Are Americans Worrying Too Much About Inflation? Two opposing views

First, see I’m an Economist. Don’t Worry. Be Happy. by Justin Wolfers, a professor of economics at the University of Michigan. Excerpts:

"The same inflationary forces that pushed these prices higher have also pushed wages to be 22 percent higher than on the eve of the pandemic. Official statistics show that the stuff that a typical American buys now costs 20 percent more over the same period. Some prices rose a little more, some a little less, but they all roughly rose in parallel.

It follows that the typical worker can now afford 2 percent more stuff. That doesn’t sound like a lot, but it’s a faster rate of improvement than the average rate of real wage growth over the past few decades."

"But in reality, higher prices are only the first act of the inflationary play. It’s a play that economists have seen before. In episode after episode, surges in prices have led to — or been preceded by — a proportional surge in wages."

For the other view, see What Economists Miss About Inflation: Prices aren’t rising as fast as they were in 2022, but consumers tend to have a long time horizon by Robert Pozen and S.P. Kothari. Mr. Pozen is a senior lecturer at the MIT Sloan School of Management and a former chairman of MFS Investment Management. Mr. Kothari is a professor of accounting and finance at MIT Sloan.

"Many economists and political commentators wonder why U.S. consumers continue to feel they are suffering from inflation, although the annual rate of inflation dropped sharply during 2023 and is still well below its peak in the summer of 2022.

The answer is that consumers have a broader time horizon. They are looking at the rate of price increases over the past three years. From January 2021 to January 2024, the consumer price index for all items rose by 17.96%.

A concrete example: You paid $10 for a tuna sandwich at a takeout lunch place at the start of 2021. By the start of 2024, the same tuna sandwich cost $11.80. That certainly feels like severe inflation. It wouldn’t be much comfort if an economist told you that you should feel good because the price of the tuna sandwich rose by only 3.11% in the last year, from $11.45 to $11.80.

Moreover, in 2021 no one was asking for a tip. Since the pandemic, it has become common for payment screens at takeout places to prompt customers for a gratuity of as much as 25%. You can say no, but at the risk of a scowl from the cashier.

Economists might argue that consumers should be satisfied because their wages rose over those three years. But the rise in total wages was only 15.3% during this period, so workers are behind in real terms.

Further, at the beginning of the pandemic, many consumers of moderate or lower income received some type of government grant, such as refundable tax credits for children or unemployment checks that exceeded their prior take-home pay. These grants declined in 2022 and ran out after 2023.

In short, prices are up, wages aren’t keeping pace, and the tuna sandwich that used to cost $10 now costs $13 including a small tip. No wonder consumers feel they are still battling price inflation."

Is Starbucks coffee no longer a Veblen good?

See Heard on the Street: Is That Starbucks Latte Finally Getting Too Expensive? by Spencer Jakab of The WSJ.

"You see an Iced Starbucks Blonde Vanilla Latte that costs $7.25. An economist sees a “Veblen good.”

Part of the secret to the coffee chain’s success and ubiquity has been the fact that it sells coffee not only at a huge markup to the cost of foamy brown water but simply that it costs a lot. Like an expensive handbag, the small luxury of the beverage that could be bought more cheaply elsewhere for the same utility is part of the appeal.

But, with the chain’s share price hitting a one-year low on Wednesday and same-store sales slumping, could it be hitting its limit with some customers? That is one of the interesting conclusions from a proprietary survey by analysts at Deutsche Bank.

“Among the 45% of consumers buying less or no longer buying from Starbucks, the top reason was related to price, with 47% saying ‘it's become too expensive,’ wrote Lauren Silberman’s team. Cost was “well above every other reason indicated.”

A year ago, analysts polled by FactSet saw revenue for the current fiscal year through September of $40.367 billion. That is now down to $38.784 billion. Excluding the year the pandemic hit, the chain is seen having its slowest growth in same-store sales since 2018.

