Robert J. GordonRobert J. Gordon

Northwestern University, NBER, CEPRNorthwestern University, NBER, CEPR

Maddison Memorial ConferenceMaddison Memorial Conference

November 6, 2010, AmsterdamNovember 6, 2010, Amsterdam

Price Index Bias in the 20Price Index Bias in the 20thth Century for the United Century for the United States: Understanding States: Understanding

Economic GrowthEconomic Growth

Background to My Background to My Interest in Historical Interest in Historical

Price Index BiasPrice Index Bias Writing a book on the hidden, previously Writing a book on the hidden, previously

unrecognized sources of improvements in unrecognized sources of improvements in the standard of living that are not included the standard of living that are not included in Maddison or any other statisticsin Maddison or any other statistics

Part of the missing improvements in the Part of the missing improvements in the standard of living fall under the standard standard of living fall under the standard dimensions of CPI biasdimensions of CPI bias– Quality change, late introduction of new goods, Quality change, late introduction of new goods,

outlet substitution bias, new goods problemoutlet substitution bias, new goods problem But others do not, and I’ve suggested six But others do not, and I’ve suggested six

dimensionsdimensions

Six Dimensions: Six Dimensions: Lifting the VeilLifting the Veil

(1) larger and better housing units(1) larger and better housing units (2) improvements in health and life expectancy (2) improvements in health and life expectancy (3) improvements in marketing including mail-(3) improvements in marketing including mail-

order catalogues and ever-changing retail formats order catalogues and ever-changing retail formats (4) easier and cheaper access to a wider variety of (4) easier and cheaper access to a wider variety of

information (dating back to the telegraph) information (dating back to the telegraph) (5) the enormous improvement in the “quality of (5) the enormous improvement in the “quality of

work” measured not just as declining work hours work” measured not just as declining work hours per year, but by the gradual replacement of the per year, but by the gradual replacement of the physical strain of farming, mining, and physical strain of farming, mining, and manufacturing by office and service occupationsmanufacturing by office and service occupations

(6) the quantum change in the “quality of youth” (6) the quantum change in the “quality of youth” and the “quality of retirement” which barely and the “quality of retirement” which barely existed in 1900 (people worked until they died)existed in 1900 (people worked until they died)

Broadening the Concept Broadening the Concept of Price Index Bias for of Price Index Bias for the Standard of Livingthe Standard of Living

CPI Problems (CPI only starts in 1914)CPI Problems (CPI only starts in 1914)– Missing new goodsMissing new goods– Introducing them years or decades lateIntroducing them years or decades late– Bias after introduction (not all CPI bias is upward)Bias after introduction (not all CPI bias is upward)– Outlet substitution bias Outlet substitution bias

Relating Outlet Substitution Bias to History of Relating Outlet Substitution Bias to History of MarketingMarketing– Replacement of local small general store withReplacement of local small general store with

Big urban department storesBig urban department stores Grocery chain storesGrocery chain stores Sears and M&W catalogues initially mainly for ruralSears and M&W catalogues initially mainly for rural Later Wal-Mart and internetLater Wal-Mart and internet

New Products Span a New Products Span a Wide Range Not Wide Range Not

Previously ConsideredPreviously Considered Improvements excluded from GDP Improvements excluded from GDP

start with #1 Housingstart with #1 Housing– Indoor plumbingIndoor plumbing– Central heatingCentral heating– ElectrificationElectrification

#2 Health: Increasing life expectancy#2 Health: Increasing life expectancy– Infant mortality, life-threatening diseasesInfant mortality, life-threatening diseases– Not just medical technologyNot just medical technology

Urban sanitation infrastructure made indoor Urban sanitation infrastructure made indoor plumbing possible (Mokyr-Stein 1997)plumbing possible (Mokyr-Stein 1997)

The Current “Consensus” The Current “Consensus” Record on Real Per-Record on Real Per-capita Consumptioncapita Consumption

This consists of NIPA 1929+, Gallman This consists of NIPA 1929+, Gallman 1869-1909, and Lebergott 1900-19291869-1909, and Lebergott 1900-1929– With some background detail from Shaw With some background detail from Shaw

1869-19191869-1919 Going beyond this official record Going beyond this official record

involves coping with the fact that involves coping with the fact that almost much of what is consumed almost much of what is consumed now had not been invented in 1869.now had not been invented in 1869.

