9 ms·

I’m trying to understand hedonic adjustments

103 points by erentz 5y ago

biren34 5y ago
I work with data a lot, and my main issue with hedonic adjustment is that anytime I've ever made any such adjustment to "improve" a metric that wasn't purely mechanical (like a moving average or a ratio to another number), it's just one step away from making the number say anything I want it to. The entire concept of "fixing" a metric relies on an inhuman level of self-truthfulness to not just lead you down the path of hearing only what you want to hear. The point of metrics is that they should slap you in the face with objective reality, and improvement is just too subjective a concept.
- SilasX 5y ago
  Yes, and this confirms one suspicion of them I had, that they only work in one direction. They ever adjust inflation upward when products get worse: >Interestingly, hedonic adjustments only act as deflators. Say the airline crams another seat in your row, eliminates carry-on bags and otherwise makes your flight less happy and hedonic. Does the hedonically-adjusted price of your airfare increase? Nope.
  - ericd 5y ago
    Hm, I wonder if anyone’s tried to popularize an alternative inflation measure to CPI that either discounts hedonic adjustments, or tries to be more “honest” about it somehow, perhaps by trying to measure relative user happiness or something (though that’d be super shaky).
    - iagovar 5y ago
      It's a lot of work honestly. I once played with that idea (not for the US) but I have a life and so on...
      - em500 5y ago
        Yup, productionalizing a comprehensive CPI is a boring, thankless and expensive (household surveys, not just webscraping!) undertaking. Which is why we pay a big government department to do it for us. The sceptical but honest truth-seeker would discover, after months of labour that the official quality-adjusted BLS numbers are reasonably sane, maybe understated by a few tens of pct-points, and the hedonic adjustments will add about 0.5 to 1%, which is probably a reasonable estimate of overall quality improvements. That truth is so mundane that your months of labour will barely net you a Medium blogpost. Or you take a shortcut, just add 1.5 to 2%-points to the BLS numbers and sell it in a newsletter, like shadowstats...
        SilasX 5y ago
        You think "TVs are 10% of their quality-adjusted price from 1998" is sane?
        OscarCunningham 5y ago
        Look at these TVs that cost $3000 in 1997: https://www.cnet.com/news/are-tvs-really-cheaper-than-ever-we-go-back-a-few-decades-to-see/ https://www.cnet.com/news/are-tvs-really-cheaper-than-ever-w.... You can definitely get a better TV now for $300. I think the point of this article is that the TV you could buy for $300 in 1997 you can't now buy for $30. So the 10 times increase in quality hasn't allowed a 10 times reduction in cost of living.
        labcomputer 5y ago
        Erm... yes? Am I supposed to think it isn't? Here's a Best Buy ad from 1998: https://www.chron.com/news/article/Best-Buy-ad-from-1998-shows-how-ridiculously-much-6156324.php#photo-7710257 https://www.chron.com/news/article/Best-Buy-ad-from-1998-sho... Here's a Best Buy listing from today: https://www.bestbuy.com/site/insignia-32-class-n10-series-led-hd-tv/6395127.p?skuId=6395127 https://www.bestbuy.com/site/insignia-32-class-n10-series-le... In 1998, a 27" CRT TV was $300 in 1998 dollars. Today's 32" LCD TV is $120. Just in nominal dollars, not adjusted for inflation, the new TV costs 40% as much as the one from 1998. Then the offical CPI says $300 1998 dollars are worth around $500 2021 dollars... so that brings us down to about 24% before making any hedonistic adjustment. [Edit: And, really, we should be comparing a 32" TV from 1998. That's not in the ad, but it is plausible to imagine it costs more than any of the 27" models. Let's call it $450 just to be conservative. That gets you to around 15% w/ CPI and no hedonistic adjustment] But the new TV has twice as many lines of resolution, a bigger screen, better color, uses a fraction as much power, is lighter and is physically smaller. So the operating cost is lower, you can put it anywhere you want, you have a bigger and nicer picture to look at. I'm sort of baffled how someone could not agree that the newer one is very clearly better. I suspect that if you offered most people a CRT version of today's TV, nobody would take it at even half the price. That gets you to within spitting distance of 10%. You can perform the same exercise with other size tubes, but the result is basically the same.
    - hnzix 5y ago
      Not CPI, but Western China-watchers (eg Morningstar) use various proxies for China's GDP since they assert that the official numbers are often politicized.
    - jerf 5y ago
