Wikinvest Wire

The great TV price inflation scam

Thursday, April 10, 2008

Anyone wanting to better understand one of the primary reasons why we are in such an economic mess these days need look no further than the history of television prices over the last half-decade or more.

Actually there are two versions of TV prices - the real world "in"-flation experience and the government's "de"-flation version.

This point was made clear yesterday when we purchased a replacement for our 2002-era 32" CRT model - a replacement that not only proved to be more costly but, as an added bonus, less functional.

A quick recap is in order.

In one of the more egregious examples of quality adjustments at the Bureau of Labor Statistics (also see automobiles, computers, and, well, just about anything that is imported) television prices have been falling for years - not necessarily at Best Buy, but certainly at the BLS.

As can be calculated from the BLS data in the chart below, that $500 TV from 2002 - the one that is now awaiting a one-way trip to the recycling center - should have been replaced with one of equal "value" today costing only $178.
According to the government data, after factoring in the changes in price along with all the improvements and added features over the last five or six years, TV prices have declined by more than 60 percent.

What did we pay yesterday?

After much searching and gnashing of teeth, we paid $600 for a 32" HDTV which, for our application, is the equivalent of about a 27" model.

Yes, there have been improvements over the years resulting in "hedonic adjustments" that purportedly balance the "true value" of the item with its cost.

But in this case, it is truly an absurd adjustment - we just want to watch television and don't care if it has two connectors or 20 connectors on the back and would much prefer the older, larger picture size to the newer, smaller one (sorry, but we don't really need HDTV in every room of the house and we don't really want to write out an even larger check to the cable company each month.)

The same arguments can be made for the number of different wash cycles on washing machines, new car features that buyers don't want or need, and computing power for desktop and laptop PCs.

The consumer has no choice about most of these features and, in many cases, the manufacturers must remain competitive by providing them as standard features - in the BLS Consumer Price Index, this results in lower prices even when prices don't go down.

Back to the Mess

So, how does this help to explain the current economic mess we are in?

Over the last decade or two, systematic hedonic adjustments have helped provide "cover" for the Fed to make money much easier than it would otherwise be if inflation better represented "real world" experiences.

During the Greenspan term at the Federal Reserve, inflation was never an issue - at any inkling of trouble in financial markets or for the economy as a whole, the monetary spigots could be opened wide and, on many occasions, they were.

Combining quality adjustments for consumer goods with the complete omission of home prices in the inflation statistics during an era of cheap energy and cheap imports created a "witches brew" of latent price pressure and impending financial instability that any economist with any common sense would have understood at the time.

Unfortunately, economists with common sense are in relatively short supply, which is why you keep reading stories about consumers feeling "squeezed", losing buying power, and seeing their standard of living decline during an era of historically low inflation.

Surely there must be some reasonable middle ground between making no quality adjustments whatsoever and the complete farce that, in some cases, hedonic price adjustments have become.

At what point in time do economists stop being the unwitting dupes of a government that is hell-bent on "inflating away" all of its financial troubles by lying to the public about how much prices are really rising?

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Nick said...

A great real-world explanation of the hedonic regression BS which invalidates the whole concept of the CPI tracking real price changes.

In answer to your question, that point comes when all news sources refuse to refer to the CPI as a measure of inflation, but rather as a bogus, BS, made-up government lie. Any economist who says otherwise is morally worse that the government: they should know it's a lie, and they are helping propagate it anyway.

Anonymous said...

you dont understand the real benefit of hedonics.....every day i get older and fatter and uglier but with the miracle of hedonics i look more like brad pit with every passing year!

use hedonics to your advantage! i bought a hedonics mirror and i actually look like brad pit in the mirror. 20 year old college chicks dig me!

this economics stuff is great...............

Aaron Krowne said...

You can't have moderation with these guys... there is no middle ground. The only safe choice is to strip hedonics completely from the CPI. Perhaps if they are so concerned with quantifying the value of every quality advancement (does that seem like an oxymoron to you too?), they could have a separate "consumer hedonics index".

little larry sellers said...

I agree with aaron, the "value added" adjustments got out of control a while ago and should be a separate index. Of course, reporting them honestly defeats the entire purpose of calcluating them into the CPI.

Hedonics was originally about computer advancements, but then expanded to audio equipment, video equipment, washers/dryers, DVDs, refrigerators, college textbooks(huh?), and other items. Bill Fleckenstein reported in 2004 that "no less than 46% of the weight of the U.S. CPI comes from products subject to hedonic adjustments". We can only imagine what that figure is today!


Quiddity said...

Looking at the chart, I expect that eventually televisions will be, by BLS standards, absolutely free. That's when the insanity of hedonic adjustments will be seen for what they are.

Bruno said...

You are of course right about the effect of hedonics in hiding the real rate of inflation. However, you really chose a particularly bad example in TV's.

While YOU may not consider HD clarity, the wide aspect ratio, improved connections, etc an improvement, many do. Electronics are in general one of the few areas where prices have been flat or possibly gone down.

As for that 32" CRT TV set. I found a 27" at Sears for $229.99. That's quite a bit cheaper than 6 years ago, even considering this is a smaller set. My 32" cost me $800 in 2000. here's the ad for a similar set today.

As an example of the market value of a 32" tube tv, I gave my perfectly functional one to the carpet cleaning guy when I moved to avoid having to lug it to my new home. By the way, the 32" LCD flat panel HD tv I replaced it with cost about $600. About the same as that old tube set of yours 6 years ago.

Good concept, but you chose the wrong example.

A similarly bad choice to illustrate your point would be full size pickups. (they cost about the same today as in 2000 despite a few significant improvements in power, refinement, safety, and comfort)

That makes me happy, since I use them in my business.

I'm sure there are tons of things they play Hedonic games with, though.

Tim said...

Here are two 32" Toshiba CRT TVs at $430 and $420 and a bunch more at Yahoo! Shopping between $400 and $500 where there also happens to be an RCA model (which is what we had) at $480.

These are all a far cry from the "inflation adjusted price" of $178, so I'll stand by my example.

To be honest, I didn't know you could still buy the 32" CRT models, but if I did, it wouldn't have made any difference because I didn't want to lug another 100 pound TV up the stairs.

Anonymous said...

The whole inflation statistic is misused and abused by this stupid government. Morons or criminals abound in U.S. government positions.

I can't believe the amount of BS U.S. citizens are being spoon fed by their government and like sheep are lined in a slaughterhouse.

Think, stupid, think! If the government bails you out of your pathetic misery because you cannot pay your bills, with whose money is it doing it? How hard is it to figure that one out?

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