Why are Durable Goods Suddenly So Expensive?

The graph below shows monthly price indices for capital equipment and consumer durables, though Oct 2009.

Economists know well that these goods have steady gotten cheaper over time. The mystery to me is that, beginning last September, they stopped getting cheaper and even got more expensive (note that the consumer durable price is on a different scale — it has tended to decline a lot over time — so the lack of decline is more remarkable there).

While you try to solve the mystery, please note:

1. volumes produced of these goods are obviously down, but that has been true in previous (ITC-less) recessions and those recessions did not have such price increases (note that my graph includes the 2001 recession). So I don’t think the high prices can be blamed on the low volumes alone.

2. For some items, one might be concerned that the price indices are based on “list prices” and those list prices have (perhaps) been discounted more heavily than usual. I am dubious of a significant “list price” bias because the increases are across broad categories of consumer durable goods, including things like cars, college textbooks, jewelry, and telephones where this bias is either less of an issue OR the BLS is measuring actual transaction prices by acting as would-be purchasers themselves).

3. Also note that most of the measured sub-index increases are nominal — I doubt that manufacturers sought to discount their goods by first hiking their list prices.

The ITC is known as the “Investment Tax Credit” — a credit going to the purchaser of a new durable good. The federal government used it in some of the 1960s and 1970s recessions, but not in the 1980s and 1990s. Professor Goolsbee has convincingly shown that the short run effect of the ITC is to make durables goods more expensive, rather than encouraging investment in them.

“Cash for Clunkers” was a kind of ITC — a subsidy going to purchases of new cars.

I have warned for a while now that investors may be rationally expecting further ITCs.

I raise all of this because the expectation of future ITCs may explain the price pattern in the chart: producers of durable goods are holding back production until those credits are in place?

Anyway, the point of this post is to hear your ideas, not to insist on the ITC interpretation.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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