Hedonic adjustments

Britain’s productivity could be better than thought because officials may have underestimated the size of the telecoms industry. Advances in broadband and digital technology may not have been shown in GDP numbers by the Office for National Statistics, analysis suggests.

The work, instigated by the ONS after a review of economic data in 2016, found that inflation in telecommunications services may have been overstated by 90 per cent from 2010 to 2015.

The problem is that we want to adjust for quality/performance as well as just price. For that’s the true measure of inflation. It’s also a difficult thing to do.

The general US agreement is that they overstate inflation by 1 to 2.5% a year. Doesn’t sound like much but over the decades it sure as hell mounts up. I’d expect the UK overstatement to be less than that (amazingly, I think ONS better than Census etc over there) but still to exist. It’s also the explanation for “real wages static for 50 years” and the obvious evidence of reality that real incomes have risen.

My real reading of this would be something which I think comes from Feynman. When a number of clearly wrong no one does come out and prove that it should be radically different. Rather, we get a shuffle away from the wrong closer to the right, it taking a number of shuffles to get to reality.

11 comments on “Hedonic adjustments

  1. More haste, less speed: “When a number of clearly wrong no one does come out and prove that it should be radically different”

  2. Tim, you’re thinking of the Millikan oil drop experiment

    https://hsm.stackexchange.com/questions/2756/is-millikans-famous-oil-drop-experiment-a-fraud

    Richard Feynman wrote an essay called “Cargo Cult Science,” in which he pointed out:

    Millikan measured the charge on an electron by an experiment with falling oil drops, and got an answer which we now know not to be quite right. It’s a little bit off because he had the incorrect value for the viscosity of air. It’s interesting to look at the history of measurements of the charge of an electron, after Millikan. If you plot them as a function of time, you find that one is a little bit bigger than Millikan’s, and the next one’s a little bit bigger than that, and the next one’s a little bit bigger than that, until finally they settle down to a number which is higher.

    Why didn’t they discover the new number was higher right away? It’s a thing that scientists are ashamed of–this history–because it’s apparent that people did things like this: When they got a number that was too high above Millikan’s, they thought something must be wrong–and they would look for and find a reason why something might be wrong. When they got a number close to Millikan’s value they didn’t look so hard.

  3. Millikan is, or was, under suspicion of arbitrarily excluding some measurements he didn’t like. Some people claim to have cleared him of the charge, but I have no idea whether that was done on patriotic American grounds or on disinterested investigation. Does anyone here know? I mean “know” at some level beyond Wikipedia.

  4. “Why didn’t they discover the new number was higher right away? It’s a thing that scientists are ashamed of–this history–because it’s apparent that people did things like this: When they got a number that was too high above Millikan’s, they thought something must be wrong–and they would look for and find a reason why something might be wrong. When they got a number close to Millikan’s value they didn’t look so hard.”

    See climate models for the modern equivalent.

  5. BiND in climate science none of the models produces results that look anything like the other models. In climate science that doesn’t matter

  6. Yes, no Economist could have predicted that technology would improve the way we do things, versus totally change the things we elect to do; cellphones did not just improve the timing of car trips but obviated a lot of movement of people and goods.

    “Stagnant wages” in the US is a stock Republican campaign theme but, at whatever nominal cost, we are living better than 20 years ago. The business tax cuts and inducement of capital to return to the US have led to a flood of voluntary wage increases and even cash gifts; this spells inflation unless we accelerate deregulation to produce new things to buy and sop up some of this sloshing money. We were shielded against the obvious effects of Obama’s $10,000,000 million of new debt by the fact that high taxes rendered a lot of money unusable.

  7. Flip side outside US is that banks’ balance sheets have to shrink as US companies repatriate cash – assuming reported 4 trillion ‘cash’ mountain is all held on deposit – anyone care to guess extent of potentially material deflationary impact or am I barking up wrong tree?

    If not held on deposit then some serious asset sales ahead?

  8. BiB I suspect it depends on how many groups used the offshore money to finance operations in other countries in a tax-efficient way. In other words, profits are being parked offshore but the actual money might have flowed back to other subsidiaries in other places. Either more profits will have to flow in those groups or the intra-group loans have to be repaid

  9. Diogenes – agree some capital/cash will be held outside US for recycling into non-US business, but now US investment opportunities more competitive plus a lot of executives will have compensation related in some way or other to cash returned to shareholders…

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