      Yes: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts However, I'm just answering your question, not endorsing that per se. Here's some skepticism, which I am also not endorsing, just balancing and emphasizing my lack of endorsement: https://munknee.com/debunking-validity-shadowstats-inflation-numbers/ https://munknee.com/debunking-validity-shadowstats-inflation... Personally I suspect the answer is somewhere in between. Arguably it's not even a well-defined question. Clearly something like inflation and deflation can exist, even across large time periods, but there may be no single number that can ever capture it accurately. I am somewhat reminded of the difficulties of trying to fix an absolute reference frame in physics, especially when trying to fix it to locations on Earth over large periods of time.
      - ericd 5y ago
        Thanks for the links! Agreed, it’s extremely hard to do well - the basket of goods that one would consider reasonable doesn’t even stay the same over time, computers get added, gasoline (hopefully) drops out.
  - dragonwriter 5y ago
    > Yes, and this confirms one suspicion of them I had, that they only work in one direction. They ever adjust inflation upward when products get worse: Well, it asserts that but doesn’t provide a basis for the claim, which directly contradicts BLS: “The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item.” [0] Given that the author focus almost the entirety of his piece on hedonic adjustments discussing new car price data as illustration without ever mentioning that this is a CPI component to which the hedonic quality adjustment method is not applied, I would trust its unsourced claims not at all, and be extra sure to double check any sourced claims. [0] https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/
- ajuc 5y ago
  Ask a colleague that has different political beliefs to fix it for you :)
  - KirillPanov 5y ago
    Er, isn't OP's whole point that these numbers and statistics should be politically invariant? We don't have liberal integrals or conservative arctangents.
    - InitialLastName 5y ago
      I have seen `conservative_arctan` in a codebase before, but it had to do with the speed/precision tradeoff.
- iagovar 5y ago
  Yes, but hedonic adjustment is basically an attack of the bottom line of inflation as an useful metric IMO. Inflation is typically used for measuring purchasing power. IDK much about CPI because I'm not from the US, but in my country the IPC index (which is similar) has a lot of massage really hurts its usefulness.
  - ur-whale 5y ago
    > really hurts its usefulness. Well, since I don't know what country you hail from, I am going to speculate, but my bet is it hurts its usefulness for you, but very probably not for the government that publishes it and uses it to demonstrate how "effective" their policies have been.
  - gruez 5y ago
    > Yes, but hedonic adjustment is basically an attack of the bottom line of inflation as an useful metric IMO. The underlying premise makes sense though. If your country got richer and everyone started buying high end variants of stuff, and the low-end variants got discontinued, is everyone suddenly worse off?
    - makomk 5y ago
      The trouble is that the reality is probably closer to it simply not being financially worthwhile for manufacturers to offer the lower-end variants anymore - in the case of cars, partly because they're legally required to include these features, but also because the incremental cost of adding those new features shrinks. That is, rather than the cost of a 1990s base-model remaining the same and people just getting higher-end models, the cost of a 1990s base model increases closer to that of more feature-filled models to the point it doesn't make sense to make the features optional. If you think about the cost of making, say, a fancy entertainment or sat-nav interface, that's gone down in a way that the cost of huge chunks of carefully machined, stamped and welded metal hasn't. Also, the definition of a high-end variant changes over time too. For example, today a 52-inch TV fills the same price niche that a 32-inch one did, say, a decade ago but it also fills the same quality niche - you need to buy the 52-incher to get the same kind of audio and picture quality as a 32-inch set from years gone by, and the 32-inch sets have deteriorated in quality in ways that aren't necessarily visible from the obvious spec-sheet numbers.
joe_the_user 5y ago
It's nice to see this. I've been interested since the mid-2000s and haven't seen any breakdowns or examples of hedonic adjustments. Anyone have any other references?
- dragonwriter 5y ago
  > I've been interested since the mid-2000s and haven't seen any breakdowns or examples of hedonic adjustments. The BLS FAQ: https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
OscarCunningham 5y ago
