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Chart of the day . . . or century?

AEIdeas

As I wrote last summer on CD, I’ve probably created and posted more than 3,000 graphics on CD, Twitter, and Facebook including charts/graphs, tables, figures, maps and Venn diagrams over the last 12 years. Of all of those graphics, I don’t think any single one has ever gotten more attention, links, re-Tweets, re-posts, and mentions than the one above (and previous versions), which has been referred to as “the Chart of the Century.” Here are some examples of those mentions from last year for the version of the chart with price data through December 2017.

A multi-colored graphic that’s made the rounds at the Federal Reserve hints at what Chairman Jerome Powell could face if President Donald Trump succeeds in throwing globalization into reverse: Higher prices for many goods and potentially faster inflation.

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged.

A chart that has been making the rounds at the Fed from economist Mark Perry shows how falling prices for trade-sensitive things like TV sets and toys have helped offset rising costs for things like medical services, housing and education.

American Enterprise Institute economist Mark J. Perry is highly and justifiably respected for his ability to convey complicated economic relationships by way of rather simple charts and graphs. The most famous example of this, shown here, is called by some the “chart of the century.” The high praise comes about because the chart is loaded with information regarding the types of challenges faced by the Fed and other Washington policymakers. Perry’s most recent version reports price increases from 1998 through 2018 for 14 categories of goods and services along with the average wage and overall Consumer Price Index.

Based on yesterday’s BLS report for CPI price data through June, I’ve updated the chart above with price changes through June 2019. During the most recent 21.5-year period from January 1998 to June 2019, the CPI for All Items increased by exactly 57.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly earnings (wages). Seven of those goods and services have increased more than average inflation, led by hospital services (+210%), college tuition (+188%), and college textbooks (+183%). Average wages have also increased more than average inflation since January 1998, by 83%, indicating an increase in real wages over the last several decades.

The other seven price series have declined since January 1998, led by TVs (-97%), toys (-75%), software (-69%) and cell phone service (-53%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.) and clothing have remained relatively flat for the last 21.5 years while average prices have increased by 57% and wages increased 83%. Various observations that have been made about the huge divergence in price patterns over the last several decades include:

a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.

New:

d. The price series that has shown the greatest change recently is the CPI for Educational Books (mostly college textbooks). Textbook prices rose an average of nearly 6% annually between January 1998 and December 2016, nearly three times average inflation during that period of just above 2% annually. But starting in early 2017, the CPI for Educational Books has been flat, and actually fell by 2.15% over the last 12 months through June following an annual decrease of -4.0% the previous month – the two largest annual percentage declines in the history of the series going back to 1967.

We can expect future declines in the prices of college textbooks, as the traditional textbook market faces increasingly tough competition from alternative options including hundreds of “open textbooks” that have been funded, published, and licensed to be freely used, adapted, and distributed. The University of Minnesota’s Center for Open Education maintains an “Open Textbook Library” website that lists hundreds of textbooks in nearly 20 academic subjects that are available for free online or as a PDF file, or as a print copy at a low-cost ($33.50 for print copies from OpenStax). Just in the field of economics, there are more than 20 free open textbooks for Economics courses including Principles of Microeconomics, Principles of Macroeconomics, International Economics, Money and Banking, Economic Analysis and Principles of Political Economy.

Bottom Line: Based on the evidence in the chart above showing stagnating and falling textbook prices following half a century of rising prices, Hurricane Joseph appears to be hitting the college textbook market with a very large, tsunami of creative destruction called “The Open Textbook Effect.”

MP: I’ll continue to update the price chart every six months, look for the next version in January 2020 with data through December 2019.

 

Discussion (18 comments)

  1. Contessa says:

    Century.

  2. Hieronymus says:

    Recently, you did a piece on music by conveyance: you could add maybe a per-song line versus, say, Broadway tickets (ex, say, Hamilton or An Evening with Bruce Springsteen).

    1. Tom Terwilliger says:

      And its not just Broadway tickets; here in the Midwest “heartland” of Cincinnati the price of almost all entertainment options has skyrocketed in the past 5 or 10 or 20 years.

  3. “[I]t shows that prices of goods subject to foreign competition… have tumbled over the past two decades as trade barriers have come down around the world.” It also shows that prices subject to governmental control have gone up faster than prices subject to free market competition. Which correlation is causation?

    1. Ron H. says:

      Both

  4. Seattle Sam says:

    Once again, you’re allowing facts to get in the way of a good emotional argument — that Government is the solution.

