I have been following Fingleton, the author of this article for quite a while. His main thesis that "Japan's lost decade is an illusion" has not changed much over the years. In fact, he was among the group "Japan bashers" in the 90s, and their main argument was that Japan's Ministry of Finance (MOF) was intentionally trying to paint a grim image of Japan to gain advantage in trade negotiations. This argument holds little water these days: it is next to impossible to hide information about the true state of a country when access to information is so easy thanks to the Internet.
Fingleton also claims that Japanese are early adopters in technology, which is only partly true. Japanese, in general, prefer to excel in something by using manual skills and they take great pride in that. They resort to technology only when manual skill is not enough. Making good cars require industrial robots so they have plenty of them, but in other parts of the industry, adoption of advanced technology can be quite limited. In other words, Japanese companies often find themselves at local maximums as compared to their American counterparts. Just look at the current state of Japan's once great electronics companies: Sony, Panasonic, Sanyo, NEC, Hitachi, etc. Only Canon seems to be doing fine these days.
This argument holds little water these days: it is next to impossible to hide information about the true state of a country when access to information is so easy thanks to the Internet.
It's actually quite easy:
Step 1: recognize that gathering macroeconomic statistics is really hard. One example: if people previously spent $3 on salsa, but now they spend $5 on guacamole, what is the inflation rate for mexican dips?
Step 2: come up with a catchy title for a statistic, and make sure reporters know all about it. E.g., "the burrito index, which measures how much good mexican food costs."
Step 3: tweak the definition of the statistic until you get the result you want.
Want more inflation? All mexican dips are equal, so inflation is up 66%. Want less inflation? Guacamole is 2x better than salsa, hence dips have actually dropped in price 17%.
Actually, substitution is used in the CPI basket of goods. Fresh fish can be replaced by canned tuna, for instance.
More amusing is the application of "hedonics." This is perhaps best explained by an example. Consider that the cost of gasoline went up when certain additives were made required by the government. This cost is not fully reflected in the CPI, because there is a "hedonic thrill" associated with the perceived improved environmental friendliness (or similar nonsense) of the new required formulation of gasoline. Basically, the new gas should make you "feel better" about using it, so there is an improvement of quality that offsets the full increase in cost. Does this make sense given that fresh fish can be replaced by canned tuna? No...
Substition and hedonics are very useful for keeping the CPI from rising, which has a number of benefits for the government, as various welfare payments and wage structures are based off of it.
Substitution is not very useful for keeping CPI down. We substitute from steak to spam, then from spam to cat food, and then there is nothing more to do. It's a trick you can only do once.
Substitution does, however, keep CPI stable, and rightly so. My food bill hasn't changed much in spite of the recent peanut butter price spike - I just substitute other goods for peanut butter.
I understand what you are saying, but you've just shown how versatile substitution is. If wheat spikes they can substitute oats for the time being. If chocolate spikes they can substitute sugar candy. However, I think that when a non-economist thinks of the CPI, what they are considering is if they can maintain the same quality of life over a period of time for the same amount of money.
As you say, this does keep the CPI stable, but I think that the way an economist experiences the CPI is different from the way the average consumer does. For the consumer who has a relatively predictable pattern of food purchases, the response is "Wow, why does it cost so much more for me to buy the same stuff this year than last year?" They experience price inflation and their economic decisions are affected by it, but the CPI remains the same.
If we want to talk about how the consumers weather pricing changes, then substitution doesn't reallyconvey their experience. Yes, the average person will say, "let me get something else instead of peanut butter," but the CPI doesn't account for the "anhedonic pain" of substitution, to poke fun at their own terminology.
...the CPI doesn't account for the "anhedonic pain" of substitution, to poke fun at their own terminology.
Yes it does, or at least it attempts to. The hedonic penalties are exactly the hedonic benefits with a minus sign.
If guacamole is 2x as good as salsa, then if the price of guacamole doubles from $5 to $10 and consumers switch to $3 salsa, then mexican dips have increased in price 17%.
Look, I'm not saying a good job is done. In fact, I've argued many times that inflation is wildly overstated. I'm just saying that the hedonic adjustments and substitution adjustments are necessary if you want to have any sort of CPI-like measurement.
Of course, it's also the case that CPI doesn't actually measure inflation. To get a real inflation measure, you'd need to measure the price of a fixed basket of goods. But then no statistic like CPI would even be possible, since inflation would no longer be a rate - Inflation(1970, 2012) would not be equal to Inflation(1970, 1990) x Inflation(1990, 2012).
Fingleton also claims that Japanese are early adopters in technology, which is only partly true. Japanese, in general, prefer to excel in something by using manual skills and they take great pride in that. They resort to technology only when manual skill is not enough. Making good cars require industrial robots so they have plenty of them, but in other parts of the industry, adoption of advanced technology can be quite limited. In other words, Japanese companies often find themselves at local maximums as compared to their American counterparts. Just look at the current state of Japan's once great electronics companies: Sony, Panasonic, Sanyo, NEC, Hitachi, etc. Only Canon seems to be doing fine these days.