billion prices inflation estimate

The billion prices project spiders prices off the internet, and gets results broadly similar to the BLS, about thee percent per year, which surprises me, since  over the last three years the BLS has been applying “hedonic adjustments” to all manner of goods where hedonic adjustment is impossible or implausible.  Today’s supposedly three percent inflation as measured by the BLS is a lot higher rate of inflation than what the BLS was measuring as three percent inflation three years ago.

Three percent a year is high enough to cast doubt on the Keynesian account of the economic crisis, but it is low enough to not worry much about inflation. The billion prices project shows prices rising two percent in the last five months, which is five percent annualized, high enough to thoroughly discredit the Keynsian account of the crisis, and high enough to make one a bit worried about inflation, but not a symptom of imminent hyperinflation.

On the other hand, online goods tend to be small lightweight consumer durables, such as cameras, cell phones, scissors and so forth, where in some countries (but not the US) progress continues, tending to reduce their price relative to goods that are less easily traded internationally, such as medical services and education, and relative to prices with a higher material content and lower skill content, such as food and fuel.  So the billion prices project probably honestly under estimates inflation, due to innate bias in what it follows, while the BLS, which attempts to follow everything, is apt to look too hard for rationalizations to interpret prices as falling, and not hard enough for prices rising. The continuous commodities index indicates sixty percent inflation per year, which is apt to make one worry about hyperinflation. Recollect that the early stages of hyperinflation do not hit everything at the same time. Real estate is the last to rise, urgent necessities the first.

An example of dubious hedonic adjustment by the BLS is that the BLS tells us that washing machines have become much better, even though it is obvious that they are not washing clothes as well as they used to, nor lasting as long as they used to, an anecdotal recollection confirmed by consumer reports testing.

The US is getting dirtier and shabbier, the cars are smaller and less powerful, and the tallest building in the US was built in 1972, even though computers are getting more powerful, and internet connections faster, thus uniformly positive hedonic adjustment looks distinctly suspicious.  While positive hedonic adjustment for computers is fair enough, there should be broad categories where hedonic adjustment is stable or going downwards, and there are not. Or better still, they just should not attempt to do hedonic adjustment, because it is impossible to do honestly.

There are parts of the world that look the way we thought 2010 would look back in 1972.  The US, on the other hand, really does not look as if hedonic adjustments should always be positive over the past forty years.  As in Cuba and North Korea, the buildings in the US are getting older and shabbier.

Here is what 2010 was supposed to look like, when were looking forward to 2010 from 1970:

What 2010 was supposed to look like

Marina Bay Sands hotel

You will notice a couple of other futuristic looking buildings in the same photo, and in different views of the same hotel, I see a third futuristic looking structure, though Marina Bay Sands hotel is the biggest and most science fictional of them all.  Singapore, by and large, looks the way 2010 was supposed to look like:  Clean, shiny, and science fictional.

That thing on top of the hotel, the Skypark, is not merely a decoration to look sci-fi.  It is a gigantic swimming pool, indeed an imitation island, with a view.  So that guests can swim, and still see the view, the swimming pool has no visible wall holding the water in:

infinity pool

That is what a 2010 swimming pool should look like

Due to the curve in the wall, you can see in the distant part of the photo the hidden gear that holds the water in The invisible wall ensures that the guests get the best possible view, and supports the illusion of being on a tropical island in a limitless ocean.

If the US look liked Singapore, then I would believe it when the BLS gave everything a positive hedonic adjustment. But the fact is the US is just getting dirtier and shabbier. The US is still cleaner and shinier than Europe, but the US today just does not look like a society where everything deserves a positive hedonic adjustment over time.

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17 Responses to “billion prices inflation estimate”

  1. Alrenous says:

    The stock market grows, long term, at an average just over 12% a year.

    The average profit of all businesses is in the region of 2%.

    Average real GDP growth is ~2% and average real debasement is ~10% and these numbers have been stable for decades.

