Tuesday, May 6, 2014

Stuff cheap, people expensive

Source: New York Times
This nice graph appeared in the New York Times (link). Of course they had to ruin it with a rant about inequality.

The deeper point is that things are getting cheaper and cheaper, and people -- services provided with their expertise -- are getting more and more expensive.

On the back of my mind: What does the economy look like when goods are essentially free, and all value consists of paying other people for their expertise?

I explored this a little in covering Larry Summers' Martin Feldstein speech.  But it remains, I think, an important question for deep microeconomic research.

In just about any transaction you name, from electronics to fashion to health care, most of the value comes from the expertise of the seller, not the physical good.

The characteristics of the production, value, and sale of expertise are completely different from those of the standard widget.  Just the measurement of GDP and inflation in such a world raise lots of open questions.

33 comments:

  1. Ruin?? What's your point about inequality, professor? Without sarcasm, or Krugman, etc. Is it a problem? If so, is it getting worse?

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    1. I don't speak for the professor, but my impression was that his point isn't actually about inequality--it's about the New York Times, which published an interesting graph and missed the opportunity to discuss what is interesting and important in it due to its fixation on inequality. Inequality is important--but it's not the only thing that's important.

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    2. Professor Cochrane was just saying that NYT again points everything back to the existence of (the worsening) of inequality, illustrated by a collection of anecdotes (with the exception of the graph extracted, of course). Then offer some seemingly obvious "solutions". It does not (try to) lead a discussion or offer some kind of insights on the mechanics of this arguably unfortunate consequence. Nor does it help to clear the picture for potential thoughtful and probably effective policy responses. But again, that business lives on readership, subscriptions, which are not necessarily correlated with being constructive and scientific.

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    3. Well put anonymous #3. Yes, inequality is interesting. But it's not the only thing, and not every phenomenon is most interesting for what it says about inequality

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  2. How could the cost of televisions have fallen more than 100%?

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    1. Log scale, I presume. Price fell by e^-1. It reflects some aggressive hedonic adjustment, see earlier post.

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    2. My understanding is that average nominal prices increased 23% between 2005 and 2014. The nominal prices of most things increased in that period, some over 23% (for example, college tuition) and others less than 23% (personal computers). And the nominal prices of a few things, in particular televisions, declined so in relation to a 23% increase they declined over 100%.

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    3. The image caption says most of the electronics cost decrease represents quality improvements. Even if the metric is just floating point operations per second, it still draws into question the validity of the graph. People are paying similar prices for phones and computers today as they were ten years ago, maybe more with all the additional services, most of which are automated.

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  3. The things represented by the red lines reflect stuff that can be manufactured abroad and imported into the US. The services represented by the green lines have not (yet) been able to benefit from the lower cost of foreign labor. So, perhaps the headline might read: US people expensive; non-US people cheap.

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    1. Some people cheap, some people expensive ... therefore ... um ... inequality.

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    2. Not a good explanation of anything tech. The people in China who assemble this stuff have become significantly more expensive over the past ten years while the cost of the stuff continues to plummet (and much of the manufacturing is increasingly automated anyway and coming back on shore). Robots cheap, people expensive is probably a better description of the next ten years.

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    3. Yep. And perhaps that is why you should consider free trade the greatest tool of all in eliminating inequality (unless of course you take a rather pedestrian and selfish view that equality should be measured by artificially and conveniently drawing geographical boundaries).

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  4. This is superficial.

    Have college professors seen a rise in pay commensurate with the tuition growth rate or are we paying for more administrators?

    Are health care expenses rising because doctors and nurses are paid better? Medicare has not raised fees commensurate with inflation for years (private insurance is now largely geared to Medicare fees). Hospitals have pared back nurse/patient ratios to dangerous levels.

    Food and beverage? Those waitresses at Olive Garden are killing it right?

    No, it's not people. At least, not useful people. Or if it's useful people, its foreign useful people as Vivian Darkbloom pointed out.

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  5. What does the economy look like when goods are essentially free,

    Food and clothing are less free than non-essentials. What would be more interesting is what are the changes in the percentages of these costs relative to incomes. You would also have to adjust this to look as a percentage for lower income groups - and then you have problems demarcating that. According to the article people at the bottom cannot save. This would suggest that real incomes for this group are falling, but prices of essentials are not.

    People, rightly, seem to focus a lot on a basis question in political science 101 - what matters absolute or relative wealth? Well they both matter. If a large group feels they are not part of a social group and have been disenfranchised and another group has a monopoly on opportunities and resources, it has been a big factor behind some of the more unpleasant episodes in history. We might yet see Goldman Sachs partners taken to the guillotines - although may be that would not be quite so unpleasant.

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    1. It would certainly be helpful in redistributing the variance around, and perhaps also reducing, mean income.

      I would like to know how energy costs fare in this graph.

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  6. In my perfect automaton future, goods become arbitrarily cheap, excepting capital robot goods, but jobs become just as arbitrarily scarce. The only expertise left belongs to those who can invent and repair robots.

    So I see cars getting cheaper, but mechanics and factory workers getting relatively poorer. Meanwhile robotic engineers start earning a larger share of the pie...but what this has to do with healthcare I just do not get...must be a temporary bubble from the wealth effects people find themselves gaining before they also are replaced by robots.

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  7. “Larry Summers' Martin Feldstein speech”?!?!? Those two are from Harvard, which is a guarantee of poor quality. I’d rather read Micky Mouse’s Donald Duck speech.

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  8. "Just the measurement of GDP and inflation in such a world raise lots of open questions."

    I agree with this sentiment.

