In­fla­tion isn’t as low as we’ve been told

Baltimore Sun Sunday - - FRONT PAGE -

Last month, Fed Chair­man Jerome Pow­ell, af­ter prais­ing the health and vigor of the econ­omy, added that “in­fla­tion is low.” But is it? Un­for­tu­nately, our in­fla­tion num­bers are less than cred­i­ble. Here’s why.

The Bu­reau of La­bor Sta­tis­tics (BLS), which is­sues mea­sures like the Con­sumer Price In­dex (CPI) gaug­ing the change over time of the price of cer­tain goods, has put tremen­dous ef­forts into ad­just­ing for qual­i­ta­tive ad­vances, rec­og­niz­ing that many price in­creases re­flect prod­uct im­prove­ments, not just higher price tags.

Alas, qual­i­ta­tive ad­vance has an evil twin: qual­ity degra­da­tion, which is con­spic­u­ously ab­sent in most BLS cal­cu­la­tions, even though two forces — glob­al­iza­tion and an in­creas­ingly ser­vice-ori­ented econ­omy — strongly sug­gest that qual­ity degra­da­tion is ex­ten­sive and in­creas­ing.

Glob­al­iza­tion has very greatly in­ten­si­fied price com­pe­ti­tion, which sig­nif­i­cantly in­clines pro­duc­ers to­ward re­duc­tions in qual­ity (qual­ity in­vari­ably costs) that con­sumers of­ten only dis­cover, some­times trag­i­cally, af­ter the pur­chase. In­deed, Ja­pa­nese pro­duc­ers like Nis­san, Subaru, Kobe Steel, Mit­subishi Mo­tors and To­ray In­dus­tries, once icons of in­ter­na­tional qual­ity, have be­come dis­graced fallen an­gels af­ter var­i­ous scan­dals re­vealed sub­par prod­ucts.

Ex­plod­ing lap­tops and iPhones, de­fec­tive sleep­wear, un­re­li­able tires, risky toys, fire-prone space heaters and fake drugs have be­come com­mon­place to­day. But th­ese fail­ures are largely ig­nored in of­fi­cial mea­sures. The BLS, for ex­am­ple, ex­am­ines new au­to­mo­bile prices and ap­pro­pri­ately deducts higher costs as­so­ci­ated with new ca­pa­bil­i­ties (like built-in GPS, park­ing guid­ance, etc.) — so as to sep­a­rate im­prove­ment-driven price in­creases from real in­fla­tion. Yet, ex­cept­ing for re­duced ve­hi­cle war­ranties, there are no ad­just­ments for near ubiq­ui­tous au­to­mo­bile qual­ity degra­da­tion.

In May 2017, Ford and Fiat-Chrysler had ma­jor re­calls, dozens of parked BMWs ex­ploded into flames, and the De­part­ment of Jus­tice charged Fiat-Chrysler with cheat­ing on emis­sions, a de­lib­er­ate scheme la­beled “diesel-gate” the prior year when sim­i­lar tac­tics by Volk­swagon and Mit­subishi were ex­posed. Au­to­mo­bile re­calls have in­creased in 14 of the last 21 years, with num­ber of ve­hi­cles in­volved ris­ing every year since 2011. Hun­dreds (more likely thou­sands) have died from th­ese qual­ity fail­ures, and 2018 is cer­tain to set an­other dis­mal record. Yet nei­ther re­calls nor emis­sions fail­ures are any­where to be found in BLS cal­cu­la­tions.

To­day’s new homes of­ten have nar­rower drive­ways, uti­lize pressed wood rather than lum­ber, and are of­ten more fire prone. Con­struc­tion in gen­eral has been in­un­dated with coun­ter­feit ma­te­ri­als, to in­clude steel, fas­ten­ers, valves, pipes and cir­cuit break­ers. The tragic 2017 Lon­don fire that killed 80 peo­ple was due to in­ex­pen­sive ex­ter­nal pan­el­ing laden with com­bustible ma­te­ri­als.

De­spite mas­sive food re­calls — prod­ucts lead­ing to lis­te­ria and sal­mo­nella, bad poul­try, tainted ice cream, etc. — the BLS makes no food qual­ity ad­just­ments. NBC Nightly News has twice cau­tioned view­ers about on­line buy­ing, cit­ing a sur­vey which found 20 of 47 prod­ucts to be fake. Sadly, cheaper im­ports, which have mean­ing­fully held down U.S. prices, have been far less than meet the eye.

Ser­vice sec­tor qual­ity de­te­ri­o­ra­tion is sim­i­larly ram­pant. Tele­phone wait­ing times have be­come ag­o­niz­ingly frus­trat­ing. Fewer ro­bots and more hu­man op­er­a­tors would greatly help but would also raise busi­ness costs. The air­lines have be­come fly­ing cat­tle cars, with dis­tance be­tween rows fall­ing by 11 to 20 per­cent. While air fares are well cap­tured in CPI mea­sure­ments, to­day’s flights are as­tound­ingly treated as if they were equiv­a­lent to those of past years. Sim­i­larly, in June 2017, the Wash­ing­ton, D.C., tran­sit author­ity im­ple­mented both higher fares and re­duced ser­vices. The price in­creases are cap­tured, but the ser­vice re­duc­tions are not. Bank­ing ser­vices are also of­ten dis­ap­point­ing, with TD Bank’s 2013 ad­ver­tise­ment — “It’s time to bank hu­man again” — di­rected to­ward ob­vi­ous cus­tomer frus­tra­tions. Then there’s Wells Fargo, which af­ter al­ready pay­ing $185 mil­lion in fines, had fraud is­sues once again sur­face last March.

In medicine, hun­dreds of pro­ce­dures are price-com­pared over time. How­ever, wait­ing times for ap­point­ments for many med­i­cal spe­cial­ties have sig­nif­i­cantly risen. Nonethe­less, if a visit or pro­ce­dure costs the same as last year (but takes longer to ob­tain), of­fi­cially there is no in­fla­tion, rem­i­nis­cent of a pop­u­lar jest in the fa­mously low-qual­ity Soviet Union: “We have the best pre­na­tal care in the world, but the baby is six months old be­fore it is ever seen by a doc­tor.” And a 2016 Johns Hop­kins Uni­ver­sity study listed med­i­cal mis­takes as Amer­ica’s third-largest cat­e­gory of killers af­ter heart dis­ease and can­cer.

The BLS must ex­am­ine qual­ity degra­da­tion — the ele­phant in the room — as vig­or­ously as qual­ity im­prove­ments. With a more bal­anced ap­proach, we would likely find that in­fla­tion is not so low af­ter all. Don­ald L. Los­man (Los­mand@gmail.com) teaches at the El­liott School for In­ter­na­tional Af­fairs at the Ge­orge Wash­ing­ton Uni­ver­sity, where Maroun Medlej (maroun@gwu.edu) is an as­sis­tant pro­fes­sor of fi­nance at the School of Busi­ness.

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