Silberman thinks the slump is temporary and the deflated stock attractive. In addition to price sensitivity, part of the problem might be Starbucks' greater dependence on cold beverages and the fact that those were less desirable during a chilly winter. Spring is here—so it is about time to test that hypothesis."

Also see Veblen Goods by Andrew Loo of CFI (Corporate Finance Institute) . Excerpts:

"Veblen good is a type of luxury good named after American economist Thorstein Veblen. It shows a positive relationship between price and demand [it should say quantity demanded-CM], and thus an upward-sloping demand curve.

The demand [it should say quantity demanded-CM] for a Veblen good rises (drops) when its price increases (decreases). A Veblen good generally is considered a high-quality exclusive product and a status symbol. When the price goes higher, its status symbol makes the Veblen good more desirable to consumers with high social and economic standing. Some common examples of Veblen goods include luxury cars, wines, handbags, fine jewelry and watches and even sneakers."

"Conspicuous consumption is another relevant concept of Veblen goods. It represents the purchase of goods and services to display one’s economic power and social status, motivated by the desire for prestige.

The concept of conspicuous consumption was also identified by Thorstein Veblen in his book The Theory of the Leisure Class (1899). In the practices of conspicuous consumption, a higher price makes a product more desirable for its status symbol, which explains the features of Veblen goods from a sociological perspective."

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

In Veblen's chapter on "Conspicuous Consumption," there is no mention of Adam Smith. 

There is statistical or empircal evidence that supports Veblen's theory. A Ph. D. student found that rich families do spend more on "Conspicuous Consumption." 

See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things. Excerpts:

"Ori Heffetz, a doctoral student in economics at Princeton University (back in 2005-now he is a professor at Cornell University), has developed the first broad-gauged index of product visibility. Sure enough, he finds in his thesis that conspicuous items make up a greater share of the consumption budget in wealthier families."

"Mr. Heffetz estimated the relationship between the amount spent on each of 29 products and a household's income, using data on 3,924 households from the 1997 Consumer Expenditure Survey, conducted by the Bureau of Labor Statistics. The "income elasticity of demand," defined as the percentage change in consumption for a 1 percent increase in income, summarizes the degree to which a good is a luxury or a necessity. A good is a luxury if a 1 percent increase in income is associated with more than a 1 percent increase in consumption of that good.

Mr. Heffetz's analysis indicates that the higher the visibility of a good, the more likely it is to be a luxury item. For example, spending on cars and jewelry, two highly visible items, rises as a share of a household's budget as its income rises, while spending on home utilities, an inconspicuous category, falls as a share of the budget as income rises."

Related posts:

China's Government Cracks Down On Displays Of Wealth On Social Media (2022)  

(See In China, Bragging About Your Wealth Can Get You Censored: Online posts by users showing off their receipts, over-ordering food or scattering money have been deemed vulgar. Regulators say such content leads young people astray by Vivian Wang and Joy Dong of The New York Times.)

Payless sold its discount shoes for $600 a pair at mock luxury influencer event (2018)

Federal Reserve Economists May Have Discovered Another Cause Of Bankruptcy (if a neighbor wins the lottery people start spending more on consumption to keep up) (2016)

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) (2007)

Pay For Performance Increases Performance (Water Runs Downhill)

For teachers in Wisconsin.

By Alex Tabarrok.

"In my 2011 book, Launching the Innovation Renaissance, I wrote:

At times, teacher pay in the United States seems more like something from Soviet-era Russia than 21st-century America. Wages for teachers are low, egalitarian and not based on performance. We pay physical education teachers about the same as math teachers despite the fact that math teachers have greater opportunities elsewhere in the economy. As a result, we have lots of excellent physical education teachers but not nearly enough excellent math teachers. The teachers unions oppose even the most modest proposals to add measures of teacher quality to selection and pay decisions.

As I wrote, however, Wisconsin passed Act 10, a bill that discontinued collective bargaining over teachers’ salary schedules. Act 10 took power away from the labor unions and gave districts full autonomy to negotiate salaries with individual teachers. In a paper that just won the Best Paper published in AEJ: Policy in the last three years, Barbara Biasi studies the effect of Act 10 on salaries, effort and student achievement.

