Existence, Enhancement, CPI Bias, and Progress

Almost all economists agree that the official Consumer Price Index is biased upwards.  Two key flaws with the CPI: It imperfectly accounts for (a) quality improvements, and (b) new products.  The Boskin Commission famously estimated that the official annual CPI increase was over a percentage point too high. 

When you measure economic welfare over time, this seemingly academic issue has massive implications:  Year after year, real income rises by over 1% more than official figures claim.  If you overestimate CPI by 1.3 percentage points per year, then after 40 years real income will be 68% higher than you imagine.

In The Great Stagnation, Tyler tips his hat to this argument, then gives the standard response:

[M]ost fundamentally, growth rates are lower today than before 1973, no matter what exact numbers you settle on for the absolute living standard.  Even if the post-1973 era has a lot of unmeasured quality improvements, so does the pre-1973 era.

Perhaps sensing the tension between this standard response and the pessimistic thrust of his e-book*, Tyler immediately adds a much more original argument:

In fact, income measures are most likely to understate growth during times when a lot of new goods are introduced into the marketplace or made more widely available, such as during 1870-1973.  Thinking carefully about measurement biases probably means that earlier decades had even stronger growth, relative to what the diagram shows, compared to the post-1973 period.  It means that our recent relative performance is in reality even worse.

Earlier in the book, Tyler paved the way for this point by contrasting earlier life-altering inventions with subsequent petty tinkering:

We still drive cars, use refrigerators, and turn on the light switch, even if dimmers are more common these days… It makes my life only slightly better to have a larger refrigerator that makes ice in cubed or crushed form.

This admittedly sounds plausible at first.  But by and large, Tyler’s wrong.  Merely bringing new inventions into existence typically has little economic benefit; the subsequent enhancement is where most of the value lies.  This is obviously true for the computer; I had a VIC20 in the early eighties that wasn’t even a workable word processor.  But the same holds for older inventions.

Take the car.  The earliest internal combustion cars, introduced in the late 19th century, were just toys for millionaires.  It took decades of gradual improvements to make them a viable form of transportation, and decades more to make them reasonably reliable and safe.  The same goes for airplanes.  Thirty years after the Wright brothers, trains and ships dominated long-distance travel.  Planes were still too bumpy and dangerous for the general public to stomach.

Or take television.  The picture and sound quality were horrible for decades.  Even in the Eighties, I had to hold the antenna with my hand or foot just to watch cartoons.  But the deeper problem was the content – three or four channels, all insipid.  As a great cultural critic wrote back in 1998:

Post-war American television, by and large, has not provided cultural riches.  Television programs entertain us and present appealing characters, but a canonic list of the best television programs would not, in this author’s opinion, stand up to a comparable list from music, painting, or literature… I concur with Robert Hughes, who notes that several hours of American television provide the best argument against market-supplied culture.

Fifty years after its introduction, television had yet to impress.  But look what’s happened since 1998!  DVRs, HDTV, The Sopranos, Battlestar Galactica, Arrested Development, Dexter, and Big Love are just the beginning.  Gradual improvements in technology and story-telling finally won over even the aforementioned cultural critic, who of course is none other than Tyler Cowen himself.

The lesson: Contrary to Tyler, it is during periods of technological consolidation that official CPI numbers understate progress the most.  Flying home for the holidays or watching the latest episode of Glee isn’t as awe-inspiring as hearing about the first flight or watching television for the first time.  But it’s the cumulative improvements that have transformed mere ideas into concrete progress.

* What kind of a pessimist says, “While progress has been slowing down, it’s been even faster than you think for over a century”?

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