The "Above Inflation" Misconception

Yesterday’s reporting in Inside HigherEd about my analysis of the low cost burden subscriptions place on institutions yielded some surprising statements by people interviewed on the subject, including an economist who equated publishers to embezzlers.

The story also included a standard complaint about publisher price increases exceeding the rate of inflation, both in the reporting and the comments.

This idea is worth examining more closely.

Inflation is an average arrived at after calculating a number of rates of price increases across multiple regions and industries. Some of these rates will be higher than the average, some lower. That’s how averages work. Average temperatures (often mistakenly referred to colloquially as “normal temperature”) can range 40°F or more. Average height, average intelligence, or average weight — hardly anyone or anything is “average” when it comes down to it, and that’s a key point.

The inflation rate is used sometimes to guide things like wage increases, and makes sense to use in such contexts because it is basically shorthand for the Consumer Price Index (CPI). Increasing wages at this rate is likely to keep people on par with the cost of living.

However, relying on averages like inflation to guide financial decisions — how much to spend, how much to save — is notoriously risky. Averages conceal variability. A number of limitations of averages are outlined in a touchstone article in the Harvard Business Review, which later became a book of the same title (“The Flaw of Averages:  Why We Underestimate Risk in the Face of Uncertainty”), with the authors recounting one famously botched use of averages to guide major financial decisions in Orange County, CA:

In the summer of 1994, interest rates were low and were expected to remain so. Officials painted a rosy picture of the county’s financial portfolio based on this expected future behavior of interest rates. But had they explicitly considered the well-documented range of interest-rate uncertainties, instead of a single, average interest-rate scenario, they would have seen that there was a 5% chance of losing $1 billion or more — which is exactly what happened. The average hid the enormous riskiness of their investments.

Orange County went bankrupt relying on averages.

Aside from the fallacy of using an average to judge an unrelated specific — what it costs to publish journals and maintain satisfactory margins — there’s a bigger problem, which boils down to the simple fact that inflation is descriptive, not prescriptive. It’s not a rate that dictates what prices can be, but describes their past behavior.

There are two main economic drivers of inflation, what economists refer to as “demand-pull inflation” and “cost-push inflation.”

The first type occurs because something is in high demand — technology salaries, server chips, and quinoa (pre-2017) may fit the bill here. (I’m sure the “Quinoa Crash of 2017” is talked about somewhere.)

The second type occurs because something happens to make items more expensive — weather can cause avocados, honey, or oil to all experience cost-push inflation from time to time.

Scholarly and scientific publishing seems to be experiencing a long stretch of cost-push inflation, with article outputs rising above the rate of inflation. For instance, the most recent “STM Report” noted that article outputs have risen 4% while publisher revenues are up only 2%. (Over the past decade, inflation in the US has ranged between 0.7% and 2%.)

Low inflation is not a panacea, and high inflation is not a disaster. High inflation increases wages, savings, and investments. Low inflation suppresses many of these things. The “stagflation” of Japan is Exhibit A here, with low inflation making it nearly impossible for people to move up and down the social ladder, buy new things, or improve their living status. It paralyzed the government, as increases in tax revenues did not occur naturally via inflation. I lived in Japan for a time in 1988, and when I returned almost 20 years later, it was surprising to me how little had changed, and how things looked a little shabby. Japan truly had stagnated.

In the US, inflation is analyzed across more than 100 industries. It’s a very complex composite metric, and its applicability to microeconomics isn’t clear — that is, any single industry will have its own rate, and one rate doesn’t invalidate any other.

So stating that publisher price increases surpass the average rate of inflation is basically an observation, not a condemnation. Yes, this may happen, but that’s because of a variety of factors, inflation in general has been very low generally for a very long time (which has some people concerned), and the average isn’t prescriptive.

Perhaps the biggest “tell” betraying the illegitimacy of the argument that it’s somehow unusual or improper for publisher price increases to exceed the rate of consumer inflation is that the rate of salary increases and library expenditures exceed the rate of inflation, as well.

It may just be that the administration of scientific and scholarly publishing — which lives at the vanguard of knowledge, and is largely a human endeavor currently — is more expensive to conduct than harvesting corn or selling diapers.

Valid criticisms of scholarly and scientific publishing certainly exist. But attempting to critique pricing based on a descriptive, backward-looking average measurement from mostly irrelevant industries isn’t taking us anywhere.

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