Compensation of most US public school teachers is rigid and solely based on seniority. This paper studies the effects of a reform that gave school districts in Wisconsin full autonomy to redesign teacher pay schemes. Following the reform some districts switched to flexible compensation. Using the expiration of preexisting collective bargaining agreements as a source of exogenous variation in the timing of changes in pay, I show that the introduction of flexible pay raised salaries of high-quality teachers, increased teacher quality (due to the arrival of high-quality teachers from other districts and increased effort), and improved student achievement.

We still have a long way to go but COVID, homeschooling and universal voucher programs have put a huge dent in the power of the teacher’s unions. There is now a chance to bring teacher pay into the American model. Moreover, such a model is pro-teacher! Not every district in Wisconsin grasped the opportunity to reform teacher pay but those districts that did raised pay considerably. Appleton district, for example, instituted pay for performance, Oshkosh did not. Prior to the Act salaries were about the same in the two districts:

After the expiration of the CBAs, the same teacher could earn up to $68,000 in Appleton, and only between $39,000 and $43,000 in Oshkosh.

Thus, pay for performance is a win-win policy. Paying the best teachers more is good for teachers and great for students who see increases in achievement which pay off many years later in higher wages."

Why Economics Is Really Called 'the Dismal Science': The (not-so-dismal) origin myth of a ubiquitous term

By Derek Thompson of The Atlantic Monthly. From 2013.

"The story goes like this: Thomas Carlyle, a Scottish writer and philosopher, called economics "the dismal science" in reference to Thomas Malthus, that lugubrious economist who claimed humanity was trapped in a world where population growth would always strain natural resources and bring widespread misery. Dismal, indeed.

But this origin myth is, well, mythical. Carlyle did coin the phrase "the dismal science." And Malthus was, without question, dismal.

But Carlyle labeled the science "dismal" when writing about slavery in the West Indies. White plantation owners, he said, ought to force black plantation workers to be their servants.

Economics, somewhat inconveniently for Carlyle, didn't offer a hearty defense of slavery. Instead, the rules of supply and demand argued for "letting men alone" rather than thrashing them with whips for not being servile. Carlyle bashed political economy as "a dreary, desolate, and indeed quite abject and distressing [science]; what we might call ... the dismal science.”

Today, when we hear the term "the dismal science," it's typically in reference to economics' most depressing outcomes (e.g.: on globalization killing manufacturing jobs: "well, that's why they call it the dismal science," etc). In other words, we've tended to align ourselves with Carlyle to acknowledge that an inescapable element of economics is human misery.

But the right etymology turns that interpretation on its head. In fact, it aligns economics with morality, and against racism, rather than with misery, and against happiness. Carlyle couldn't find a justification for slavery in political economic thought, and he considered this fact to be "dismal." Students of economics should be proud: Their "science" was then (as it can be, today) a force for a more just and, crucially, less dismal world."

The Seasonally Adjusted CPI Was up 0.38% in March

See Consumer Price Index for All Urban Consumers: All Items in U.S. City Average from FRED (Federal Reserve Economic Data) compiled by the Research Division at the Federal Reserve Bank of St. Louis for data on the seasonally adjusted CPI.

That site shows a graph but if you click on the Download button you will get the actual numbers in Microsoft Excel.

The Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (CPIAUCSL) was 311.054 in Feb. and 312.230 in March. Since 312.230/311.054 = 1.0038, that means it was up 0.38% in Feb. If we had that every month for 12 months it would be up 4.63%.

It was 301.744 in March 2023. Since 312.230/301.744 = 1.035, that means it was up 3.5% over the last 12 months.

The non-seasonally adjusted CPI was 312.332 in March and 301.836 in March 2023. That was up 3.5%. So pretty close to the seasonally adjusted CPI. This is still above the Fed's target of 2.0% (although they prefer to use the Personal Consumption Expenditures Price Index which was 2.5% higher in Feb. 2024 than Feb. 2023).

