Tuesday, January 31, 2012

D-Bood Deals

Don Boudreaux gives some useful counterpoints to Robert Reich's class war screed.

D-Bood clearly has this right. To review:

1. By most measures, real wages are up slightly since 1976. If anything, these measures understate the actual increase in consumption by a lot. How much did your hipster OWS kid's MacBook Pro cost in 1976? How about his iPad? How about his MP3 player? (Hint: infinity, infinity, infinity). Stuff has gotten WAY better, and cheaper at the same time. Attempts to control for hedonics, quality change, and innovation are notoriously difficult. How would you build Moore's Law into a CPI adjustment, when it implies prices of computer power are constantly falling at a rate of more than 25% per year? But these clearly lead toward understating the effective real wage increase. Even if I only have a minimum wage job, I can save up and buy an iPod. In 1976, I could not.

So, for example, here is the cost of a 1-gig hard drive (picture for RAM same dynamic):
(The vertical scale is not linear, so the fall is even more dramatic. This stuff is nearly free. Enjoy your capitalism!)

Check this RAM chart out. It even freaked me out a little bit, and I'm an optimist already. Wow, does RAM ever get cheap!

2. Health care benefits have soaked up real annual gains of 4% or more, on average. If you include total compensation, not just wages, workers have gotten huge gains. (Of course, this is a problem, but it is a DIFFERENT problem than the one pointed out by Dr. Reich.)

3. It really is absurd that people think wages have not gone up, for John Smith the worker, hired in 1976. He makes a LOT more now (though he may have lost his job, which is a DIFFERENT problem than the one pointed out by Dr. Reich). Wages rise with job tenure, they just do. John Smith makes pretty good money now. The new guy just being hired, sure, he doesn't make much more than John Smith did in 1976, adjusted for inflation. Not sure why that is surprising, or even bad.

(UPDATES:  a.  Joe Thacker is right.  Immigration and women entering the work force are huge factors.  b.  On the video on YouTube, a commenter said something so true and funny I peed myself:  "I agree with this guy but it looks like he took 3 hits of acid before doing the vid."  Yes, friends, it is true that D-Bood is likely to be cast as the psycho-murderer, not the RCMP hero.


John Thacker said...

Also note immigration. We've taken in a lot of really poor people from around the world. If you just measure people who were here before, wages have increased. And the immigrants are better off than where they came from.

Anonymous said...

I like the hard drive graph. But let's just note that a hard drive of a size thahert worked just find in 1980 would not function with today's software. The operating system, which on my old Kaypro CP/M machine took up a single 5.25" disk, now hogs a lot of space on the hard drive.... I do miss the good ol' days....

-- Old Fart

Anonymous said...

I am not a fan of hedonic adjustments. The problem I have is that it accounts well for improvements in the standard of living. But, in my opinion doesn't account well for the cost of living. In other words, if I saved a years salary in 1976 for my retirement I do not believe the cpi accurately reflects how much a years retirement will cost me.

Cars are a lot better now what with air bags, mp3 players, and higher gas mileage. My standard of living may have gone up with a flat cpi in cars. But, I still can't buy a new car at 1976 prices. I basically have no choice but to buy the improvements. My cost of living has gone up. Hedonics would imply it hasn't because my car is "better".

I still want a measurement that tells me how much I will need for retirement. Not one that tells me the new phone I am buying is better then my old phone.

enoriverbend said...

@Anonymous (11:20):

To back up for a sec, for most of us, how much we will need for retirement actually has more to do with hedonic adjustments in our tastes than it does with hedonic adjustments in prices.

For one thing, many of us have a standard of living that is way in excess of what we had in '76. Speaking for myself, I had not yet developed an appreciation for fine wines, good food, or travel to exotic foreign destinations. Which is good, since I was making very close to minimum wage at the time. Any plans I would have made for retirement at that time probably consisted entirely of "hope I die before I get old" or irrational thoughts of winning the lottery.

This is why many retirement planners use a rule of thumb based on your current income or current spending habits. One may scoff at this primitive approach, but it is a better match in real life than many supposedly sophisticated techniques. Our desires, even our supposed "needs", rise with income, and most of the time the best that you can do is manage to throttle it back to 85% of your net income rather than 115%.

Josh Mc said...

I'm not so sure all those fancy devices and benefits end up going to the middle and working class though. They definitely don't go to the poor. That makes a bit of a difference.

Kindred Winecoff said...

Related to what John Thacker says, it's not just immigrants that we've integrated into the labor force. We've added a lot of other people since the 1960s:


John Thacker said...

Thanks for the kind words Munger, but it's John Thacker. :)

Josh Mc: You don't think that the poor have fancy devices? Actually, I'd argue that the fancy devices and benefits accrue more to the poor-- the poor today have electronics and fancy devices that only the middle class and wealthy had in 1970, as is well-established.

And the wealthy could always get music on demand, or clean clothes, or transportation. As Joseph Schumpeter put it in Capitalism, Socialism, and Democracy:
"Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. [...] [T]he capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.

Brandon said...

I would TOTALLY drop acid with Don Boudreaux!