Have we been mismeasuring Chinese inflation?

by on March 14, 2014 at 1:37 am in Current Affairs, Economics, History | Permalink

This is from a reputable source, although it is not an established consensus conclusion:

That is the tricky task that Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University set themselves in a recent study. They start with an economic law first observed by a 19th-century statistician, Ernst Engel: richer households spend a smaller share of their income on food. Thus as a household becomes richer over time, its spending pattern should match that of households who were equally rich a year or two before.

But in China, they discovered something different. They compared urban households in 2006 with households that were, according to the official figures, equally rich in 2008. They discovered that the later households were devoting 3-4% more of their budgets to food. Perhaps they were not quite as rich as their 2006 counterparts, after all.

That would suggest the Chinese economy tanked more during the financial crisis than is usually believed.  This part I believe for sure:

Moreover, it turns out that China’s official figures do not always understate inflation. From 1996 to 2006, they actually exaggerated it in every year but one, according to the same method. As a result, urban consumption was growing even faster in this period than the official statistics conveyed. China’s policymakers had more to boast about than they knew.

The inflation figures calculated by the three economists are also remarkably well correlated with the official numbers. They rise and fall in unison. It is just that the unofficial figures rise faster and fall further. The trio conjecture that two competing biases are at work. First, new goods are often of higher quality than the ones they replace, but their price is the same. That would explain why China overstated inflation before 2007. More subtly, statisticians sometimes fail to grasp that new goods are merely upgrades of existing ones. So they invent new categories; that biases inflation towards zero. As a consequence, China’s official figures “present a smoothed version of reality,” the authors write.

You can read more here.  You will find the pdf of the paper here.

Steve Sailer March 14, 2014 at 1:46 am

My vague recollection is that in American grocery stores, food prices of staples like eggs (i.e., products where the marketing and processing don’t account for much of the price) exploded between 2006 and 2008. I presumed at the time that this was tied into China.

alvan March 15, 2014 at 12:14 pm

Does “food” include just groceries or dining out as well. Maybe there is a shift on where the food budget is spent.

mulp March 14, 2014 at 1:49 am

Perhaps this from Marketplace explains a part of the problem:
http://www.marketplace.org/topics/world/preparing-chinas-urban-billion

“The voice of Tan Congshu rises above the rest. “In the countryside, we grow our own vegetables and slaughter a pig when we want to eat,” she says. “Here, everything costs money. Electricity, water, rent, food…everything!”

“Tan just moved from her farm in the village of Wanzhou to this low-rent urban housing project near Chongqing’s airport. She says if this is part of a national test, it’s already an epic fail. Dozens of curious onlookers nod in agreement. We’re standing in the shadow of a more than a dozen gray towers, each thirty stories high. The city built them to house more than 50,000 transplants from the farm.”

The Anti-Gnostic March 14, 2014 at 10:21 am

“We’re standing in the shadow of a more than a dozen gray towers, each thirty stories high. The city built them to house more than 50,000 transplants from the farm.”

Somebody call Matt Yglesias! And I bet the hot pot is great too!

mulp March 14, 2014 at 1:55 pm

In the US, the government didn’t build housing but companies did and there former farmers were forced to pay high prices for rent, food, clothing because the only place they could get credit was the company store and they couldn’t leave the company town because they were in debt.

In places like Mexico and Africa farmers come into town outskirts and just setu camps which become slums with the slum dwellers forced to pay high prices for food their parents grew or gathered for free off the land.

The private sector does not seem to be able to deliver food to those who move from the farm for less that it cost on the farm, or even deliver food for the same price it cost on the farm. Thus, quoting from the report, “They discovered that the later households were devoting 3-4% more of their budgets to food.”

The situation in China is like the 20s and 30s in the US when millions of people were effectively forced to move off the farms unwillingly. Farmers using machines to replace human labor, using job killing oil burning to do the work, had no use for the people living off the land and sent them away, but now they had to pay for food, rent, etc where before that was included in the job on the farm.

msgkings March 14, 2014 at 2:49 pm

Yes, mulp, better if we’d never invented that stuff and we all still lived on the farm.

LB March 14, 2014 at 1:54 am

My limited understanding of Chinese culture is that food is an important part of the social structure. Devoting more to the food budget may be an indication of increased wealth as they can ‘show off’ more with their food.

EL March 14, 2014 at 2:10 am

Anecdotally, I’ve noticed a large shift in the way Chinese people shop – open air vegetable & meat markets used to be far more popular (and less sanitary; many of the ones that still exist have gotten tile floors & roofs). Supermarkets & Walmarts & those sorts of superstores familiar to Americans are now quite common. Also, the number of food safety scares in recent years have pushed those that can afford it to buy safer groceries, which are obviously more expensive.

