THE ECONOMIST: Of debt, deflation and denial

The Economist ^ | October 11, 2002 | The Economist

[ReadMyMind]

Product enhancement creep meets psychology....Here's a thought that occurs to me when you describe the Boskin Commission.

To the consumer, it is still a color TV. Even though it has more features, it is still worth to the consumer the same as a less capable color TV in 1970. The consumer in 1970 feels just as good about his purchase as the consumer in 2002, even though the consumer in 2002 would not feel very good spending any amount of money on a 1970 model TV (except for some strange collectors among us).

Does this make sense? I look at it like I see the $3,000 PC. I feel good buying a $3,000 PC about every 4 years. Same amount of money, same feeling of having a new more capable machine, even though, objectively, the last $3,000 machine I bought is like 10,000 times more capable than the IBM PC with 64Kb RAM and dual floppy drives and a CGA monitor that I bought for $3,000 in 1984.

Strange thing, value.

[IncPen]

It is explained by continuing advances in technological capability (making more smaller transistors for the same amount of money or less).

We agree.

I'm referring to the fact that you can now spend less than $5,000 and get a computer that is more capable than a 1980 mainframe costing $10,000,000 or more.

See above.

What's your question?

[ReadMyMind]

Well, it goes back to my original question. How does deflation (which seems to be viewed as something bad) differ from increasing bang-for-buck (which, at least in computers is good). I guess I don't understand your answer.

[babble-on]

yes and value is especially elusive when you are talking about something that is neither a necessity nor a capital good, like a PC for home use or a color TV. The PC's available in the office today may really be worth a large multiple of what the one in 1983 was worth, because now it can run software capable of replacing a roomful of accountants, or can save money in other ways. But a TV, even one that gets 299 channels instead of the 4 we had when I was a kid, is still just the idiot box. It just takes longer today to figure out that there's nothing on.

[babble-on]

Deflation is a general drop in prices. It is bad for a leveraged society, because the hard assets are declining in value relative to the financial liabilities. It also has the insidious characteristic of delaying consumption. If prices are dropping 5% per year, you can afford a better car by simply waiting. That means that the level of economic activity is actually deterred by the price action itself.

Central banks will fight deflation by printing money via the banking system, but if the economic mood is bleak enough, as in Japan at present, even that won't work because even at zero interest rates, people won't borrow. But the product enhancements/bang for buck phenomenon actually result in CPI being OVER-stated. These things would actually be hidden deflation rather than measured deflation.

[IncPen]

Inflation is too much money chasing too few goods, and prices rise.

Deflation is the opposite, not enough money, so prices fall. The danger is what happened in Japan; a vicious circle.

In the case you're asking about, computers, there is demand because there is value, and the markets reward the efficiency (of technology, in this case).

Manufacturers would be concerned if, as in the case of the tools, they were being forced to sell essentially the same product that they did 30 years ago for the same (or less) money.

But in the case of computers, efficiencies in the factory coupled with demand-driven value (faster processors and drives, etc) allow the manufacturers to sell 'more for less'. But they're not losing anything because they're more efficient (note that overseas labor must be seen as an 'efficiency' also)

A case somewhat in point is on e i had personal experience with last weekend: I went to get a part for my McCulloch chainsaw and the repaor guy tells me that instead of making their tools more efficiently (or charging a premium for having a better product), they chased the cheaper brands right into the ground...

One anti-deflationary advantage the US had in recent year that's not often mentioned is thin inventories, another plus of technology. Just-in-time inventories mean that demand can be compensated for faster and losses minimized (glossed over, but you get the idea)

[Willie Green]

The world is still awash with excess capacity, in industries from telecoms and cars to airlines and banking. Until this is eliminated, downward pressure on inflation will persist.

"Excess capacity" being blamed again.
Who does this "economist" work for? The Sierra Club or Greenpeace?

