Sunday, March 02, 2008

Hedonic Regression

According BEA deflators, $1,000 computers bought in 1990, 1995 and 2000 would cost $48.63, $95.84 and $526.58, respectively, today. I bought computers in each of those time frames and could not replicate any one of them for the suggested proportionate price in deflated dollars, regardless of free memory enhancement.

This very interesting website belongs to W. John Williams, a fellow who said on CNN that we're heading for another Great Depression. Now, I'm not exactly in the George W. "Pollyanna" Bush school of economic forecasting, but I do think he may a bit alarmist. Of course, since the purpose of his website is to provide "accurate" economic statistics (which disagree with the official versions) he may well determine us to be in a Great Depression whether anyone else agrees or not.

But, I would like to criticize the quoted passage which I found a bit over the top, because I have a pretty perfect counter-example.

This $129 toy exceeds any $5000 PC made in 1990

The Nintendo DS is tiny, rugged, runs for 10h or so on battery, has wireless networking, two RISC CPUs, and two pretty good color, backlit displays -- one of which is a touchscreen. This costs $129 today. You could not buy a desktop PC with similar capabilities in 1990 for under $5000. I'd hazard a DS would give an entry-level SGI of the time a run for its money.

(Note: the article was written in 2004, and the Nintendo DS originally came out in 2004 or 2005, but at a slightly higher price. There are plenty of other, similar examples to pick from, however.)

This example is pretty key, because it is one of the key points in his attack on modern CPI calculations which differ from earlier versions in arguing that the "fixed basket of goods" shouldn't be fixed if the goods get better. Some of his arguments (hamburger is not a fair substitute for steak) seem sound to me, assuming he hasn't misrepresented what the economists are doing, but his arguments against hedonic regression are, where he provides examples, simply wrong.

A safer car is truly more valuable than a less safe car -- just by factoring the lowered chance of death or injury.

Anyway, Williams argues that every change made to CPI calculations has reduced the CPI, and since a lot of things the Federal government pays for are CPI-indexed this is just free money for the Federal government (which is, as a cumulative result of all this fiddling, paying half as much Social Security as it would be with the old "fixed basket" calculation). In turn, GDP is quoted in "inflation adjusted" terms, so anything you do to reduce CPI increases GDP as well, making recessions disappear. And finally, he points out quite a bit of apparently willful ignorance: the government estimates things like increases in wages and investment income using voodoo when the IRS is actually measuring it and the values don't mesh. Guess what the consistent bias is?

Anyway, it's an interesting site (click "primers" for the free essays) and certainly worth reading (if you're at all interested in Economics) even if he's a little over the top.