If somebody put a new car on the market for $9000 with the same features as the 1990 Ford Mustang, what would happen? Yes, they'd be arrested for not meeting safety standards. But assuming we changed the law, would people want to buy it? Would it be better or worse than a second-hand modern car at the same price?
- avidiax 5y ago
  The baseline utility of a car is that it transports you to and from a job, errands and leisure activities. A $9,000 2021 "1990" Mustang would do that rather well, and the other safety/quality improvements probably aren't worth almost $20k to most people, especially given that most people consider themselves above average drivers. $9,000 for a used car gets you the safety improvements, but perhaps not the new car reliability, even adjusting for 30 years of quality improvements. I think it would sell rather well so long as it had Bluetooth.
  - TheCoelacanth 5y ago
    > $9,000 for a used car gets you the safety improvements, but perhaps not the new car reliability I'm not convinced of that. Reliability has definitely been trending upwards. 100k miles used to be considered a high-mileage car, but now a car model that didn't regularly make it to that distance would be considered defective.
- ergot_vacation 5y ago
  Given the option, my bet would be that people (those on the mid to low end of the economy anyway) would strip out just about every feature not essential to the car going down the road if it meant big savings. They'd ABSOLUTELY do if for 50% off. Safety features would be gone in an instant. Cars don't come with airbags or even seat belts because consumers demand them, they do so because its the law. That's not to say safety features are a bad thing, just that their omnipresence isn't due to economic forces.
  - cheaprentalyeti 5y ago
dragonwriter 5y ago
So, the author is trying to understand hedonic adjustment, and does it via the BLS CPI series for new car purchases. Which is rather clearly a fatal error since BLS uses cost-based, rather than hedonic, quality adjustments for new car and truck purchases. [0] The author is trying to understand a process by examining an area in which the process is not applied. [0] https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/ (see ELI TA011)
- Thorrez 5y ago
  Hmm, I guess now we need an article about what cost-based adjustment is.
  - rsj_hn 5y ago
    That article would be here: https://www.bls.gov/cpi/quality-adjustment/new-vehicles.pdf https://www.bls.gov/cpi/quality-adjustment/new-vehicles.pdf
omalleyt 5y ago
The US gov’t has a massive incentive to underreport inflation. When they underreport inflation (and people believe it), they are able to: - pay less in interest on their debt - raise Social Security payments by less - inflate away the real value of the debt principal The US gov’t has reached a record level of debt. It needs to cause massive inflation to devalue its debts, and it needs to lie about it.
- snidane 5y ago
  There is no other way to run the world today under democratic regimes. Politicians will never win votes by promising to reduce govt debt. The only sustainable way to run the world is to underreport on inflation using a flawed metric, which nobody is supposed to understand, such as CPI. And then let the real 8% or so inflation eat the govt debt away while the govt borrows money at <2% interest on treasury bonds. These adjustments to CPI are not to be understood. They are designed.
  - adamjb 5y ago
    >Politicians will never win votes by promising to reduce govt debt. Huh, what? Promises to balance the budget or run a surplus are practically a cliche at this point.
    - BitwiseFool 5y ago
      But how many politicians actually follow through on such promises? Do they ever get in trouble for failing to do so? In the United States at least, none of them ever get punished by losing their seat when they fail to cut spending.
  - ur-whale 5y ago
    >Politicians will never win votes by promising to reduce govt debt. So, in other words, the only way to govern is through demagogy ... what a terribly cynical view of the world. I also believe it's historically inaccurate. I know of at least two countries for which it is: Singapore and Switzerland.
StanislavPetrov 5y ago