[weikel]

I said the same thing on a previous thread to habs4ever he said I was nuts. There is more debt then actual currency if any disasters happen it could trigger bank causing the dissapearance of the funny money( ie money which doesn't have any real physical existence) created by the fractional banking system.

[hosepipe]

Ivan psssst, have you heard that:
" Economics is an entire scientific discipline of not knowing what you're talking about. " ...... -P.J. O'Rourke

[oldcomputerguy]

In essence yes.

We have "burned" about 7-8 Trillion in the stock markets in the last few years alone.

Large corporate bankruptcies of late have "burned" billions more of debt written off.

[oldcomputerguy]

This results in the removal of money from
the system. This then results in too many goods
chasing too little money or price deflation.

[Stefan Stackhouse]

Inflation is a supply of money that is increasing relative to the supply of goods. Deflation is a supply of money that is decreasing relative to the supply of goods. The decline in cost of a particular good due to improved technology or productivity just leaves more money available to purchase other goods, but this can occur in either an inflationary or deflationary monetary environment.

Neither inflation nor deflation is really good -- a stable supply of money is best for any economy, because it enables economic decisions to be made efficiently without having to factor in guesses about where the money supply is going.

[L_Von_Mises]

On deflation. I've noticed a couple of trends. Tools are getting cheaper and cheaper. A Milwaukee [a top-of-the-line American toolmaker] Hole-Hawg drill or Sawzall reciprocating saw cost less now than they did 30 years ago. You can buy lesser-quality tools for a fraction of what they cost thirty years ago.

That is more a reflection of rising productivity decreasing costs so they really are not the same goods. They are manufactured using different manufacturing processes, etc. Thirty years ago much of the manufacturing process was performed using manual machines and basic labor. Now the process is all pretty much automated, and the tolerances are better which makes products that perform better and last longer (at least the guts are better, the housings are now mostly plastic).

Now, the vegetable prices you mentioned are true price changes as they are the same commodity product. This year has been pretty bad for most crops - particularly grain. Coming off several years in a row of a glut of ag products you get a real noticable price differential.

[snopercod]

Thanks for the comment, Ludwig.

Being a "tool person" (the one who dies with the most tools wins), It seems like an amazing gift to Americans (who know how to use them) to sell us such inexpensive tools.

But I think productivity has it's limits. Find yourself a Harbor Freight catalog and browse thru those pages for a while. Then ask yourself how productive you would have to be to built a million candle power hand held spotlight with nicad batteries and sell it for $10. It simply can't be done in America. The batteries are worth much more than that (about $50).

But I digress. The availability of inexpensive tools of good quality presents a once-in-a-lifetime opportunity for the builders and creators of America. We can produce more buildings, furniture, airplanes, boats, etc. with less labor.

Oh yes, being old, I've built houses with handsaws and brace-and-bits. Chop saws and DeWalt battery drills are better!

[A. Pole]

The truck I bought in 1987 can be had for about the same $ amount today (though it's truly more if there has been deflation). The part that gets me is why does a cheeseburger and iced tea cost 5 bucks?

It looks to me that $5 for your meal went up because of inflation accumulated earlier. So in the real terms car prices are collapsing. Soon cheeseburgers will follow too or the restaurants will close.

[A. Pole]

I get tired of hearing about Japan's deflation being anything that any other country would have to worry about. Deflation is a symptom. The real problem is nationwide socialist corruption. In the 80's it was perfectly normal for a Japanese bank to create a child company and then loan the child company money for real estate which was overvalued anywhere from 10 to 1000 times with 0 intention of paying it back.

This is nonsense. I lived in a socialist country for many years and I assure you that there was no problem with deflation (or even with the inflation). The main problem were the shortages of non-basic goods and the corruption meant better access to them. For example if your friends were in the Party committee you could get subsidized appartment in a year instead of waiting five years or more. You paid the bribe and you could purchase the car in a few monts instead of waiting a couple of years etc ...

The cases you give are the examples of capitalist corruption. EVERY system is corruptible so do not put blame on socialism for all ills.