    Then, why the fixation on a 2 percent inflation ceiling (in the case of the Fed, ECB) or the sentiments of many others that "inflation should be zero" (the old BoJ and many pundits in the USA)?

    Would not a better goal be robust economic growth, as long as inflation (as measured) is somewhere in low digits?

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  9. Is this Baumol's cost disease?

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    1. My recollection is Baumol said the costs of things requiring more human involvement naturally rise relative to those things requiring less. So, generally the cost services provided by people will eat up more and more of our income compared to goods. He included government services. The chart certainly seems consistent with this.

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    2. Yes, this is Baumol's cost disease. See this article from The New Yorker, in particular its last paragraph: http://www.newyorker.com/archive/2003/07/07/030707ta_talk_surowiecki

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  10. Physical things getting cheaper relative to wages is pretty much the definition of rising real incomes - which I think we universally agree is a good thing.

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  11. Check out what kind of growth there has been in "people" in health care.
    http://authenticmedicine.com/wp-content/uploads/2012/07/483994_447875728578712_1927873976_n.jpg

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  12. Brings to mind Bryan Caplan's musings on a "pure service economy":
    http://econfaculty.gmu.edu/bcaplan/service

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  13. This makes me think about the relationship of inflation to inequality. Seems to me decades ago, when we were all more equal, inflation used to make TVs more expensive while simultaneously shrinking rich folks bank accounts. Perhaps inflation is the great equalizer?
    Peter

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  14. I think cheap things, expensive people is only half the story. The services that have risen in cost the most are the ones where state subsidy and regulation are heaviest: College is notorious for it's aggressive price discrimination and massive subsidies that result in serious inflation - health care costs are soaring for similar reasons. And child care has seen increases in regulation and minimum 'standards' that have driven its costs upwards. You can even see the 'regulatory' premium on the goods side: housing costs have stayed relatively high in part because of land use regulation that limits supplies of new housing and unregulated hardware costs have fallen much faster than regulated wireless services have.

    In every case government's meddling and manipulation has been a key contributor to the excessive increase in services costs. There's no reason that lectures and paper grading should rise in cost faster than car repair or a restaurant meal, it's just that colleges are much better rent seekers. This differential between the 'have' sectors who have state protected cartels and subsidies and the 'have not' sectors exposed to international competition is a major contributor to income inequality. (Sorry, John I couldn't resist bringing IE up).

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    1. This sounded right to me till I thought twice about college education and realized that at the high-quality end (top 150 colleges and universities) it *is* exposed to international competition, and thriving because of it. Moreover, it's hard to start a foreign college to undercut American ones because you have to hire professors who can and will quit to work for more attractive US jobs.
      On the other hand, the massive low end of post-secondary education may well be driven by government loan subsidies and direct funding.

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  15. Tradeables cheap, non-tradeables expensive.

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  16. I think this post misses the point a bit. I agree that in real terms goods have gotten cheaper and people more expensive, but how much of this is due to the quality adjustments being included in the data series? I don't know about anyone else but the last 3 TV's I've purchased for my living room have all cost ~$800. The latest one is far superior but it still cost the same in nominal terms and all 3 have provided me with roughly the same quality of life. In my opinion we should be focusing on how much a given amount of "utility" costs. I'll pay more for expertise because it increases my utility but I still spend the same in nominal terms for the TV viewing experience. This is why middle / lower class feels pinched more and more. Baseline goods still require a given outlay and every service people acquire costs more.

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  17. This blog sheds light to a reality that we are exposed to today. John Cochrane’s argument about the constant increase in value of an expertise of the seller and the declining costs of physical goods raises concerns as to why such phenomenon occurs, and how it impacts the economy. As a college student, the weight of college tuitions that continuously becomes substantial to endure, I am completely aware of the excessive increase in service costs. I believe that technological progressions, alongside the improvement of human capital, are notable contributors of the increase in demands of value of expertise of the seller. In my opinion, as the market becomes more challenging and difficult to thrive in, most firms incorporate the use of technology in developing their products; employers would invest in expensive physical equipment and human capital (prospective applicants with technological knowledge). As a result, it contributes to the overall increase in expertise services.

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  18. I definitely agree that the things in are getting cheaper and the services of people are getting more expensive. It is obvious where people get the idea of inequality between people of different expertise knowledge. Now people are spending money on people for their expertise rather than the actual good because of this mindset of self-interest. I have never really looked at the economy in the way that makes me think about items themselves being next to nothing compared to what people have to spend for the service of the provider. The economy is already heading in the direction of labor costing more than goods and it is going to keep heading in that direction. For example, berries grown with no upkeep would be les expensive than a berry bush that has been planted and maintained by a farmer. It is the cost of the labor behind making things that is where the real value of a product comes from. When people buy hand carved wood they are paying for the labor that went into the wood because the wood itself if probably a lot cheaper than the labor it took to hand carve it. The economy is all about open-ended questions that have a multitude of answers.

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  19. I agree with this article 100%. It makes sense for people doing services to charge more because time is money, and of course certain items can be created in bulk (maybe 100 pieces an hour) but time for one person is valuable. As a business women I spend 10-12 hours a day working to service people because I believe in high quality items. My time is very valuable and should not be paid less because machines could make it faster. Quality over quantity is what I believe. Less time= less money.

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  20. Do return to the "goods are free" economy idea. One thing I've noticed is that it isn't just info for shopping (on hi-low quality and goodness of fit to personal needs) that's increasingly valuable. It's also just knowing where things are. When goods are free, you buy a lot of them, and forget where you put them. One response is to buy only as needed--- and let the store (=Amazon) keep more inventory and keep track of where everything is. Thus, retailing services will be increasingly important.

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