    The problem with things like billion prices is that they don’t measure debasement. They include deflation due to efficiency gains, which means that, roughly speaking, internet prices are dropping ~7% a year but debasement is completely wiping out those gains.

    _

    It looks like that swimming pool is basically a giant fountain. I wonder what they do in harsh weather?

    As I’m not in Singapore, I can’t check whether that hotel is a white whale or not. Admittedly, the US can’t even make good white whales anymore, but it is as likely that the debt incurred during construction will never be repaid as it is likely that Singapore could actually afford that hotel.

    Tokyo is also quite impressive, but not because it can afford to be. It’s wasteful and Japan is rapidly running out of things to waste.

    • jim says:

      it is as likely that the debt incurred during construction will never be repaid as it is likely that Singapore could actually afford that hotel.

      I have heard, but have not personally verified, that the reason that Singapore banks were unaffected by the financial crisis was impeccable financial virtue – that Singaporean bankers resemble Ebenezer Scrooge and Henry F Potter, and responded to all financial innovations with “Bah, humbug!”.

      “They don’t do things like lending 120 percent of the value of a property to people without a job, and they don’t do stupid things in the derivatives markets and proprietary trading.”

      The casino was planned to make one billion a year annual profit. No profit reports as yet. But to just walk into the casino, before one makes any bets and starts losing money, costs about a hundred dollars, to keep the low rollers away. Allegedly they have twenty five thousand casino visitors a day, indicating one billion dollars a year in entrance fees alone, even if the gamblers were to lose nothing and the house to win nothing, so look likely to exceed their planned profits. Of course they could be lying to avoid bankers calling in their debts, but they are claiming to be making money.

      • Alrenous says:

        Lately financial ‘innovations’ have been code for ‘milk the Fed more.’

        ‘Course Canada mostly dodged the bullet as well. Our banks are hardly impeccable, just not completely insane.

        -

        That profitability is pretty impressive, and the numbers sound reasonable. (How do I know? Meh, I just roll with it because I keep being right… Also, they can only lie for so long, which means they usually don’t and we’ll find out soon enough if we’re wrong.)

        Lately, the US seems incapable of concentrating resources that way. A lot of rich Singaporeans/travellers are basically subsidizing that hotel. And, presumably most of them don’t become poor in the process, but remain rich.

        The rich in the US apparently all give their cash to Obama.

        Actually, that is probably much less of a joke than I thought. Singapore doesn’t have politics. Their richies aren’t dropping all their spending money on lobbying,* and have to find actual useful ways to fill their time.

        *(Also, hilariously ineffective charities.)

        • jim says:

          “Concentrating resources” implies a pharaonic system where a few gigantic fascist monuments are built by filthy peasants amidst a million peasant huts built of mud. But Singapore is all shiny. This building is shinier than the rest of them, but not so shiny as to be out of place The whole place looks twenty first century, while the US does not. It is hard to say to what extent this is because the government is fascist, and to what extent it is because the government is libertarian. Mencius, of course, would argue fascism.

          • Alrenous says:

            I imply deliberately.

            That one trade-hub city can afford to be 21st century does not imply that any larger group can afford the same, though it is still very impressive that Singapore can legitimately afford it at all.

            If that hotel didn’t represent a concentration of resources, then roughly speaking all of its clientele would also have wall-less pools on the roofs of their “Who needs structural support?” houses, give or take economies of scale. (AKA “materials science is awesome” houses.) This is true of any impressive edifice – to be impressive, it has to be unaffordable by those it impresses.

            Similarly, are there enough richies in the world to support two such hotels? If America’s could stop dropping 35K on Obama dinners, and spent it on travel instead, could this Singapore company put one up in Atlanta or something? Well…maybe. The issue’s complex.
            However, if not, it would mean that resources were being concentrated in Singapore, or else that hotel wouldn’t be affordable.

