Friday, June 02, 2006

Slate Article on Measuring Inflation

A recent Slate article by the Underground Economist Tim Harford does a good job of explaining why it's so hard to measure inflation:

But which increasing prices? Flipping through the Montgomery Ward mail-order catalog, which began publication in 1893, economic historian J. Bradford DeLong calculates that a simple bicycle cost 260 hours' wages for the typical worker in 1895 and just 7.2 hours' wages in 2000. But silver spoons actually cost more hours of labor today than in 1895. Your personal inflation rate depends on whether you are spending your money on bicycles or spoons.

The official inflation rate tries to compare the price of a typical bundle of goods today with that of a typical bundle of goods in the past. But we do not consume the same goods today as we did in the past. How many Walkmans in an iPod? The question has no sensible answer, but an answer, nevertheless, is codified in the official inflation rate.

You can be forgiven for thinking that this is an irrelevant intellectual game. You will not, of course, be thinking that if your pension or salary is linked to the inflation rate.

In recent years, received wisdom among economists has been that the inflation rate has been overstated because of unmeasured improvements in quality. Home computers have not only become cheaper but dramatically better, and failure to fully adjust for the quality improvements would overestimate the inflation rate and underestimate how much better off we are compared with previous generations.

If it's true that we've been overstating the inflation rate all these years, it follows that we are much better off in real terms compared to our forebears. But that doesn't make sense either. As Harford notes, economist Robert Gordon figures that if recent estimates of inflation bias are correct, then a peasant household in the mid-16th century would have had an annual income of only $6.

Thursday, June 01, 2006

Another Example of Lying with Statistics

The Freakonomics Blog recently posted this item:
The National Association of Realtors has started a blog. The lead item today is headlined “The Cost of Selling without a REALTOR®: $31,800.” Pretty scary, huh? Here’s the lead: “Real estate professionals do more for sellers than make the transaction easier. They make them money. In fact, the average seller who uses a real estate professional makes 16 percent more on the sale of their home than do sellers who go it alone. That’s an average of $31,800 per home.” Unfortunately, there’s no supporting data. So it could be that a Realtor actually brings in, on average, $31,800 more per home sale. Or it could be that a few dozen, or few hundred, or few thousand Realtor-sold multimillion-dollar homes skews the average very high compared to FSBO’s [FSBO is an acronym of For Sale by Owner, and is pronounced "fizzbo"], which tend to be cheaper. Or it could be a few dozen other factors.

I believe I've discovered how the National Association of Realtors (NAR) came up with their surprising statistic. The 16% figure probably comes from an NAR study which found that the median 2005 sales price for a home that was sold by an agent was $230,000, compared to only $198,200 for a FSBO home.

But the NAR is guilty of comparing apples with oranges. While $230,000 is about 16% higher than $198,200, it doesn’t follow that hiring an agent will boost a home’s sales price by 16%. There are many possible reasons that FSBO prices are relatively low. One is that FSBO properties include a disproportionate number of mobile homes and manufactured homes, which usually sell for less than detached single-family homes.

The Case of the Hit-and-Run Driver

The following editorial from the Sacramento Bee would be a terrific discussion topic in any public policy course:

A minor fender-bender that prompted an extreme response from Davis police and Yolo county prosecutors must have the locals there scratching their heads, if not fuming.

Last June, someone driving an SUV hit a parked car in a Davis supermarket parking lot and drove off. Witnesses who saw the accident jotted down the license number of the SUV and left a note on the damaged car.

The victim called Davis police, who told her she could press charges against the driver and later drop charges if the accused agreed to pay for damages. The victim initially agreed to press charges. When the family was notified that their car was believed to have been involved in a hit-and-run, they agreed to pay the damages - estimated at $870 - even though the woman who said she was driving the SUV at the time did not recall hitting another vehicle.

On June 10, the victim picked up the check from the family and cashed it, later fixing her car. Both parties thought it was the end of the incident. But three nights later, a police officer showed up at the home of the SUV owners. He said a witness had identified a teenager, not her mother, as the driver and ordered the parents to get their daughter, who was sleeping at the time, out of bed. Over the objections of her parents, the 16-year-old was taken to jail (still dressed in her pajamas) and booked for misdemeanor hit and run.

The teenager and her family are baffled and angry. Her father, who immigrated from Libya 30 years ago, thinks they are being targeted because of their ethnicity.

The woman whose car was damaged is also outraged. She has asked police and the district attorney to drop the charges: "I don't want charges to go forward, and I'm unhappy they're using my name in this way for charges to go forward," she said. "I feel it's been civilly settled and I'm content with the responsibility the family has taken."

Instead, prosecutors asked the judge in the case to sanction the defense attorney for talking to the media (which the judge refused to do) and to slap a gag order on the case (which the judge partially granted, ordering attorneys to speak only about court proceedings and nothing more). A defense motion to dismiss all charges will be heard April 17.

Meanwhile, Davis police and Yolo prosecutors have some questions to answer. Has the SUV driver's family been targeted because of their ethnic background? Why are police and prosecutors spending this much time, effort and money on a minor car accident that has already been settled civilly by the parties? Don't they have anything more useful to do?

Sample questions:

  1. Do you think the police and prosecutors were justified in arresting the hit-and-run driver?
  2. Suppose the police made it a policy to drop criminal penalties against any hit-and-run drivers who later compensate their victims. How would that change the incentives of drivers who are involved in accidents? What's the worst that can happen to them if they flee the scene?
  3. What if someone tried to shoplift an $870 camera, but was caught while walking out of the store. If the shoplifter offered to pay for the camera, should the matter be closed? How is this case different from the case of the hit-and-run driver?
  4. Should the victim in a hit-and-run case be able to decide whether criminal charges are filed?