What the hedonic adjustment ignores the fact that many of the things people need to live are bought for utility, now how many added features they might have. Take toilet paper as an example, since most Americans find this a necessary object for if utility. Lets say the cheapest roll of toilet paper has 100 sheets cost $1. One day, the toilet paper company decides to reduce a roll to 90 sheets, but claims the new toilet paper is softer and of a better quality. The pointy heads at the FED may very well decide that increased quality and added softness of the sheets means that the new, smaller roll is of equal value to the older, larger roll. Through a hedonic adjustment, no inflation will be reflected to have occurred. But to the guy trying to wipe his ass, he is getting 10% fewer sheets for the same money. He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices. Now lets take a look at the cars, since they were cited in the article. CPI data has cars as unchanged. The author of the article shows how actual prices tracked hourly earnings. However, the author looks at average hourly earnings, which are skewed due to the vast majority of wage gains going to the top wage earner. So let's take a look at the median numbers. Using the example from the article, a Honda cost ~$12,000 in 1990 and ~$25,000 - more than 100% increase in real price. Median household income went from $59,966 in 1990 to $78,500 today, a rise of ~31% over the same period of time. The same Honda that cost ~1/6th of median household income costs ~1/3 of median household income 30 years later. The need for workers to get to their jobs (unfortunately for them) remains constant. Similar real price comparisons between the costs of things people actually need to survive (food, transportation, healthcare, insurance, education) and median wages will reveal similar discrepancies, so its not all too surprising that people hold official CPI numbers in such low regard. But at least TVs are cheaper.
- lordnacho 5y ago
  Does someone make an old school, non-hedonically adjusted index?
- ahahahahah 5y ago
  > What the hedonic adjustment ignores the fact that many of the things people need to live are bought for utility, now how many added features they might have. That's true. > He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices This is 100% wrong. I don't think anyone should be surprised that professionals who have thought about these things a lot were long aware that a hedonic adjustment is not appropriate for all things. Toiler paper does not get any quality adjustment (hedonic or otherwise) in the CPI calculation. See https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/
nwellnhof 5y ago
You simply have to understand that inflation is impossible to measure objectively. By extension, all inflation-adjusted data (so basically all historical economic data) is more or less made up. If we'd measure inflation like we did in the 80s, it would easily come out 1% higher, meaning the real GDP growth is 1% lower than currently reported. So several economies would be considered in a recession for years insead of showing low growth. I'm not saying that the way inflation is measured is wrong. But most data depending on the official inflation rates is a lot less accurate than you might think.
DocTomoe 5y ago
The car example is flawed, as it takes availability of comparable offers out of the equation. Instead of comparing brands and models, we should look at "what is the cheapest four-seat car you can buy?" and compare prices between them over the years.
- spaetzleesser 5y ago
  Very true. That’s the choice that’s most important for most people. Same for housing. What good is it when housing prices have doubled but inflation is zero because they also have doubled in size? Houses are not affordable anymore.
dougmwne 5y ago
Wow,that was both eye opening and also not that surprising. Of course the government is cooking the books on inflation, and has been for a long time. But I would say instead of replacing reality, they are just substituting one fantasy for another. The money itself is an abstraction and it's not possible to compare value across time except as an approximation. The paper money from 1980 may still exist in a drawer somewhere and function as a financial instrument, but the economy it interacts with is radically changed. How do you hedonically adjust access to all the world's information and entertainment and instant communication with anyone anywhere? How do you hedonically adjust the difference between Covid with and without biotech. How do you hedonically adjust 2-hour delivery of every product imported from anywhere? How do you hedonically adjust Pacman to Halflife Alyx?
SeanFerree 5y ago
Excellent article!
benlivengood 5y ago
With more detailed purchase history available it seems like price indexes should switch to purely volume weighted adjusted price indexes. The quantiles of purchase history would show a much more accurate history of consumer behavior over time; A rise in the ~10th percentile price of goods by volume is a pretty clear indication of fundamental inflation whereas median or higher percentiles may only reflect fads, substituted goods, or improvements in quality, for example. Maybe such an index already exists? It looks like CPI is switching to this kind of price adjustment for some categories but it seems like the data is readily available for basically all consumer goods; Are stores reluctant to share the volume and price of goods at the individual UPC level?