For more information, see Consumer prices rose 3.5% from a year ago in March, more than expected by Jeff Cox of CNBC. Excerpts: 

"The consumer price index accelerated at a faster-than-expected pace in March, pushing inflation higher and likely dashing hopes that the Federal Reserve will be able to cut interest rates anytime soon.

The CPI, a broad measure of goods and services costs across the economy, rose 0.4% for the month, putting the 12-month inflation rate at 3.5%, or 0.3 percentage point higher than in February, the Labor Department’s Bureau of Labor Statistics reported Wednesday. Economists surveyed by Dow Jones had been looking for a 0.3% gain and a 3.4% year-over-year level.

Excluding volatile food and energy components, the core CPI also accelerated 0.4% on a monthly basis while rising 3.8% from a year ago, compared with respective estimates for 0.3% and 3.7%"

The article also discusses what is going up and what is going on. There is a graph of the monthly year-over-year percent change in prices and core prices going back almost 3 years.

Other related links:

Consumer Price Index Data from 1913 to 2023

Personal Consumption Expenditures Price Index 

The Bureau of Labor Statistics makes seasonal adjustments. See Consumer Price Index Summary.

Handbag authenticators (creative destruction and how the economy just keeps creating new types of occupations & professions)

I've posted about many new jobs like this. See related posts below. 

Also, this post is based on yesterday's post You Spent $6,000 on a Secondhand Chanel Bag. Now Find Out if It Is Real. It had excerpts from an article by Chavie Lieber of The WSJ. Here are excerpts related to today's post:

"Many secondhand luxury shoppers say [Zekrayat] Husein, a 43-year-old Palestinian mother of three and a former aesthetician who goes by the nickname Zeko, is the Coco Chanel of authentication. She has evaluated over 25,000 Chanel bags since she started her business in 2019, she said. She authenticates hundreds of bags a week." 

"Most of her clients, who are buying used Chanel bags from boutiques or online resellers, will email Husein photos of their purchase, taking close-ups of stitching, hardware, and interiors. Husein charges $50 for her authenticity certificate based on photos and also does in-person inspections for $100."

There "is a cottage industry of independent authenticators who can easily tell a counterfeit from the real McCoy."

Related posts: 

Who wrote your potential love's online dating profile? (maybe they outsourced it to a professional who specializes in that) (2016)

New Profession Of "Wedding Hashtag Helper" Might Be An Example Of Creative Destruction At Work (2022)

Are dating coaches who help you with texting modern Cyrano de Bergeracs? (2023)

Do You Need a Fixer for Your Disney Vacation? Third-party companies tout advanced knowledge for private tours of complex amusement parks that can cost $1,000 and up (2023)

Parents Hire $4,000 Sorority Consultants to Help Daughters Dress and Impress During Rush (creative destruction and how the economy just keeps creating new types of occupations & professions) (2023)

Prompt engineers chat with generative-AI chatbots (creative destruction and how the economy just keeps creating new types of occupations & professions) (2023)

"Wedding content creators" curate the perfect social-media-ready images of the nuptials and celebration (creative destruction and how the economy just keeps creating new types of occupations & professions) (2023)

 

"Independent education consultants" help high school students and their parents navigate the competitive college-admissions process (creative destruction and how the economy just keeps creating new types of occupations & professions) (2024)

"Robot Wranglers" help lost and confused automatons (creative destruction and how the economy just keeps creating new types of occupations & professions) (2024)

Professional Bridesmaids (creative destruction and how the economy just keeps creating new types of occupations & professions)  (2024)

 

Creative Destruction

See Creative Destruction by Richard Alm and W. Michael Cox. Excerpt:

"Joseph Schumpeter
(1883–1950) coined the seemingly paradoxical term “creative destruction,” and generations of economists have adopted it as a shorthand description of the free market’s messy way of delivering progress. In Capitalism, Socialism, and Democracy (1942), the Austrian economist wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)

Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” in which he described capitalism as “the perennial gale of creative destruction,” it has become the centerpiece for modern thinking on how economies evolve."