            And, innovation hasn’t stopped in the US, it just isn’t in building design. It’s in politics, sophistry, self-deception, and rent-seeking. Our 21st century sophistry is seriously amazing. Even the lay American is capable of startling feats of linguistic trickery. ‘Course that means I find better logic floating in the toilet, but gotta give credit where it’s due. The way the Party follows patterns of misrule at least as old as Rome and still manages to credibly claim to be New? To still claim Progress is being Made? Such craftsmanship!

          • jim says:

            That one trade-hub city can afford to be 21st century does not imply that any larger group can afford the same

            New York is ten times the trade-hub city that Singapore is, and not only does it not look 21 century, much of it is so devastated by ancient wear and tear that it looks like it has been bombed, and the parts that have actually been bombed have not been replaced.

            This is true of any impressive edifice – to be impressive, it has to be unaffordable by those it impresses.

            Most of Singapore is impressive, lots of buildings try to stand out and attract attention, so to be really impressive in Singapore, have to up the ante. Singapore looks a little bit like the Vegas strip would look if they had more taste and more money. To be impressive in New York, all you need a big building with a recent paint job and a wash, and to repair the bits that are falling apart. Some of the trashiness of the Vegas strip is that they are going overboard to catch the eye, while Singapore is more into restrained elegance, but a big part of the trashiness of the Vegas strip is that they are trying to catch the eye using cheap lo-tech. The Marina Bay Hotel sky pool in Singapore is conspicuous consumption sustained by genuine high technology that is genuinely difficult to accomplish, while in Vegas you have the conspicuous imitation of consumption and the imitation of high technology by lots of neon.

            Similarly, are there enough richies in the world to support two such hotels? If America’s could stop dropping 35K on Obama dinners, and spent it on travel instead, could this Singapore company put one up in Atlanta or something?

            Observe that the tallest building in the US was built in 1972. Has real estate in big cities become cheaper? We can’t go to the moon any more, and we can’t build big buildings any more. If we could still build big buildings, the price of real estate in New York would result in us actually building big buildings.

            The hotel impresses by impressive engineering, just as the US impressed by sending a man to the moon. Today, engineering is low status in the US, so being low status, does not get done well. Reading Feynman’s account of the Challenger disaster, those who knew the Challenger was going to explode, lacked the authority and prestige to get things done right.

          • Alrenous says:

            The moon landing is a bad example. It was obviously a complete waste. It couldn’t have been market funded because there’s no return.

            The tallest building thing I will buy.

            New York is not ten times the trade hub. London has New York beat in exchanging foreign currencies and the World Bank ranked Singapore #1 in logistics in 2007.

            Also problematic, Tokyo has Singapore beat in forex. Tokyo looks fairly shiny. Tokyo’s shininess is almost entirely funded by government debt it never intends to repay. Again, no return. Their very nice light rail systems are all heavily subsidized, for example.

            This pattern is why I’m so impressed to see Singapore build these things and actually get a return.

            Offtopic, but I found supporting evidence that Singapore banks are run competently. Their Monetary Authority’s report actually has a maturity transformation section. http://www.mas.gov.sg/about_us/annual_reports/annual20052006/Index_J/Section%20J%20156.pdf I won’t vouch for the numbers, but measurement means problems can get fixed, if they exist.

            I also just found out that the hotel’s developer is American. It is very, very interesting that they had to have it built in Singapore by a Singaporean construction company. (As opposed to winning a bid elsewhere.) Further, the design was by a jewish member of the Canadian Architectural Institute. The engineering was British.

            All of which is to say you need to very, very careful with that ‘can’t.’ It is true that America isn’t building cool shit. But which step along the way does the ‘can’t’ actually come up?

            Tokyo has been shiny but likely to stop now that the tsunami has got the ball rolling. No return means they won’t be able to afford maintenance.

            I would consider this the null hypothesis on New York. Government-backed building followed by no maintenance because there’s no return. (Partially due to terrible regulatory and bureaucratic burden.) For example, the Statue is very impressive. But doesn’t do anything – it’s a pure money sink. Tokyo tower is very impressive. But a money sink. Tokyo won’t ever look bombed out because they have a sane immigration policy, but the paint will peel.