103 points by erentz 5y ago

I work with data a lot, and my main issue with hedonic adjustment is that anytime I've ever made any such adjustment to "improve" a metric that wasn't purely mechanical (like a moving average or a ratio to another number), it's just one step away from making the number say anything I want it to. The entire concept of "fixing" a metric relies on an inhuman level of self-truthfulness to not just lead you down the path of hearing only what you want to hear. The point of metrics is that they should slap you in the face with objective reality, and improvement is just too subjective a concept.

SilasX 5y ago
Yes, and this confirms one suspicion of them I had, that they only work in one direction. They ever adjust inflation upward when products get worse: >Interestingly, hedonic adjustments only act as deflators. Say the airline crams another seat in your row, eliminates carry-on bags and otherwise makes your flight less happy and hedonic. Does the hedonically-adjusted price of your airfare increase? Nope.
- ericd 5y ago
  Hm, I wonder if anyone’s tried to popularize an alternative inflation measure to CPI that either discounts hedonic adjustments, or tries to be more “honest” about it somehow, perhaps by trying to measure relative user happiness or something (though that’d be super shaky).
  - iagovar 5y ago
    It's a lot of work honestly. I once played with that idea (not for the US) but I have a life and so on...
    - em500 5y ago
      Yup, productionalizing a comprehensive CPI is a boring, thankless and expensive (household surveys, not just webscraping!) undertaking. Which is why we pay a big government department to do it for us. The sceptical but honest truth-seeker would discover, after months of labour that the official quality-adjusted BLS numbers are reasonably sane, maybe understated by a few tens of pct-points, and the hedonic adjustments will add about 0.5 to 1%, which is probably a reasonable estimate of overall quality improvements. That truth is so mundane that your months of labour will barely net you a Medium blogpost. Or you take a shortcut, just add 1.5 to 2%-points to the BLS numbers and sell it in a newsletter, like shadowstats...
      - SilasX 5y ago
        You think "TVs are 10% of their quality-adjusted price from 1998" is sane?
        OscarCunningham 5y ago
        Look at these TVs that cost $3000 in 1997: https://www.cnet.com/news/are-tvs-really-cheaper-than-ever-we-go-back-a-few-decades-to-see/ https://www.cnet.com/news/are-tvs-really-cheaper-than-ever-w.... You can definitely get a better TV now for $300. I think the point of this article is that the TV you could buy for $300 in 1997 you can't now buy for $30. So the 10 times increase in quality hasn't allowed a 10 times reduction in cost of living.
        labcomputer 5y ago
        Erm... yes? Am I supposed to think it isn't? Here's a Best Buy ad from 1998: https://www.chron.com/news/article/Best-Buy-ad-from-1998-shows-how-ridiculously-much-6156324.php#photo-7710257 https://www.chron.com/news/article/Best-Buy-ad-from-1998-sho... Here's a Best Buy listing from today: https://www.bestbuy.com/site/insignia-32-class-n10-series-led-hd-tv/6395127.p?skuId=6395127 https://www.bestbuy.com/site/insignia-32-class-n10-series-le... In 1998, a 27" CRT TV was $300 in 1998 dollars. Today's 32" LCD TV is $120. Just in nominal dollars, not adjusted for inflation, the new TV costs 40% as much as the one from 1998. Then the offical CPI says $300 1998 dollars are worth around $500 2021 dollars... so that brings us down to about 24% before making any hedonistic adjustment. [Edit: And, really, we should be comparing a 32" TV from 1998. That's not in the ad, but it is plausible to imagine it costs more than any of the 27" models. Let's call it $450 just to be conservative. That gets you to around 15% w/ CPI and no hedonistic adjustment] But the new TV has twice as many lines of resolution, a bigger screen, better color, uses a fraction as much power, is lighter and is physically smaller. So the operating cost is lower, you can put it anywhere you want, you have a bigger and nicer picture to look at. I'm sort of baffled how someone could not agree that the newer one is very clearly better. I suspect that if you offered most people a CRT version of today's TV, nobody would take it at even half the price. That gets you to within spitting distance of 10%. You can perform the same exercise with other size tubes, but the result is basically the same.
  - hnzix 5y ago