A static graph helps to think about A static graph helps to think about thisthis

Simplifications in the Simplifications in the Consumer Surplus Consumer Surplus

DiagramDiagram Takes account of new goods, late introduction into Takes account of new goods, late introduction into

CPI, and post-introduction CPI biasCPI, and post-introduction CPI bias Source of decline in P and increase in Q is a steady Source of decline in P and increase in Q is a steady

rightward shift in the unobserved supply curve for the rightward shift in the unobserved supply curve for the product due to innovationproduct due to innovation

This graph will abstract from shifts of demand curveThis graph will abstract from shifts of demand curve– Changes of incomeChanges of income– Changes in populationChanges in population– Changes in prices of related goodsChanges in prices of related goods– Changes in tastesChanges in tastes– Development of complementary inventionsDevelopment of complementary inventions– Quantity is quality-corrected so that is taken into Quantity is quality-corrected so that is taken into

account, so think of vertical axis as computer quality-account, so think of vertical axis as computer quality-adjusted price and horizontal as speed/memory/ancillary adjusted price and horizontal as speed/memory/ancillary quality of computer boxquality of computer box

How Broadly Can This How Broadly Can This Be Applied?Be Applied?

This framework has already been applied This framework has already been applied to high-tech goods, including computers to high-tech goods, including computers in 1980-2010 and automobiles in 1910-in 1980-2010 and automobiles in 1910-19401940

Can we go beyond modern products to Can we go beyond modern products to deal with the three necessities, food, deal with the three necessities, food, clothing and shelter?clothing and shelter?

Clothing and shelter have been studied, Clothing and shelter have been studied, food has been subject to remarkably little food has been subject to remarkably little researchresearch

Conventional Growth Conventional Growth Rates,Rates,

1869-2007 by ~ Decade1869-2007 by ~ DecadeFigure 1-2 Real Consumption Per Capita in Annualized Annual Growth Rates for Selected 10 year Intervals, 1869-2007 (Shaw's goods destined for consumption,

NIPA PCE, Gallman, Lebergott)

-1

0

1

2

3

4

5

Puzzles Clearer over 30-Puzzles Clearer over 30-yearyear

IntervalsIntervalsFigure 1-3. Real Consumption Per Capita in Annualized Annual Growth Rates, Selected 30 year Intervals, 1869-2007 (Shaw's goods destined for consumption,

NIPA PCE, Gallman, Lebergott)

0

0.5

1

1.5

2

2.5

3

1869-99 1899-29 1929-59 1959-87 1987-07

Questions from DataQuestions from Data

Why is measured Cons pc so low 1900-29?Why is measured Cons pc so low 1900-29?– Could most of the social benefits in this period Could most of the social benefits in this period

have taken the form of unmeasured consumer have taken the form of unmeasured consumer surplus from new products?surplus from new products?

– Example: automobile ubiquitous by 1929 but Example: automobile ubiquitous by 1929 but not introduced into the CPI until 1935not introduced into the CPI until 1935

– We’ll get help from Raff-Trajtenberg (1997)We’ll get help from Raff-Trajtenberg (1997) 1869-1900?1869-1900?

– Rees 1890-1914 vs. black box 1869-90 and Rees 1890-1914 vs. black box 1869-90 and 1914-291914-29

– Which price indexes are actually used in the Which price indexes are actually used in the Gallman GDP estimates 1869-1909?Gallman GDP estimates 1869-1909?

