expected to fall significantly.

Posted by Orrin Judd at November 30, 2004 9:45 AM
Comments

When it comes to economics, Dog Bites Man -- competition and free enterprise work -- is news. Man Bites Dog -- socialism works -- well, it never happens.

Posted by: Bob Hawkins at November 30, 2004 10:10 AM

You make a bold statement, and I am eager to see how many counter-examples your readers will try to stump you with. I also look forward to the replies.

For example, take the infamous cost of a "college education", which has been rising even in real terms (more than say, core-CPI). A service experiencing inflation? Or a long-term asset whose value need not rise or fall based on core-CPI? I am sure some economist could make a claim that a college education is an investment, and its real cost/value should be the residual of net cost less the real excess income from getting such education. On that basis, is it clear that the cost = value of a college education has steadily become "pricier"? (In any event, there is enough room to make the claim that even a college education is becoming cheaper! And I suspect, there is analytical wiggle room with other examples.)

This actually does bring up the serious issue of the proper way of measuring inflation in the cost of productive assets (from real estate to shares); and the implications of failing to introduce quality adjustments (usually improvents) in comparing goods and services over time. Both of these suggest less not more core inflationary pressures.

Posted by: Moe from NC at November 30, 2004 10:34 AM

Moe:

A government subsidy in action, as with health care. But go ask anyone who works at a university what the kids actually pay and you'll find that the schools work out absurd financial packages. The actual cost to the parents hasn't changed much or enrollment would stop rising.

Posted by: oj at November 30, 2004 10:56 AM

School financial aid officers use the term "gap funding". Gap funding is the gap between the govt payments and the tuition rate (i.e., what Mom and Dad have to pay.) The school's gap funding has to be kept below a certain limit or they lose students.

Anything the govt adds just gets ratcheted up. When Congress passed the new education tax credits, average college tuition costs promptly jumped by the same amount.

Posted by: Gideon at November 30, 2004 11:19 AM

The high price of college education is actually a form of price discrimination. They charge say 20k for tuition, recognizing that very few people can actually afford it, but the true price is "what you can afford to pay."

This allows them to extract the 20k from the rich, and extract 10k from the middle class, and extract 5k from the lower middle class.

Posted by: AML at November 30, 2004 11:31 AM

In essence, two parallel currencies circulate in the US economy. A non-tradeable, weak entitlement-dollar, that is issued indiscriminately, and is used to pay for college, health-care (any others?) and a tradeable hard dollar that is used to pay for everything else. The two co-exist once spent. The biggest risk to the price stability (or in oj's case, "good deflation") scenario of the tradeable currency is to keep issuing entitlement dollars. Inflation is after all a monetary phenenom, but the Fed would err if it confused the root of this monetary weakness. Is not with those of us who operate mostly (produce and consume) in the hard dollar world. since they can not influence the issuance of the entitlement dollar, they end up suffocating all.

Posted by: Moe from NC at November 30, 2004 1:16 PM

The cost of consumer electronics gets cheaper, but the cost of real stuff that people need, like energy, steel, food, water is getting more expensive. I would also classify housing as an expense driver. Most people do not rent out their homes, so it is not an income producing asset for them, so to be realistic you should add the sharp increase in home prices to the mix.

I think that hedonic adjustments to production numbers is also misleading. The government uses the fact that a computer that sells for $500 today is more powerful than a $500 computer last year to juice the GDP contribution of computer manufacturers, which is ridiculous. A dollar is a dollar. If today's $500 computer were more valuable than last year's $500 computer, it would sell for more money, because people would pay more money. But they won't, so it isn't.

To really understand how well the economy is doing, stick to real dollars, not hedonic dollars. Noone gets to put hedonic dollars in their bank account.

Posted by: Robert Duquette at November 30, 2004 1:43 PM

Robert:

Actually a dollar isn't a dollar. You earn a tv in a day. Your father in a month.

Posted by: oj at November 30, 2004 2:55 PM

Home prices have increased "sharp[ly]" in a handful of markets, but not so sharply nationally.

Additionally, in many markets, rental costs have actually decreased, so renters are much better off than they were.

Posted by: Michael Herdegen at November 30, 2004 5:18 PM

Robert:

Actually, they do. Another example of hedonic dollars is in cars.

20 years ago, the economic lifespan of a car was about 4 years. New cars are at least twice that--that has to factor in somehow.

Also, your $500 computer comparison is strained. What would the price of last year's $500 computer have to be today in order to sell?

Posted by: Jeff Guinn at December 1, 2004 6:54 AM

Jeff,
These are qualitative adjustments, they don't belong in a calculation of GDP. The reason last year's computer was worth $500 last year was because it was available last year, and this year's computer wasn't. You have to figure in the time factor when you do comparisons like this.

Does the computer manufacturer benefit by the deflation of computer prices? No, he has to invest more and more money in R&D to do as well this year as he did last. It's the Red Queen effect. It's really a crappy business to be in. It is very profitable if you are first to market with a new, hot product, but within 18 months the product is a commodity.

So again, if a company sells the same number of computers from one year to the next for the same revenue, why show in the GDP that they've increased their revenues because this year's computer is better? Will the shareholders expect larger dividends? Should the value of their stock rise?

Posted by: Robert Duquette at December 1, 2004 2:58 PM

Robert:

Yes, GDP keeps growing rapidly despite the absence of any pricing power. Why would you think that a bad thing?

Posted by: oj at December 1, 2004 3:12 PM

What is reported as GDP isn't real, it is inflated with hedonics. Get it?

Posted by: Robert Duquette at December 1, 2004 6:14 PM

No.

Posted by: oj at December 1, 2004 6:16 PM

Robert:

That's an accounting argument, not an economic argument.

Quality has value, whether it's fiscally reflected or not. Even perceived quality has value, as the "status symbol" markup reflects.

If consumers were completely happy with their older computers, then they wouldn't buy newer models, the computer companies' revenues would drop, and GNP would shrink, or at least not grow.

Posted by: Michael Herdegen at December 1, 2004 9:34 PM

Michael:

Good points--I wish I had enough on the ball to make them.

Robert:

Hedonic inflation is endemic. As just one example, I replaced the heater in my house last year, going from the original system that was probably 60% efficient to one that is 93%. That sort of thing simply wasn't available 30 years ago, but costs roughly twice as much as the 60% efficient unit. Attributing all of that cost change to inflation just doesn't make any sense.

I bought a new washer this summer. More expensive, but uses 1/3 the water of the previous model.

The new computer I bought a year ago included free video editing software that has proved very useful in tightening up home videos, and putting them on DVD. Two things that even a few years ago were out of the reach of any but professionals.

How does any of this get accounted for in inflation statistics?

Posted by: Jeff Guinn at December 2, 2004 7:17 AM

This is a nice discussion of whether hedonic price indexing of computers has thrown off GDP growth statistics. The short answer is no.

Posted by: David Cohen at December 2, 2004 10:53 AM
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