    Not CPI, but Western China-watchers (eg Morningstar) use various proxies for China's GDP since they assert that the official numbers are often politicized.
  - jerf 5y ago
    Yes: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts However, I'm just answering your question, not endorsing that per se. Here's some skepticism, which I am also not endorsing, just balancing and emphasizing my lack of endorsement: https://munknee.com/debunking-validity-shadowstats-inflation-numbers/ https://munknee.com/debunking-validity-shadowstats-inflation... Personally I suspect the answer is somewhere in between. Arguably it's not even a well-defined question. Clearly something like inflation and deflation can exist, even across large time periods, but there may be no single number that can ever capture it accurately. I am somewhat reminded of the difficulties of trying to fix an absolute reference frame in physics, especially when trying to fix it to locations on Earth over large periods of time.
    - ericd 5y ago
      Thanks for the links! Agreed, it’s extremely hard to do well - the basket of goods that one would consider reasonable doesn’t even stay the same over time, computers get added, gasoline (hopefully) drops out.
- dragonwriter 5y ago
  > Yes, and this confirms one suspicion of them I had, that they only work in one direction. They ever adjust inflation upward when products get worse: Well, it asserts that but doesn’t provide a basis for the claim, which directly contradicts BLS: “The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item.” [0] Given that the author focus almost the entirety of his piece on hedonic adjustments discussing new car price data as illustration without ever mentioning that this is a CPI component to which the hedonic quality adjustment method is not applied, I would trust its unsourced claims not at all, and be extra sure to double check any sourced claims. [0] https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/
ajuc 5y ago
Ask a colleague that has different political beliefs to fix it for you :)
- KirillPanov 5y ago
  Er, isn't OP's whole point that these numbers and statistics should be politically invariant? We don't have liberal integrals or conservative arctangents.
  - InitialLastName 5y ago
    I have seen `conservative_arctan` in a codebase before, but it had to do with the speed/precision tradeoff.
iagovar 5y ago
Yes, but hedonic adjustment is basically an attack of the bottom line of inflation as an useful metric IMO. Inflation is typically used for measuring purchasing power. IDK much about CPI because I'm not from the US, but in my country the IPC index (which is similar) has a lot of massage really hurts its usefulness.
- ur-whale 5y ago
  > really hurts its usefulness. Well, since I don't know what country you hail from, I am going to speculate, but my bet is it hurts its usefulness for you, but very probably not for the government that publishes it and uses it to demonstrate how "effective" their policies have been.
- gruez 5y ago
  > Yes, but hedonic adjustment is basically an attack of the bottom line of inflation as an useful metric IMO. The underlying premise makes sense though. If your country got richer and everyone started buying high end variants of stuff, and the low-end variants got discontinued, is everyone suddenly worse off?
  - makomk 5y ago
    The trouble is that the reality is probably closer to it simply not being financially worthwhile for manufacturers to offer the lower-end variants anymore - in the case of cars, partly because they're legally required to include these features, but also because the incremental cost of adding those new features shrinks. That is, rather than the cost of a 1990s base-model remaining the same and people just getting higher-end models, the cost of a 1990s base model increases closer to that of more feature-filled models to the point it doesn't make sense to make the features optional. If you think about the cost of making, say, a fancy entertainment or sat-nav interface, that's gone down in a way that the cost of huge chunks of carefully machined, stamped and welded metal hasn't. Also, the definition of a high-end variant changes over time too. For example, today a 52-inch TV fills the same price niche that a 32-inch one did, say, a decade ago but it also fills the same quality niche - you need to buy the 52-incher to get the same kind of audio and picture quality as a 32-inch set from years gone by, and the 32-inch sets have deteriorated in quality in ways that aren't necessarily visible from the obvious spec-sheet numbers.

