Bryan Caplan  

Steve Miller on Stagnation

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My co-author Steve Miller's comments on stagnation are not to be missed.  So I'm re-posting them in full.  Here's Steve:

This isn't about ideology, for Tyler, Bryan, or anyone else except maybe the progressives giving Tyler's book such glowing reviews.

In a sense it would be nice for us, the free-marketers, if we could make the case that growth in government spending has led to stagnation. But it hasn't, because there is no stagnation. Whether that's because of or despite of growth in government is a separate issue. The stagnation hypothesis ONLY fits the income data. It does not the purchasing power (in labor hours) data, not at all. It doesn't fit with the economists' standard of greater choices, either. In the 1980s Robin Williams' character in Moscow on the Hudson collapsed in a small grocery store because he was overwhelmed by the coffee selection. What has happened to those choices since the 1980s?

Further, it doesn't pass a basic sniff test. Forget the 1950s kitchen, I have a 1980s kitchen, and it sucks. The modern microwave, toaster oven, and dishwasher make it tolerable, but nowhere near as nice as the 2005 kitchen in the house we rented a few years ago. Of course that is in addition to HUGE growth in transportation, entertainment, and communication since the 1980s or even 1990s. Wasn't it less than 15 years ago that we had to use an envelope and a stamp to send someone a photo? In the past I have been skeptical about the singularity and other Hansonian visions of accelerating progress in the near future. But if the evidence in TGS is the only counter to it... well then maybe I should be bracing myself for the singularity after all.

Okay, maybe CPI-adjusted median household income is stagnating. Consumer surplus isn't -- it's accelerating. Some will argue that's because government spending is almost a third of GDP; I wouldn't. But that doesn't change the fact that innovation accelerated throughout the 20th Century. It wasn't constant, and it didn't stagnate.

I mentioned this video on one of Arnold's posts:

http://www.collegehumor.com/video:1788161

Between that video and Mark Perry's post, I don't see how stagnation holds up.


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COMMENTS (6 to date)
david writes:

Bring us right back to "not growing as fast as before" vs. "not growing".

volatility bounded writes:

Caplan's entire post is weak. None of his criticisms directly address the point that CPI adjusted wage growth is growing slower in absolute terms and relative to the top earners. And pointing out consumer surplus is committing the basic math error of double counting, since CPI is adjusted for hedonics and other things to take into account such gains.

The huge point failure by Cowen that Caplan, Kling, and Hendersen ought to be pointing out is that wages need to be adjusted to take into account increased benefits. Basically, median worker's productivity gains have been shifted from wage comp to benefits compensation. And Caplan, Kling, and Hendersen ought to be yelling that if workers don't want all their compensation growth going into health care, they ought to demand cash comp instead of health care, and buy cheaper health insurance that has a high deductible, and is pretty much just designed to protect against catastrophe.

Steve Miller writes:

CPI *tries* to make hedonic adjustments. It fails. We know this because an hour's labor buys more than ever before, much more than CPI adjustments would suggest. And in what version of the world does the BLS keep track of demand prices?

steve writes:

"We know this because an hour's labor buys more than ever before,"

Housing? Medical care? Education? Since wages have stagnated, it is more difficult to buy more.

Steve

Steve Miller writes:

An example (courtesy of Steve Horwitz) of what I'm talking about is the first table at this link:

http://myslu.stlawu.edu/~shorwitz/Good/myths.htm

I believe he posted an update last year, from 1999 to 2009, but I don't see it on his page.

[miscoded link fixed--Econlib Ed.]

Matthew Gunn writes:

Isn't this just the endlessly repeated critique that the CPI overstates inflation because it misses substitution effects?

Since 1985, the CPI has increased approximately 100%. Taking the standard interpretation of the CPI, I would be roughly indifferent between:

(A) $25,000 income in 1985
(B) $50,000 income in 2010

If I understand Miller, I would prefer option (B) to option (A). The percentage increase in income required to make me indifferent between 1985 and 2010 is not 100%. It is less.

Isn't this just the basic point that the CPI is similar to a Laspeyres index, and Laspeyres indices overstate inflation because they don't capture substitution effects. For example, Laspeyres indices suffer from "new good bias." While some prices have gone up, the price of any new good has declined from an infinite to a finite value, and this is not taken into account.

In equations, let p be the old price level, p' be the new price level, and let x be the old consumption bundle. Let p*x denote the dot product. Let e be the expenditure function.
e(p', u) / e(p, u) is less than (p' * x )/(p * x)

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