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The Great TV Price Inflation Scam

Economics / Inflation Apr 12, 2008 - 02:28 AM GMT

By: Tim_Iacono

Economics

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.

TV Prices

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?

By Tim Iacono
Email : mailto:tim@iaconoresearch.com
http://www.iaconoresearch.com
http://themessthatgreenspanmade.blogspot.com/

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

Copyright © 2008 Iacono Research, LLC - All Rights Reserved

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