            That hotel has return. But even still, it’s an open question as to how many of those the world can support. Also important, how many of those could a low-parasite-load version of our world support?

          • jim says:

            All of which is to say you need to very, very careful with that ‘can’t

            We retreated from space not because the umpteenth visit to the moon was pointless and boring, but because the Challenger fell out of the sky.

            Recall why the Challenger fell out of the sky? The guys who knew that it was likely to fall out of the sky had no power and prestige, so could not address the problem. The correct cure for the problem would have been to use a silicone O ring as everyone else does, but to change the O ring would have involved struggling through an unfathomable bureaucracy full of morons.

            Similarly, if you tried to build a sky island (the structure on top of the Sands Hotel in Singapore) in the US, it would fall out of the sky.

            I was in Informix shortly before it collapsed. I left two weeks before the final collapse. The company was run by a techie, but in between the management and the engineers was a layer of matrix management, mostly women with degrees in communications and such like, who were busy articulating goals, defining schedules, outsourcing tasks, formulating strategic visions, constructing PERT charts, and doing power deals. They demonstrated their superior skills in project management by creating a PERT chart two meters wide and thirty meters long, and every little box on the chart revealed that their supposedly vast skills in project management were accompanied by total incomprehension of software engineering. They would outsource some crucial part of the product without defining any meaningful acceptance criteria, indeed they completely lacked any capacity to articulate or comprehend meaningful acceptance criteria. The contractor would announce “finished” even though there was total incompatibility between the inhouse part of the product and the outsourced part of the product. There was no compatibility test suite, and no one with the relevant knowledge to create such a test suite, since the interface between the people producing the product inhouse and the people producing the outsourced parts of the product was entirely project management people who could not use the product, nor understand how it worked, nor what was required to create it. People capable of asking questions like “What the #@*& is this supposed to do?” lacked authority to ask such questions, just as in the challenger disaster, people capable of knowing why they should have used a silicone o-ring lacked authority to get a silicone o-ring.

            The Informix software did not work, and if the sky island was built the way Informix software was being built, (elaborately detailed project management by people who lacked any relevant skills in the engineering needed to hold it up in the sky) it would fall out of the sky.

            If Sands tried to build the sky island in the US, they would need a construction company in which power was in the hands of those with the necessary connections to regulatory authority, and such people would not be capable of building the sky island. They would instead have communications degrees and expertise in PERT charts, matrix management, and power lunches.

          • Alrenous says:

            I’ll agree with all of that.

            Except, we would have had to retreat from space anyway when the money ran out. More specifically, when the wealth ran out. Are the shuttles still grounded because NASA can’t afford maintenance, even the half-ass maintenance their matrix management requires, or did they finally fix them up?

            Certainly, politicians can and often do try to fill bottomless holes with tax dollars, but ultimately it has to take physical form, which requires consuming real wealth. No matter how many bills they print, losing ventures run out of stuff. (Turns out ‘reusable’ doesn’t mean ‘economic,’ for example.)

            -

            Informix sounds like a sublime example of skilled rent-seeking. These people are really devoted to their craft. Shame rent-seeking is negative sum.

          • jim says:

            Informix sounds like a sublime example of skilled rent-seeking.

            My analysis is somewhat more complex. Informix had a thundering herd of programmers, who, for the most part, were not the best. To produce a product required coordination. So on the face of it, need a bunch of people with expertise in communications and project management and pert charts to manage them. Since engineering is low status, they figured they needed neither good engineers, nor management that understood engineering.

            So what would happen in practice is that task X would be subdivided into task Xa, to be done by A, task Xb, to be done by B, and task Xc, to be done by C. Tasks Xa, Xb, and Xc would be completed on schedule, and yet, strange to report, task X was not in fact completed, even though the PERT chart said it was completed. Since obviously this could not be, it was proclaimed completed, milestone met, even though it was not in fact completed.