joe_the_user 5y ago

It's nice to see this. I've been interested since the mid-2000s and haven't seen any breakdowns or examples of hedonic adjustments. Anyone have any other references?

dragonwriter 5y ago
> I've been interested since the mid-2000s and haven't seen any breakdowns or examples of hedonic adjustments. The BLS FAQ: https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...

OscarCunningham 5y ago

If somebody put a new car on the market for $9000 with the same features as the 1990 Ford Mustang, what would happen? Yes, they'd be arrested for not meeting safety standards. But assuming we changed the law, would people want to buy it? Would it be better or worse than a second-hand modern car at the same price?

avidiax 5y ago
The baseline utility of a car is that it transports you to and from a job, errands and leisure activities. A $9,000 2021 "1990" Mustang would do that rather well, and the other safety/quality improvements probably aren't worth almost $20k to most people, especially given that most people consider themselves above average drivers. $9,000 for a used car gets you the safety improvements, but perhaps not the new car reliability, even adjusting for 30 years of quality improvements. I think it would sell rather well so long as it had Bluetooth.
- TheCoelacanth 5y ago
  > $9,000 for a used car gets you the safety improvements, but perhaps not the new car reliability I'm not convinced of that. Reliability has definitely been trending upwards. 100k miles used to be considered a high-mileage car, but now a car model that didn't regularly make it to that distance would be considered defective.
ergot_vacation 5y ago
Given the option, my bet would be that people (those on the mid to low end of the economy anyway) would strip out just about every feature not essential to the car going down the road if it meant big savings. They'd ABSOLUTELY do if for 50% off. Safety features would be gone in an instant. Cars don't come with airbags or even seat belts because consumers demand them, they do so because its the law. That's not to say safety features are a bad thing, just that their omnipresence isn't due to economic forces.
- cheaprentalyeti 5y ago

dragonwriter 5y ago

So, the author is trying to understand hedonic adjustment, and does it via the BLS CPI series for new car purchases. Which is rather clearly a fatal error since BLS uses cost-based, rather than hedonic, quality adjustments for new car and truck purchases. [0] The author is trying to understand a process by examining an area in which the process is not applied. [0] https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/ (see ELI TA011)

Thorrez 5y ago
Hmm, I guess now we need an article about what cost-based adjustment is.
- rsj_hn 5y ago
  That article would be here: https://www.bls.gov/cpi/quality-adjustment/new-vehicles.pdf https://www.bls.gov/cpi/quality-adjustment/new-vehicles.pdf

omalleyt 5y ago

The US gov’t has a massive incentive to underreport inflation. When they underreport inflation (and people believe it), they are able to: - pay less in interest on their debt - raise Social Security payments by less - inflate away the real value of the debt principal The US gov’t has reached a record level of debt. It needs to cause massive inflation to devalue its debts, and it needs to lie about it.

snidane 5y ago
There is no other way to run the world today under democratic regimes. Politicians will never win votes by promising to reduce govt debt. The only sustainable way to run the world is to underreport on inflation using a flawed metric, which nobody is supposed to understand, such as CPI. And then let the real 8% or so inflation eat the govt debt away while the govt borrows money at <2% interest on treasury bonds. These adjustments to CPI are not to be understood. They are designed.
- adamjb 5y ago
  >Politicians will never win votes by promising to reduce govt debt. Huh, what? Promises to balance the budget or run a surplus are practically a cliche at this point.
  - BitwiseFool 5y ago
    But how many politicians actually follow through on such promises? Do they ever get in trouble for failing to do so? In the United States at least, none of them ever get punished by losing their seat when they fail to cut spending.
- ur-whale 5y ago
  >Politicians will never win votes by promising to reduce govt debt. So, in other words, the only way to govern is through demagogy ... what a terribly cynical view of the world. I also believe it's historically inaccurate. I know of at least two countries for which it is: Singapore and Switzerland.