  5. JK Brown says:

    In a recent Free Thoughts podcast, Stephen Davies made the observation regarding modernity that the benefits haven’t been equally distributed. We see it with free trade. Rich, well off people in rich countries and poor people in poor countries do well, but average income people in rich countries are just maintaining, with the “feeling” of falling behind. This seems to be shown in you chart. The falling behind feeling even more so for those needing the costly childcare, medical or college services.

    “Now, what you can show pretty easily is that actually the bulk of… Even if some people do much better than the others, everyone is better off. The specific problem we have at the moment is that the two groups who have gained enormously in the last 30 years are poor people in poor countries, particularly very poor people in poor countries, and rich and well-off people in rich countries. And the people whose living conditions have not actually gone down but have stagnated perhaps, nominal income terms anyway, are the average income people in rich countries, and they’re the people who are making the protests you’re talking about.

    44:32 Stephen Davies: Now, I tend to think that actually that will be self-correcting. There are reasons why that will not continue the way it has done. The problem is that that could take quite a while, and I’m afraid if somebody is annoyed because he hasn’t had a pay rise for 10 years, effectively, saying, “Well, okay, things will work out in about 20 years” is not going to console him or reassure him. That’s, however, ultimately a political challenge. And I think the answer is to find ways to crack the problem of raising the incomes of the average person.”

    But as you point out average wages have been beating inflation so perhaps after 40 years of perceived decline and flat wage growth, the average income are finally seeing an uptick?

    1. Ron H. says:

      JK

      But as you point out average wages have been beating inflation so perhaps after 40 years of perceived decline and flat wage growth, the average income are finally seeing an uptick?

      That total inflation line is somewhat confusing. I would read the chart to mean that since nominal average hourly wages have steadily risen by a total of 80+% since 1998, and overall inflation has been 57.6% in that time period, real average hourly wages have increased by 23+% since 1998.

      Hopefully someone will correct me if I’m wrong.

      1. Tom Terwilliger says:

        You’re almost correct. Rather than subtracting 57.6% from 80%, you should divide 1.80 by 1.576, which gives you 14.2%, which is still a good increase, but quite a bit less than 23%.

        Yes, its 23% of the 1998 base, but only 14% of the current 2019 wage. A mathematical technicality for sure, but a mistake you often see in the press and other casual reporting.

        1. Ron H. says:

          Thanks, Tom. I understand. I guess it depends on which end of the chart is chosen as a starting point.

  6. Midwest Man says:

    It does not appear that regulations have anything to do with the prices. Most of the items which have gone up in price are services, which cannot be made overseas. Most of the items which have gone down in price are manufactured goods, which frequently are made overseas.

    1. Dangerman says:

      Hi Midwest. Mark has also posted comparisons between most medical procedures and electives like cosmetic surgery that typically are outside the govt and insurance incestuous loop. Elective medical has also gone down in price.

    2. Tom Terwilliger says:

      I think what you are saying is precisely Mark’s point; foreign competition is good for the consumer because it leads to lower prices. Where the regulations come in is in determining how much the top 3 on Mark’s list go up. They will always be more than TV’s, but without the extensive government regulation they would be substantially less than the graph shows. Likewise, if the government starts regulating trade like it regulates other stuff, the prices of TV’s and toys can be expected to reverse their downward trends.

    3. Mark Perry says:

      See post: “The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.”

  7. Mike says:

    Basic economics tells us that the opening of the world economy following a period of relative autarky will most help capital where it is relatively abundant (the rich countries) and labor where it is abundant (poor ones). That seems to have occurred. But while capital is unevenly distributed, middle income people own some of it, directly and through their pension funds including their IRAs. That won’t be evident in labor income but does indicate they’ve been doing better than one might immediately perceive.

    As to textbooks, Mark, my advice is to demur for the time being.

  8. David Harold Chester says:

    Looks like the poor will be confined to watching TV without the benefit of sufficient education for understanding what is being shown.

    1. Ron H. says:

      That shouldn’t be a problem. Most TV programing is designed for an 8th grade or lower comprehension level, and in the US grades K – 12 are provided to – in fact forced on – everyone “free”.

      And as soon as Bernie or one of his several imitators is elected president, all of those More Expensive lines on the chart will disappear as those services also become “free”, leaving Average Hourly Wages rising faster than any of the remaining goods and services for which they will be spent.

      What could be better than that?

  9. Dave says:

    Medical care price increases are entirely due to the inability (or lack of interest) of the private market to control hospital prices. Medicare and Medicaid prices are actually flat over this time. So much for the free market.

    https://www.healthsystemtracker.org/chart-collection/how-have-healthcare-prices-grown-in-the-u-s-over-time/#item-standardized-payment-rates-for-inpatient-hospital-stays-are-higher-and-have-increased-more-rapidly-for-the-privately-insured-than-for-medicare-or-medicaid

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