Arnold Kling  

Tyler Cowen's Daily Miracle

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School Choice Pessimism... One Million Dollars!...

He writes,


Any single year there has been inflation, from one year to the next.

From 1900 to 2008 there has been radical *deflation*, for instance in the Sears catalog. You'd rather spend 10K in the modern catalog than in the old catalog.


If you look at inflation year by year, the cost of living goes up very year. However, Tyler suggests, if you had $10,000 to spend you would rather spend it on today's goods at today's prices than on goods in 1900 at 1900 prices.

That may be a bit strong. With $10,000 in 1900, I believe you could have taken care of all of your food, clothing, and shelter needs for the year with plenty of money left over. Not so today. (Of course, in 1900 your food would be bland, your clothing would be uncomfortable, and your shelter would not have air conditioning--possibly not even indoor plumbing. So the comparison is awkward.)

In any event, I think that Tyler's larger point holds. The upward drift in quality of goods and services is significant, and therefore so is the cumulative over-estimate of long-term inflation. This means that when people try to compare real incomes across generations, they are entering a fool's realm.

The title for this post comes from my memories of Curt Flood, a centerfielder for the Cardinals. His striking defensive plays were so frequent that we referred to them as "Flood's daily miracle."


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CATEGORIES: Growth: Consequences



COMMENTS (13 to date)
dearieme writes:

"in 1900 your food would be bland": why assume that?

Steve Miller writes:

For (ahem) younger Cardinal fans, we only know from history books that he a) tragically misplayed a fly ball in Game 7 of the '68 series and b) was the first free agent.

Maybe Colby Rasmus will have daily miracles.

Anyway, Tyler's point is valuable. Most people would never think of it that way. Your point about low-quality food, clothing, and housing is important. I personally think that I'd much rather be well below the poverty line (living on, say, $10K a year) in 2008 than a ten-thousandaire in 1900.

PrestoPundit writes:

It's somehow telling that economists would leave these things out:

1. Tastes would be different.

2. Incomes would be different.

3. Demographic location would be different (farm vs. city, etc.)

I'm surprised the economists are better at science fiction -- given the nature of the mathematical constructions.

Steve Miller writes:

"1. Tastes would be different"

Yes, I would be even more grateful for basic comforts.

"2. Incomes would be different."

That's been taken into account...

"3. Demographic location would be different (farm vs. city, etc.)"

... which makes 1900 seem even worse. Not only is there nothing to buy, there's nothing to do (except work very hard, all day). I think one has to be incredibly romantic about the past to even consider how their life might be better in 1900, in any way.

ChanceH writes:

I'd rather buy 10K of gold at 1900 prices (500 oz's). Then I could sell 12 oz's of that (2.4%) and buy 10000 dollars worth stuff from todays catalog. and still have 400k in the bank.

That's how productivivty gains are supposed to be distributed to savers. (run in fear ... it's DEFLATION .... oh no!).

Lord writes:

Just imagine how much Tiffany you could buy.

liberty writes:

"That may be a bit strong. With $10,000 in 1900, I believe you could have taken care of all of your food, clothing, and shelter needs for the year with plenty of money left over. Not so today. (Of course, in 1900 your food would be bland, your clothing would be uncomfortable, and your shelter would not have air conditioning--possibly not even indoor plumbing. So the comparison is awkward.)"

That's exactly the point. If you take $10,000 today, you could buy all your food, shelter and needs for the year too if you buy a crappy shack in a crappy rural area like you would get in 1900, with no indoor plumbing, and you buy the limited choice of foods that you could get in 1900, and you buy crappy clothing that is equivalent (maybe from Salvation Army or something).

And with the remaining $1000 you can buy a laptop and an iPod or whatever.

Arnold Kling writes:

Steve,
I was at that game. Flood lost the ball, perhaps because of a lot of white shirts in the upper deck behind home plate.

But the Cardinals couldn't hit Lolich, anyway. Just a meaningless late home run by Shannon.

Colby Cosh writes:

And any history book that describes Flood as the "first free agent" is badly misinformed. The Supreme Court upheld the owners in Flood v. Kuhn.

Steve Miller writes:

Point taken, maybe I should have said something along the lines of "his refusal of a trade kicked off free agency."

Daniel Elmore writes:

"The upward drift in quality of goods and services is significant, and therefore so is the cumulative over-estimate of long-term inflation. This means that when people try to compare real incomes across generations, they are entering a fool's realm."

While I don't work in prices here at BLS, I do know that the quality of goods is not ignored in the pricing of goods when the CPI is calculated. You may not agree with how it is done, but you shouldn't leave your readers ignorant of this fact.

spencer writes:

Daniel Elmore -- a couple of years ago the Chairman of their department, Don Boudreaux, published an entire newspaper article about how the CPI missed the quality improvements in automobiles. He was completely ignorant of the fact that the auto component of the CPI had been quality adjusted for decades. That is what they are teaching the young people of Virginia.

Steve Miller writes:

The point of this post is somewhat orthogonal to CPI quality adjustments. Even with the quality adjustments the CPI is positive each year, which is all Arnold said in the first line. Tyler's post went further -- maybe $100 buys more in 1900, maybe $10K buys more (maybe not), but higher amounts, he argued, actually have more purchasing power in 2008, taking quality into account. It wasn't a cheap shot at the CPI, it was questioning how we think of inflation and deflation more generally. The CPI tells you one thing, introspection tells you another.

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