Mark in CA March 14, 2014 at 4:27 am

Perhaps the Chinese in 2008 simply have more, and more costly, food choices available to them than their predecessors, and/or the society has progressed to richer tastes.

dearieme March 14, 2014 at 5:38 am

“not an established consensus conclusion”: the sarcasm on this blog sometimes reaches British levels.

Z March 14, 2014 at 9:09 am

We pretend to live in a cynical age, yet smart people accept official Chinese data on face value. Of course they are goosing the numbers.

8 March 14, 2014 at 10:27 am

They are doing useful work, but I don’t think they are measuring inflation. Looking at changes in spending habits brings in too many variables. It also mistakes an increase in demand or supply shortage for inflation, such as oil. Look at the supply of money and credit; that is your cleanest signal.

As Chinese get wealthier, they buy less rice with cadmium and instead buy more imported Thai rice. There are organic options in all the supermarkets, not just high end ones. For instance, I can buy bean sprouts for about 0.6 yuan or I can pay 4-5 yuan for the same amount organically produced. China imports a lot of food as well.

Ryan March 14, 2014 at 6:42 pm

The private sector does not seem to be able to deliver food to those who move from the farm for less that it cost on the farm, or even deliver food for the same price it cost on the farm. Thus, quoting from the report, “They discovered that the later households were devoting 3-4% more of their budgets to food.”

Yes, you’re correct. Decentralized production and local consumption of food is far more energy and capital efficient since it needn’t be transported to urban centers. This needn’t involve a return to old agrarian technologies—although from an examination of household leisure time remaining for most employees after work and other burdens of civilization, it is apparent that civilized jobs aren’t more efficient for food acquisition.

Moreover, the small residual needs for distribution of food to cover local shortage is far more viable now with “just in time” inventory systems based on efficient, decentralized and very robust communications infrastructure. For example, the trading pits are not a necessity—it can all be electronically distributed and decentralized with reputation networks.

Likewise, huge central repositories of grain and livestock yards are inefficient inventory policies vulnerable to attack and sabotage.

Chicago can go.

Similar arguments apply to almost all other urban areas due to their existence as mere levels of abstraction atop the thermodynamics of food. The primary value of such abstractions remains via the distributed networks of communication keeping alive inter-cultural dialogs for those who choose it.

Ryan March 14, 2014 at 6:48 pm

Moreover, you have to take into account the higher risks that come with centralized population structure. Centralized population structure creates vulnerabilities. The obvious vulnerabilities, such as pandemics, bioweapons attacks, nuclear attacks, due to centralization of population, central stores and transportation hubs, need not be elaborated.

There will be an outflow of population to the areas of solar collection of their energy—photosynthesis of their food—to reduce total system complexity will necessarily be driven by the ecological structure of the food chain.

It will likely begin when a few catastrophes hit and cause millions of deaths rendering the apparent “safety” of urban areas a cruel deception. Since there have been no massive wars in the Western world since WW II, there has arisen a profound complacency which has just recently be shaken by the AIDS pandemic, the attacks of 9/11, the de-population of New Orleans and the on-going sacrifice of civil liberties for “homeland security” primarily due to the vulnerability of specialized, highly centralized, structures. The world’s population is far more vulnerable to pandemics today than it was in 1918 and there could easily be a billion deaths, disproportionately concentrated in highly civilized societies if cascade effects arise as they are likely to.

As this awareness rises, and people begin to look for genuine security and alternatives to urban lifestyles, it will become apparent that current social constructs aren’t working for people. People will no longer see contributing half of their labor to a government that is resulting in their deaths as a good deal.

Structures stabilized by bottom-up kin-altruism than top-down enforcement will become the obvious solution and people will naturally migrate to those most akin to themselves. Some people will continue to believe the multicultural ideology that maximum diversity within the smallest area is the best way to live and they—too—will find their “kin” as multicultural demes will certainly form near the former urban centers.

Initially, land will be a problem, not because there isn’t enough of it but because of the centralization of ownership.

Localized agricultural consumption, in present circumstances, under which land ownership is highly centralized, requires particularly high-density and low-capitalization forms of agriculture so that tenants can rent inexpensive land and make minimal capital investments (investments that will inure to the landlord as tenancy is terminated) in it while reaping subsistence over a very short period of time. Trophic losses dictate that any investment in such an agricultural system focus on highly efficient autotrophic sources with, at most, one highly optimal trophic layer prior to human consumption. (“Trophic losses” are the losses of food energy that occur in a layer of the food chain. “Autotrophic” means acquiring energy and materials for sustaining life from the inorganic environment—typically photosynthetic organisms that fix carbon dioxide and nitrogen, etc. with solar energy.)

TallDave March 15, 2014 at 12:25 am

Yes. All inflation is mismeasured, because it’s a subjective concept.

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