February 10, 2017

IT'S IMPOSSIBLE TO OVERSTATE DEFLATION:

The US economy may be growing faster than we think -- and has been for a long time (James Pethokoukis, 2/09/17, AEIdeas)

And now there's a new research paper on the subject. See, it's widely known that measuring quality improvements in a product is tough. So perhaps traditional inflation measures like the consumer price index fail to fully capture the benefits of new or upgraded products. (This seems to be particularly true when it come to software.) In a San Francisco Federal Reserve Bank working paper, "Missing Growth from Creative Destruction," researchers add to that argument:

We argue that there exists a subtler, overlooked bias in the case of creative destruction. When the producer of the outgoing item does not produce the incoming item (i.e., when there is creative destruction), the standard procedure at statistical offices is to resort to some form of imputation. Imputation inserts the average price growth among a set of surviving products that were not creatively destroyed. We think this misses some growth because inflation is likely to be below-average for items subject to creative destruction. ... As some products disappear precisely because they are displaced by better products, inflation may be lower at these points than for surviving products. As a result, creative destruction may result in overstated inflation and understated growth.

The researchers used two different ways to try to measure the possibly missing growth: 0.5 percentage points per year on average one way, 1 percentage point per year on average the other. That's a lot of growth!

Posted by at February 10, 2017 5:33 PM

  

« HE COST HER THE ELECTION: | Main | WE SECOND THE PRESCRIPTION: »