Many dimensions Many dimensions behind the scenesbehind the scenes

1869-1900: people read by oil lamps, 1869-1900: people read by oil lamps, went to privies outside, were heated by went to privies outside, were heated by stoves not central heat, and the city and stoves not central heat, and the city and the farm were driven by the horse the farm were driven by the horse rather than the motor (although the RR rather than the motor (although the RR connected them)connected them)

Dimensions of expansion of RR and Dimensions of expansion of RR and telegraph, 1869-1900 telegraph, 1869-1900 – Population 2xPopulation 2x– RR track 5xRR track 5x– Telegrams sent 7xTelegrams sent 7x– Postal stamps sold 10xPostal stamps sold 10x

But with all this, after 31 But with all this, after 31 years life around 1900 years life around 1900

was still dismalwas still dismal NYC 1907NYC 1907

– 1.5 persons per room1.5 persons per room– 1/3 of rooms “dark” with no windows1/3 of rooms “dark” with no windows– 20% with bathrooms, 31% with toilets20% with bathrooms, 31% with toilets– 0% electricity0% electricity

Big problem, unsettled hereBig problem, unsettled here– What percent of population were urban What percent of population were urban

upper class, middle class, working class, upper class, middle class, working class, northern rural, and southern rural?northern rural, and southern rural?

Questions Raised by Questions Raised by Rees Apparel ResultsRees Apparel Results

Can the 1% annual rate of relative Can the 1% annual rate of relative decline be interpreted as a measure of decline be interpreted as a measure of shrinkage of retail/wholesale margins, shrinkage of retail/wholesale margins, increased efficiency of retail?increased efficiency of retail?

What’s going on with Shaw price What’s going on with Shaw price indexes and resulting deflated real indexes and resulting deflated real values in 1869-79?values in 1869-79?

Further work needs to be done on Further work needs to be done on other sources of CPI for 1860-90 other sources of CPI for 1860-90 surveyed by Officer (2009)surveyed by Officer (2009)

Drawing into Question Drawing into Question Lebergott’s Slow Growth Lebergott’s Slow Growth

1900-19301900-1930 1900 only ¼ of Pittsburgh streets had sewers1900 only ¼ of Pittsburgh streets had sewers Working class families had to share toilet Working class families had to share toilet

facilities, some of which had to be emptiedfacilities, some of which had to be emptied Most working class families had to obtain Most working class families had to obtain

water outside the housewater outside the house Only 1/5 of all premises had a bathtubOnly 1/5 of all premises had a bathtub A typical housing unit is quoted at 500 sq ft A typical housing unit is quoted at 500 sq ft

and often housed a 4-person family and one and often housed a 4-person family and one or more boardersor more boarders

Tenants weren’t at the bottom of the ladder, Tenants weren’t at the bottom of the ladder, boarders wereboarders were

The Cheerful Poem from The Cheerful Poem from the the National Labor National Labor

Tribune ~ Tribune ~ 19001900 In cellars chill and dingy, oftIn cellars chill and dingy, oft In alleys with foul filthy groundIn alleys with foul filthy ground Or crowded to a lonely loftOr crowded to a lonely loft These toiling ones are mostly found;These toiling ones are mostly found; An ancient stove, with sooty scrapAn ancient stove, with sooty scrap A box, a bench a broken chair;A box, a bench a broken chair; A few patched duds in which to wrapA few patched duds in which to wrap Their weary limbs, fed on scant fare. Their weary limbs, fed on scant fare.

Samples of Research Samples of Research Already DoneAlready Done

Rees on apparel 1890-1914 linked to Rees on apparel 1890-1914 linked to Gordon 1914-1993Gordon 1914-1993

Raff-Trajtenberg on autos 1906-1941Raff-Trajtenberg on autos 1906-1941 Gordon-vanGoethem on housing Gordon-vanGoethem on housing

1914-20051914-2005– Complementary with Nakamura Complementary with Nakamura et et

al al revealing sources of CPI biasrevealing sources of CPI bias

Summary of Results in Summary of Results in Recent ResearchRecent Research

Apparel Rees (1961), 1890-1914Apparel Rees (1961), 1890-1914– Sears catalog basisSears catalog basis– Raises question as to how many people Raises question as to how many people

actually bought from Sears catalogueactually bought from Sears catalogue– Omits drop in price as customers shift Omits drop in price as customers shift

from rural general stores to Sears; thus from rural general stores to Sears; thus understates price index biasunderstates price index bias