            The major hard problem of engineering is to divide an engineering task into smaller engineering subtasks. Non engineering management is simply incapable of doing this, for obvious reasons, so non engineering management really does not work, resulting in pointy haired boss syndrome. If technology is low status, high tech will not be accomplished.

            As the communist regimes demonstrated, technology is not sufficient for a wealthy and prosperous society, but it is necessary. If technology is low status, will not be accomplished. If government, and interfacing with government (that is to say, the human resources department) is high status, engineering will be low status, Challenger will fall out of the sky, and the Sky Island will not even be attempted. The sky island impresses because it is a genuinely difficult engineering feat. That they chose to impress in this fashion, reflects a society where technology is high status.

            Recall the challenger inquiry. The video showed flame coming out of the wrong place on the booster. Discovering what went wrong turned out to be simply a matter of asking the chief engineer of the team who built the booster what went wrong. Feynman proceeded to demonstrate that the material that was used to build the o-ring was unsuitable for o-rings. But because the engineers of the team that built the booster were so far down the status pole, finding out what went wrong akin to finding a needle in a hay stack.

            It had taken many years of work, and umpteen million dollars, to qualify the material for the o-ring. It took Feyman ten minutes, and a couple of dollars worth of equipment, to disqualify the material.

            In the lead up to the challenger disaster, numerous engineers issued findings that the joint was unacceptable, and needed to be redesigned. They were blown off by management, in large part management that had absolutely no idea what they were talking about.

            Management concluded that it was safe, because in previous launches the o-ring had not burned all the way through – but an o-ring is not supposed to burn at all. That the thing tended to catch fire was an indication of something dreadfully wrong, of extremely serious and menacing malfunction. The management decision that partial burn was acceptable was a bad engineering decision, an engineering decision made by people who lacked the relevant engineering skills to make it, an obviously incompetent decision.

            The guy who decided that it was OK for an o-ring to burn was Lawrence Mulloy, who was an engineer in only in the sense of being an engineering manager. His doctoral study was in public administration. He had a BS in engineering, a masters in administration, and some post doc in public administration, but had absolutely zero practical experience of engineering.

    • jim says:

      Average real GDP growth is ~2% and average real debasement is ~10% and these numbers have been stable for decades.

      Hard to measure GDP growth, because if it is actually growing, what people consume is changing. Something, however, has not been stable for decades, since adult male work force participation has been dropping steadily and massively, and electricity use per capita seems to have peaked. On the other hand, cars per head do indicate steady GDP growth.

  2. [...] “Here is what 2010 was supposed to look like“ [...]

  3. Occupant says:

    Hu Jintao was trained as an hydraulic engineer, Premier Wen Jiabao studied geomechanics. Most of China’s Politburo have engineering backgrounds.

    That appears to be changing, however.

    “Of the eight fastest-rising young Politburo stars, none got their highest degree in engineering. Instead, their educational backgrounds—defined by the highest degree attained—include economics, history, management, journalism, business, and law (three have legal training).”

    http://www.newsweek.com/2009/09/07/right-brain.html

    Is this the beginning of the end for China?

    • Occupant says:

      Related: 108 Giant Chinese Infrastructure Projects That Are Reshaping The World

      http://www.businessinsider.com/giant-chinese-infrastructure-projects-2011-6#

      • jim says:

        Skills in economics and business will perhaps tell them which of these projects are worth doing, and which are white elephants, something the Chinese government is notoriously poor at. It will be a while before engineers are so far down the totem pole that they can no longer do these projects.

        History, journalism, and some extent law, are however classic recreational do nothing degrees that the not so bright children of the elite take because they have no need to be productive to obtain highly paid jobs. “Management” sounds like they are teaching something useful, but in practice cannot be taught, so just another excuse for children of the elite to hang out with other children of the elite at party U.

        I have been reading the challenger inquiry. It seems that Lawrence Mulloy had been given chapter and verse as to why the Challenger was going to explode, a detailed engineering account. Low temperature means a less resilient o-ring. Less resilient o-ring, fails to seal, flames blast over it, burning it out.