But also see this link which suggests that the idea goes back even before Schumpeter to other scholars: Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter by Hugo Reinert and Erik S. Reinert.

"Abstract

This paper argues that the idea of ‘creative destruction’ enters the social sciences by way of Friedrich Nietzsche. The term itself is first used by German economist Werner Sombart, who openly acknowledges the influence of Nietzsche on his own economic theory. The roots of creative destruction are traced back to Indian philosophy, from where the idea entered the German literary and philosophical tradition. Understanding the origins and evolution of this key concept in evolutionary economics helps clarifying the contrasts between today’s standard mainstream economics and the Schumpeterian and evolutionary alternative."

You Spent $6,000 on a Secondhand Chanel Bag. Now Find Out if It Is Real.

Handbag authenticators are cashing in on buyers’ anxieties about fakes; hardware must be champagne not bronze; that pink leather is only made in France.

By Chavie Lieber of The WSJ. Excerpts:

"Many secondhand luxury shoppers say [Zekrayat] Husein, a 43-year-old Palestinian mother of three and a former aesthetician who goes by the nickname Zeko, is the Coco Chanel of authentication. She has evaluated over 25,000 Chanel bags since she started her business in 2019, she said. She authenticates hundreds of bags a week." 

"Chanel bags sold in Japan from 1985 through 2016 have the bag’s date of purchase and boutique initials inside; that Chanel’s MSHLG (metal shiny light gold) hardware is closer to champagne than bronze, while its MPY (or metal pale yellow) has a darker tone of yellow; that Chanel classic medium flap bags in colors other than black are exclusively made in France and never in Italy; that 10218184 is the serial number counterfeiters use the most."

"Most of her clients, who are buying used Chanel bags from boutiques or online resellers, will email Husein photos of their purchase, taking close-ups of stitching, hardware, and interiors. Husein charges $50 for her authenticity certificate based on photos and also does in-person inspections for $100."

There "is a cottage industry of independent authenticators who can easily tell a counterfeit from the real McCoy. But their jobs have gotten harder as the quality of fakes has reached new heights, so even high-end consignees may end up unwittingly selling knockoffs. Return fraud, where customers buy real luxury goods, then get refunds by returning fake ones, also plagues the primary market."

"Husein sometimes works as an intermediary between a buyer and seller, verifying the authenticity of a bag before a purchase. She said she’s gone head-to-head with banks, insurance companies and resale marketplaces to help customers who were sold counterfeits get their money back."

"Of the average 50 bags she reviews a day, around 10 are counterfeits"

"“They [master fakes] use the exact same leather as Chanel,” she said of the brand’s high-quality lambskin materials."

"Others who have turned their love of luxury into a marketable skill include Paola Tapia, 35, an Atlanta-based authenticator who checks Chanel, Louis Vuitton and Gucci goods for boutiques in the area and for shoppers online. Michelle Peeters, a 38-year-old reseller and authenticator in Brooklyn, N.Y., said she examines around 30 Chanel bags a week.

There are tools of the trade for verifying the authenticity of a handbag. Tapia authenticates with Entrupy, a piece of software that compares photos taken with a micro-lens gadget to those in a database. Laura Chavez-Sainz, senior authentication manager of Fashionphile, a luxury-resale site, said she likes to use a jeweler’s loupe, flashlight and dental tools."

"'Like Husein, [Michelle ] Peeters also entered the authentication world as a reseller in 2009. Touching and seeing bags helped her become well versed in Chanel’s language. She co-moderates a Chanel Facebook group with over 130,000 members and began authenticating Chanel bags in 2020. She charges $35 for certificates."

"Chanel is cracking down on the secondary market, alleging that vintage dealers are engaging in counterfeit sales. In February, Chanel won a lawsuit against the website and New York boutique What Goes Around Comes Around; a jury ruled Chanel was owed $4 million in damages related to counterfeiting."

