Monday, December 02, 2002

There is a profoundly irritating article in yesterday's New York Times magazine about the rise of Ikea furniture in America, and other related issues. A lot of this actually applies to quite a few places throughout the whole world and not just to America. The point is that Ikea sells inexpensive furniture of surprisingly high quality. The effect of this has not been so much on poorer Americans as on middle class Americans, for whom furniture has changed from being a durable good into being a disposable good. The article also talks compares this with the spread of other sophisticated, stylish goods with finite lives, like cellphones, and Swatch watches and Blackberries and iPods. Cool, design oriented things with finite lives. The high quality design of these things comes of course from the PC. Whereas high quality design previously required a lot of labour, the aid of the PC means that it can now be present in everything, including low cost furniture.

Josephine Rydberg-Dumont noticed a corollary change that had similar advantages for Ikea's American experiment: an upmarketing of downmarket goods. Calvin Klein's cK T-shirts, Starbucks coffee, basketball shoes designed as if for the space program, sushi in the Grand Union -- these were tokens of conspicuous quality for a broad part of the population. ''Ten or 15 years ago, traveling in the United States, you couldn't eat well,'' she said. ''You couldn't get good coffee. Now you can get good bread in the supermarket, and people think that's normal. I like that very much. That's more important to the good life than the availability of expensive wines. That's what Ikea is about.

Okay, this is all great. People throughout the country can buy goods of a quality that people could only get in the larger cities a decade or fifteen years ago.

However, for reasons unknown the author seems then to have somehow felt the need to turn the article into a piece of class warfare.

It was a particularly good thing to be about in the 1990's, a decade in which the economic folk tales were of astronomical success (or, by the end, vertiginous falls), but the broad reality was quite different: for Americans in the middle of the wage scale, real earnings, adjusted for inflation, declined or held flat for much of the decade. Even when they were putting away a few dollars, members of the middle class were losing ground to the people to whose status they aspired, the heroes of those folk tales. The majority of Americans were participants in a zeitgeist of obscene riches without having a piece of the action.

What they could have, in just the same degree as the new economy's new rich, was the immaterial titillations of design. Design was a perfect class commodity for a class that was going nowhere. It added value to a toilet brush or a garbage pail, to say nothing of personal computers. The ubiquity of these fluid computer-generated designs suggested an attractive world of class mobility. It promised that you could be moving forward, even if your paycheck was slipping back: why, just look at your toothbrush, designed by Philippe Starck for Alessi.

So the people of America, whose real income was not increasing and whose paychecks were slipping back were suddenly able to buy a much greater variety of all sorts of goods either of better quality than they had been able to buy before. Even though people were much better off, they somehow weren't much better off. Sounds silly to me, but perhaps not to the writer.

Lets get back to the beginnings of the above quote. for Americans in the middle of the wage scale, real earnings, adjusted for inflation, declined or held flat for much of the decade. What exactly does this mean? What it means is that the dollars that people take home increased by about the same percentage in an average year as did the calculated inflation rate. (Actually, for the middle classes this is not true. Real wages in the middle brackets have increased over the last 15 years, just not as much as in the top brackets).

However, what is the inflation rate? Traditionally we take a basket of goods that typical consumers buy, and we see how the price of this basket of goods changes over time. This is fine when looking at goods and services that are the same every year: a pound of sugar, or of a kilowatt of electricity or a litre of petrol, or a haircut or a ride on the same train. However, when buying manufactured goods of any kind, it is extremely problematic. The VCR I buy today has lots more features than the one I bought ten years ago, but the basket of goods probably contains the cost of the average VCR. If people instead buy DVD players instead of VCRs, then the basket of goods can be changed and changes in DVD prices taken into account in future. However, the calculation doesn't take into account the fact that people make the change because DVD players are better. When people are buying large numbers of manufactured products with short lifetimes and rapidly changing technologies, figuring out how these can be taken into account in the inflation basket is extraordinarily difficult. However, if people are buying Apple's iWidget this year, and next year they stop buying iiWidgets and start buying Microsoft's Zbox instead, the broad conclusion we can come to is that the Zbox is a better product than the iWidget. That is, people are better off because they are buying a higher quality product. The point of this is that the calculated inflation rate becomes more and more inaccurate when goods are rapidly improving in quality and/or people the goods people are actually buying is changing rapidly. In particular, in these cases the calculated inflation rates overstate the true rates by more and more. Over the last 15 years, these conditions have been met. Our spending patterns have changed dramatically.

And this matters. If wages are increasing by 5% and the calculated inflation rate is 5%, this tells you that people are not better off. If, instead the true inflation rate is 4%, over 10 years people are 10% better off. If the true inflation rate is 3%, people are 21% better off. If the true inflation rate is 2%, people are 34% better off. If it is 1%, people are 47% better off.

The real point of this, is that we are using a single number (inflation rate) to model a complicated situation, which is the change in prices and the change in spending patterns. The longer the period of time being modelled, and the greater the change in people's spending patterns over the period, the more and more meaningless inflation numbers become. They are too crude to model what is going on. However, the Times Magazine article simply makes the assumption that because the statistically crude measure of "real wages" are flat, then people are somehow not better off. Instead, rich people are doing great, and middle class people are merely being thrown the small crumb of "design" and a better choice of goods.

The point in reality is that better design and and a better choice of goods are the way in which people are benefiting from economic growth. If I can buy myself an excellent latte in Sierra Blanca, Texas (as the permalinkless Micky Kaus recently asserted that I can), then this wider availability in actuality represents a decrease in the cost of a good latte. Why? Because previously, to have good lattes regularly I might have had to have lived in New York City, and the cost of renting somewhere to live there would be higher, and now that lattes are regularly available to me in Sierra Blanca, I can a life that includes lattes for much less than I could before. What did rich people previously spend their money on? Well, they spent it on products with better design. These are now available more cheaply and throughout the country. More people can afford lives that include these things, and as these lives can be lived in places where it is cheaper to live, then the cost of a life including them has dropped. None of this shows up in inflation statistics, but the effect is real. Thanks to computers and inventory management systems, shops throughout the country can carry much greater numbers of lines of goods.This allows people to substitute goods that they like (and which are of higher value to them) for goods that they don't like. This doesn't show up in the statistics either, but it surely means people are better off, and, if you like, richer. Ikea is an obvious manifestation of this.

The goods in my living room (and in yours) are much more sophisticated and interesting than they were ten years ago. This unequivocally means I am better off.

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