Analogy – the vast literature on computer prices Analogy – the vast literature on computer prices never estimates the huge price decline as never estimates the huge price decline as mainframes were replaced by PCsmainframes were replaced by PCs

– General result, apparel prices decline by General result, apparel prices decline by 1% per year relative to WPI (no CPI for this 1% per year relative to WPI (no CPI for this period)period)

Gordon Apparel Gordon Apparel 1914-19931914-1993

Distinction between matched-model indexes Distinction between matched-model indexes and hedonic indexesand hedonic indexes

Analogy to studies of PCs 1980-2010Analogy to studies of PCs 1980-2010– Price decreases occur with new model introductionsPrice decreases occur with new model introductions– Hedonic indexes decline faster than matched model Hedonic indexes decline faster than matched model

indexesindexes Women’s apparel.Women’s apparel.

– Hedonic includes all the data, matched models Hedonic includes all the data, matched models virtually nonevirtually none

– Downward CPI bias by 1.28 percent per year for Downward CPI bias by 1.28 percent per year for womens’ dresses, 1914-1988. Near zero pre-1947, womens’ dresses, 1914-1988. Near zero pre-1947, much higher post-1947.much higher post-1947.

Raff-Trajtenberg on Raff-Trajtenberg on Autos, 1906-41Autos, 1906-41

During 1906-40 quality-adjusted prices During 1906-40 quality-adjusted prices declined at 5 percent per yeardeclined at 5 percent per year

During 1906-15, the decline was even During 1906-15, the decline was even fasterfaster

Auto prices not introduced into the CPI Auto prices not introduced into the CPI until 1935.until 1935.

Thus for the period 1906-35, the price Thus for the period 1906-35, the price of autos was implicitly proxied by the of autos was implicitly proxied by the growth of everything else that was growth of everything else that was covered by the CPI.covered by the CPI.

Gordon – van Goethem Gordon – van Goethem on Housing, 1914-2003on Housing, 1914-2003 Begins with a stark fact: between Begins with a stark fact: between

1940 and 1987 CPI rises 2.0 percent 1940 and 1987 CPI rises 2.0 percent slowerslower than gross rent per apartment than gross rent per apartment

Could the 2.0 percent difference be Could the 2.0 percent difference be explained by quality change?explained by quality change?

Regressions based on comprehensive Regressions based on comprehensive data after 1975data after 1975

More creative: estimates of quality More creative: estimates of quality change 1914-75change 1914-75

Dimensions of Quality Dimensions of Quality Change Before 1975Change Before 1975

Can control for room size and condition, Can control for room size and condition, 1930-19701930-1970

Control for presence of the Big Three Control for presence of the Big Three quality attributes starting in 1914quality attributes starting in 1914– Electricity, central heating, indoor plumbingElectricity, central heating, indoor plumbing– Biggest impact of indoor plumbing prior to Biggest impact of indoor plumbing prior to

1935 and of electrification prior to 19501935 and of electrification prior to 1950 A detailed study of rental prices in A detailed study of rental prices in

Evanston IL yields a downward CPI bias Evanston IL yields a downward CPI bias of about 1.4 percent per yearof about 1.4 percent per year

ConclusionsConclusions

Yes, there is evidenceYes, there is evidence– It is contradictory, downward bias for apparel It is contradictory, downward bias for apparel

and rents vs. upward bias for durable goodsand rents vs. upward bias for durable goods But no, there is a near-total dearth of But no, there is a near-total dearth of

evidence on new-product biasevidence on new-product bias– Electricity and the internal combustion engine Electricity and the internal combustion engine

revolutionized American life 1900-1930revolutionized American life 1900-1930– This is Lebergott’s slow growth periodThis is Lebergott’s slow growth period– Is it feasible for further research to overturn Is it feasible for further research to overturn

Lebergott by estimating consumer surplus Lebergott by estimating consumer surplus triangles for the Great Inventions?triangles for the Great Inventions?