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Sunday, June 13, 2004

Economists Say: Who cares what they say?

Lydia Polgreen, covering the "high price of milk" story that has been in every newspaper, apparently decides that a NY Times reporter should dig deeper, and investigate whether rising prices are harming New York City's growth.
Economists are watching inflation closely to see whether it will threaten the city's nascent economic recovery. Most say rising prices are a sign of a healthy economy; pent-up demand and confidence that buyers can afford to pay more has led businesses to pass on increases they might have otherwise absorbed.

Got that? "Economists" are worried that inflation may be harmful to NYC, but at the same time "most" say that it isn't harmful. I'm quoting the entire paragraph; it isn't that the next sentence clarifies the contradiction.

As far as I can tell from the rest of the article, what this paragraph means is that Polgreen thinks inflation might choke off the city's growth, but can't find an actual economist to agree with her. Polgreen worries that retailers won't be able to pass along price increases to consumers, writing,
Small business owners...say the price increases are narrowing profit margins and tempering the feel-good aura of recovery. High prices for everyday items like rent, gas, transportation and, yes, milk are making them reluctant to add employees or expand even as the economy improves, some merchants say.

Most of the article is devoted to discussing national and international price spikes in the price of gasoline, milk, and even vanilla. Polgreen quotes some figures for NYC inflation in March and April, which was high, but doesn't seem to realize that these are figures for the prices that consumers pay (it's the consumer price index), undermining her theory that price increases aren't passed on to consumers.

To her credit, she does talk with some actual economists, but none agree with her theory. "I don't think it is much of a threat to the city's economy at all," says one.

Well who cares what the economists think? Polgreen finds plenty of small business owners to whine about the high cost of purchasing supplies. The funniest example is the bagel shop that she opens and closes the article with.
"It is very simple," [a Brooklyn bagel shop owner] explained, barely looking up from a newspaper at an empty counter in his shop. "The price of cream cheese goes way up. I still need all my employees. The rent stays the same. People don't want to pay more for bagels. So what can I do?"

At the end of the article, the bagel shop owner reappears, but this time it turns out there is something he can do, after all.
Mr. Roy, the Brooklyn bagel shop owner, reluctantly raised his prices by a nickel after the price of 150-pound tubs of Philadelphia cream cheese rose to $270 from $210, more than 25 percent. Now a $1.55 bagel with cream cheese costs $1.60, and a 75-cent small coffee costs 80 cents. But Mr. Roy said he was afraid to go any higher.

He's raised prices! The price of a bagel with cream cheese has gone up by 5 cents.

Some simple math shows the cost of cream cheese has gone up by 2.5 cents an ounce. How many ounces of cream cheese go on a bagel? My local bagel shop provides me with sliced bagels, but requires me to smear on the cream cheese myself, offering a choice of one or two 1-ounce packets. I usually buy one, thought I'd probably prefer about 1.25. I consider 2 ounces of cream cheese excessive, but many bagel shops do put on an excessive amount. So, assuming 2 ounces of cream cheese per bagel, Mr. Roy's costs have gone up 5 cents per bagel, or maybe a little less, and he's raised prices by 5 cents.

So not only have economists told her she's wrong, but much of the evidence she's gathered (plus a little math) should also tell her she's wrong: higher prices of inputs are being passed on to consumers.

Now, there are many reasonable ways Polgreen could have covered this story. She could had examined how national price spikes (for example, gas price increases) might harm the national recovery. She could have focused on costs that were specific to NYC, especially rents for housing and commercial space. Rising rents could indeed slow economic growth in the city. She could have written about the hardships caused by rising gas and milk prices: she does this to some extent, but it's not the main focus. She could have examined the effect of price increases on some important NYC industries other than retail, with tourism being the most obvious. But she's no economist, so writing about effects on the national or NYC economy aren't her thing. Writing about the effect of rising prices on consumers, the poor, or the tourism industry would play to her strengths, but probably seems too pedestrian. So instead she overreaches, trying to invent her very own economic theory.


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