StanislavPetrov 5y ago

What the hedonic adjustment ignores the fact that many of the things people need to live are bought for utility, now how many added features they might have. Take toilet paper as an example, since most Americans find this a necessary object for if utility. Lets say the cheapest roll of toilet paper has 100 sheets cost $1. One day, the toilet paper company decides to reduce a roll to 90 sheets, but claims the new toilet paper is softer and of a better quality. The pointy heads at the FED may very well decide that increased quality and added softness of the sheets means that the new, smaller roll is of equal value to the older, larger roll. Through a hedonic adjustment, no inflation will be reflected to have occurred. But to the guy trying to wipe his ass, he is getting 10% fewer sheets for the same money. He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices. Now lets take a look at the cars, since they were cited in the article. CPI data has cars as unchanged. The author of the article shows how actual prices tracked hourly earnings. However, the author looks at average hourly earnings, which are skewed due to the vast majority of wage gains going to the top wage earner. So let's take a look at the median numbers. Using the example from the article, a Honda cost ~$12,000 in 1990 and ~$25,000 - more than 100% increase in real price. Median household income went from $59,966 in 1990 to $78,500 today, a rise of ~31% over the same period of time. The same Honda that cost ~1/6th of median household income costs ~1/3 of median household income 30 years later. The need for workers to get to their jobs (unfortunately for them) remains constant. Similar real price comparisons between the costs of things people actually need to survive (food, transportation, healthcare, insurance, education) and median wages will reveal similar discrepancies, so its not all too surprising that people hold official CPI numbers in such low regard. But at least TVs are cheaper.

lordnacho 5y ago
Does someone make an old school, non-hedonically adjusted index?
ahahahahah 5y ago
> What the hedonic adjustment ignores the fact that many of the things people need to live are bought for utility, now how many added features they might have. That's true. > He is now going to have to buy 10% more toilet paper despite CPI reflecting no inflation in toilet paper prices This is 100% wrong. I don't think anyone should be surprised that professionals who have thought about these things a lot were long aware that a hedonic adjustment is not appropriate for all things. Toiler paper does not get any quality adjustment (hedonic or otherwise) in the CPI calculation. See https://www.bls.gov/cpi/quality-adjustment/ https://www.bls.gov/cpi/quality-adjustment/

nwellnhof 5y ago

You simply have to understand that inflation is impossible to measure objectively. By extension, all inflation-adjusted data (so basically all historical economic data) is more or less made up. If we'd measure inflation like we did in the 80s, it would easily come out 1% higher, meaning the real GDP growth is 1% lower than currently reported. So several economies would be considered in a recession for years insead of showing low growth. I'm not saying that the way inflation is measured is wrong. But most data depending on the official inflation rates is a lot less accurate than you might think.

DocTomoe 5y ago

The car example is flawed, as it takes availability of comparable offers out of the equation. Instead of comparing brands and models, we should look at "what is the cheapest four-seat car you can buy?" and compare prices between them over the years.

spaetzleesser 5y ago
Very true. That’s the choice that’s most important for most people. Same for housing. What good is it when housing prices have doubled but inflation is zero because they also have doubled in size? Houses are not affordable anymore.

dougmwne 5y ago

Wow,that was both eye opening and also not that surprising. Of course the government is cooking the books on inflation, and has been for a long time. But I would say instead of replacing reality, they are just substituting one fantasy for another. The money itself is an abstraction and it's not possible to compare value across time except as an approximation. The paper money from 1980 may still exist in a drawer somewhere and function as a financial instrument, but the economy it interacts with is radically changed. How do you hedonically adjust access to all the world's information and entertainment and instant communication with anyone anywhere? How do you hedonically adjust the difference between Covid with and without biotech. How do you hedonically adjust 2-hour delivery of every product imported from anywhere? How do you hedonically adjust Pacman to Halflife Alyx?

SeanFerree 5y ago

Excellent article!

benlivengood 5y ago

With more detailed purchase history available it seems like price indexes should switch to purely volume weighted adjusted price indexes. The quantiles of purchase history would show a much more accurate history of consumer behavior over time; A rise in the ~10th percentile price of goods by volume is a pretty clear indication of fundamental inflation whereas median or higher percentiles may only reflect fads, substituted goods, or improvements in quality, for example. Maybe such an index already exists? It looks like CPI is switching to this kind of price adjustment for some categories but it seems like the data is readily available for basically all consumer goods; Are stores reluctant to share the volume and price of goods at the individual UPC level?