        But, says Mulloy to Lund, the secondary o-ring will save the day.

        But, says Lund to Mulloy, the secondary o-ring does not actually work, because the flange flexes too far. One hundred milliseconds after the primary o-ring is burnt through, flexing metal will open a gap in the secondary o-ring, and then the Challenger will be destroyed with great loss of life.

        Mulloy, however, finds this argument incomprehensible. He did not understand it, therefore the argument is false. Cold, Mulloy says, has nothing to do with it, and you cannot altogether prove that the flexing is too great for the secondary o-ring.

        Mulloy tells us:

        I found this conclusion without basis and I challenged its logic.

        Mulloy has two counter arguments to Lund: It was not proven, Mulloy tells us, that cold prevents the o-ring from working (that was the point of Feynman’s experiment, to prove cold did indeed render the o-rings dysfunctional), and it was not proven, Mulloy tells us, that flange opens too far for the secondary o-ring to maintain a seal.

        Regardless of whether or not the flexing was too great for the secondary o-ring, if the primary o-ring was too cold to seal, the secondary o-ring would also be too cold to seal. In retrospect, seems obvious to me, and I expect it seems obvious to you, and it was obvious enough in prospect to Lund. Mulloy, however, failed to follow.

        The blame gets diffused around. Morton Thiokol’s management yielded to Mulloy. Now if Morton Thiokol’s management had stuck to their guns, and backed their engineer all the way, probably Mulloy would have yielded and the the flight would have been cancelled. And probably they would have lost their jobs.

  4. Fake Herozg says:

    Jim,

    I really like your blog (I’ve been coming here from Foseti). I’m going to add you to my blogroll.

    I’m also going to send this post to my goldbug friend who has been warning me of hyperinflation for the past couple of years now — I always argue with him about inflation measures and whether or not we can ‘trust’ the BLS (he doesn’t and uses “ShadowStats”; I take the position that the BLS does the best they can and hedonic adjustments, among others, make sense).

    I do have to register disagreement with your statement that the U.S. is getting “dirtier and shabbier”. I would make the case that many big cities, especially my beloved Chicago, got cleaner and more beautiful over the past 30 or so years:

    http://featuresblogs.chicagotribune.com/theskyline/2011/04/chicago-that-shape-shifting-town-chicago-from-the-sky-captures-25-years-of-dramatic-transformation-w.html

    Also, think of New York and what Giuliani did there and also the rebirth of many downtown cores in our older big cities. Sure, the rust belt is still suffering (can anyone say Detroit?) and certain big city neighborhoods are still “shabby and dirty” even here in Chicago, but you and I both know the reason for a lot of that suffering and it is going to be difficult to deal with racial issues in America whatever the timeframe you are talking about. There is still much to admire in America, even from an ancedotal perspective — all is not lost!

    • jim says:

      Well I am from California, which definitely has become shabbier and dirtier. Coming from a state that was and is going broke might give me an unrepresentative impression. The racial transformation of California is certainly part of the problem, but on the other hand, you cannot blame the infamous dog poop statue in downtown San Jose on the racial transformation. That one is the bad taste and corruption of our lily white elite, the elite that Murray and Hernstein famously told us was the cognitive elite – though the statue causes me to doubt their taste, Paul Krugman is not very bright, and Ward Churchill well below average IQ. San Francisco has not undergone a racial transformation, but nonetheless could do with a wash and some paint.

      Rudy Giuliani restored order in New York, running petty criminals off the streets, preventing graffiti, and so forth, but he conspicuously arrested various rich people on vague charges that were not actually wrong doing, just being rich, and ran them through the perp walk, while appointing numerous low lifes to high office on the basis of family connections This created an economic environment were people do not in fact do maintenance on New York buildings – recall Park 51, the building that became the victory mosque. Damaged the 9/11 attack, no one ever got around to repairing it. Last I heard, there were still bits of dead people in it. That definitely counts as New York becoming shabbier and dirtier, even though he took care of the graffiti artists.

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