Thursday, May 1, 2014

Inflation v. Productivity

This graph is from a very nice article by Annie Lowrey of The New York Times.  The article is about what it means to be poor in the 21st Century USA.

But what I like about this graphic is that it shows you that inflation is an average of a basket of goods and that some goods, whose productivity has far outpaced the average across the industries in the basket, have rapidly declining prices while others, who have not seem much productivity gains at all see very steep relative price increases.

Take computers and college tuition.  The latter is often used as an example of Baumol's Cost Disease, and you can see the point very clearly above: for industries such as education, where the process of learning is still very similar to what it was 100 and 200 years ago, the relative price has shot up.  Why?  Because the other industries, like computer manufacturing, have seen massive productivity increases.  The price of big TVs today is shockingly low.  And thus the number of fancy TVs you have to forgo to pay for college is going up all the time.

But this shows the danger of such comparisons which is essentially Baumol's point: we should not expect all industries to increase productivity similarly. It is, in fact, quite natural for some industries to see little productivity increases (like in his classic example, a symphony orchestra).  They are not doing anything wrong which is why the term 'disease' was used - it is something natural.

Which does not mean, of course, that these prices don't hurt - they do.  But my little Macintosh SE I bought as an undergrad cost about 1/5th of my private college tuition.  Now a student at the same college can buy in infinitely more nice, colorful, powerful Mac for about 1/20th of a year's tuition.  The notion that one price has gone 'up' while the other 'down' is a purely relative statement and only reflects the rate at which you can trade one for the other.

I wonder, though, if there is any correlation between the relative accessibility to consumer electronics and similar consumer good and the declining support for unions and other former champions of the 'middle class.'  No idea...just a thought.  

1 comment:

RossInEugene said...

The main reason that College Tuition and Fees has had such a high inflation rate has been the decline in state support of higher education. The dilemma for state institutions is that there are major incentives to recruit out-of-state students since they pay full freight while in-state students, even with tuition increases and state contributions, may not generate enough income for the institution to fully fund the education they do receive.