"Megs Mahoney Dusil, co-founder of the handbag site PurseBlog, said she’s noticed more Chanel fans gravitating to smaller, independent resellers, making services from Husein or Peeters more in demand. Shoppers feverishly swap stories on blogs and social media about counterfeits sold on big sites." 

"Authenticators are also on the lookout for return fraud. There are some telltale signs, like sellers listing multiples of the same bag or items with tags. When Fashionphile noticed that a seller was doing this with Gucci bags, it flagged the seller internally and rejected her sales, said Chavez-Sainz. Fashionphile also contacted the store whose receipts the seller had shared as proof of authenticity. The store said it was building a case against the seller because she was bait-and-switching the bags."

Related posts:

Fake Books Are a Real Trend (and people pay money for them) (2023)

Job Listings Abound, but Many Are Fake (2023)

You can hire someone to do the job interview for you (2022)

How to Spot Fake Reviews and Shady Ratings on Amazon (2022)

Making Money Off of Fake ATM Receipts (2021)

People are hiring out their faces to become deepfake-style marketing clones (2021)

Why would men bring fake cell phones to bars? (2021)

Are sellers paying Amazon customers to delete negative reviews? (2021)

Fake Reviews and Inflated Ratings Are Still a Problem for Amazon  (2021)

Photos show China's most surreal tourist spot— a fake Instagram-worthy town full of pretend farmers and phony fishermen (2021)

The Myth of Authenticity Or The Story Behind Products (2010)

Fake Authenticity (2011)

Students: Make a mistake on purpose, its good for you! (2007)

A fake job reference can be just a few clicks away (2015)

Fake Economist Fools Portugal (2013)

Slave Redemption in Sudan (2007) (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive? (2008) (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends? (2013) (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them (2008)

Saudis grapple with fake street sweepers (2017)

Rent a White Guy: Confessions of a fake businessman from Beijing (2010) (by Mitch Moxley in The Atlantic Monthly, excerpts below)

Can adding a phantom third story to their homes help families find a wife for their son? (2018)

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling (2018)

Mexicans buy fake cellphones to hand over in muggings (2019)
 
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) (2007)

How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption) (2019).

Why do stores sometimes pay people to be fake shoppers?  (2019)

What if companies can't afford real models for their ads? Use AI generated fake pictures  (2020)

Excerpts from "Rent a White Guy"

"NOT LONG AGO I was offered work as a quality-control expert with an American company in China I’d never heard of. No experience necessary—which was good, because I had none. I’d be paid $1,000 for a week, put up in a fancy hotel, and wined and dined in Dongying, an industrial city in Shandong province I’d also never heard of. The only requirements were a fair complexion and a suit.

“I call these things ‘White Guy in a Tie’ events,” a Canadian friend of a friend named Jake told me during the recruitment pitch he gave me in Beijing, where I live. “Basically, you put on a suit, shake some hands, and make some money. We’ll be in ‘quality control,’ but nobody’s gonna be doing any quality control. You in?”

I was.

And so I became a fake businessman in China, an often lucrative gig for underworked expatriates here. One friend, an American who works in film, was paid to represent a Canadian company and give a speech espousing a low-carbon future. Another was flown to Shanghai to act as a seasonal-gifts buyer. Recruiting fake businessmen is one way to create the image—particularly, the image of connection—that Chinese companies crave. My Chinese-language tutor, at first aghast about how much we were getting paid, put it this way: “Having foreigners in nice suits gives the company face.”

Six of us met at the Beijing airport, where Jake briefed us on the details. We were supposedly representing a California-based company that was building a facility in Dongying. Our responsibilities would include making daily trips to the construction site, attending a ribbon-cutting ceremony, and hobnobbing. During the ceremony, one of us would have to give a speech as the company’s director. That duty fell to my friend Ernie, who, in his late 30s, was the oldest of our group. His business cards had already been made."

"For the next few days, we sat in the office swatting flies and reading magazines, purportedly high-level employees of a U.S. company that, I later discovered, didn’t really exist."