“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”
-Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003
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I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled "Don't Like the Numbers? Change "?Em."
Fred Sheehan saved me the trouble with a brutal takedown of Boskin here.
For those of you who may be unaware, Boskin is the economist/weasel/fraud who helped to officially distort the CPI, making it more or less worthless as a measure of inflation. The Boskin Commission was an act of fraud, a backdoor method to suppress Social Security cost of living adjustments (COLAs). To be blunt, it was an act of cowardice. Rather than man up and say “fix this, its broken, we can’t afford it” the commission took a different route — they fabricated a series of nonsense adjustments that artificially lowered CPI by 1.1%.
The Boskin Commission’s massive government falsehood allowed former Fed Chair Alan Greenspan to take rates to absurdly low levels, as the official CPI data showed no inflation, despite double digit price increases.
As such, he is one of the contributors to the financial collapse.
The specific fraudulent methods of the Boskin Commission are laughable. That the Economics profession failed to kick him out of its membership is as much an indictment of the profession as it is about Boskin.
My two favorite pieces of Boskin intellectual fraud are substitution and hedonic adjustments.
Hedonic adjustments are addressing the improvement in quality as a form of deflation. For example, the price of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using hedonic adjustments, the government calculated the price of a new car had risen from $6,847 in 1979 to $11,708 in 2004.
These adjustments wildly distort not only CPI data but GDP as well. Bill Fleckenstein calculated that the hedonic adjustments of faster computer chips and dropping costs massively jacked up the productivity data and GDP data from 1995-2002.
Substitution is a nonsensical approach that adjusts inflation for consumer behavior. When steak prices rise, consumers “substitute” cheaper proteins such as hamburger or chicken. Thus, Boskin states, the consumer is spending no more than they previously were, and is not suffering inflation.
The reality is that consumers have been priced out of steak due to price increases. Oh, and somehow, the decrease in quality does not get hedonically adjusted when it raises inflation.
As I said, the Boskin Commission was a massive fraud. Fred Sheehan has more here . . .
I think the CPI consistently overstates inflation.
It does not properly account for quality increases in goods and services. These include not just quality in the actual item purchased but availability, convenience, buying experience, etc.
One only has to look at healthcare… which plays in the numbers a major source of positive inflation. Yet if I only wanted 1990s level healthcare this would be actually much cheaper in nominal $ than it was in 1990. Studies show that Lipitor alone is worth more in life-extension and heart-health than ALL HEART SURGERY pre-1990. Not to mention the convenience, lower risk, lower side effects. What would Viagra be worth in pre-1980 equivalents? The answer on both is hundred of thousands of dollars. Patent only last about 15 years and then these are available cheaply to all. That is deflation.
Similar quality adjustments are understated in tech/comm, housing, food, travel, etc.
This actually straightens out the economic picture greatly. It is not really that “real” rates are so low… but the adjustment measure (some “inflation” number) continues to be mis-measured as too high. The 2008 financial crisis is best understood as a massive deflationary event. Etc.
Cars are another great example. Todays auto is roughly: 10x as safe, 5x as reliable, and pollutes 1/10th as much as one from the 70s or 80s. Its interior is of enormously better quality (esp at the high end) and it has services that would have cost >$1M (if avail at all) — GPS navigation, on-star, DVD-TVs, etc.
Yet the silly “inflationists” tell me that they love the car they bought for “just a few thousand” when I was in college. And people at the BLS or whoever runs the numbers says that there is car inflation. Do they know how reliable a Toyota is?
don’t forget that home ownership is not included in calculating inflation – just rent is. local and state taxes are not included so that when the sales tax or property tax goes up that’s not included in inflation. this manipulation goes back to the greenspan commissions in the early 80’s.
we keep electing frauds and we get……fraud. what a surprise.
wake up voters.
I don't dispute the proposition that the Boskin Commission has perpetrated a massive fraud. But it is one that politicians of both parties have happily gone along with.
I thought something was funny during the bush years regarding that index. I couldn’t get how they could claim inflation was near zero when my monthly expenses showed a steady inexorable increase.
I of course chocked it up to another one of our modern day forms of doublespeak. Also blamed bush, but I wasn’t able to connect the dots until now. thanks
Speaking of fraud, given the recent hype about Greece, you may find the below 2006 NYT article interesting Greece revises GDP to include underground activity – Business – International Herald Tribune
Thanks for making TBP such a great blog.
ATHENS "” Greece will revise upward its gross domestic product for the past six years by as much as 25 percent a quarter by including parts of its underground economy, top officials said Wednesday.
The revision will help Greece meet deficit standards set by the European Unions by shrinking its budget deficit as a percentage of GDP. The 2006 deficit will fall to 2.1 percent from current estimates of 2.6 percent, well below the EU’s 3 percent limit.
“The revised GDP will include some money from illegal activities, such as money from cigarette and drinks smuggling, prostitution and money laundering,” the National Statistics Service chief, Manolis Kontopyrakis, said.
Let’s face it, when the powers that be can lie about inflation, that means the Sheeple can’t demand salary increases, even though they know their expenses are rising. Problem solved on that front for our elite masters. That’s what a credit card was/is for, right?
BR-
please- substitution makes perfect sense-
steak too expensive- buy hamburger, hamburger too expensive- buy Alpo- Alpo too expensive- mug somebody- buy steak- and so it goes-
it is well known that all this nonsense was to keep the cost of living increases in check
cognos-
do you have any cognitive abilities or do you just regurgitate something you read somewhere?
BR Thanks for naming names.
exactly why you shouldn’t buy TIPS.
But ahab, you’re not accounting for the “quality increases” of that Alpo. It’s improved so much over the years, it’s just like a nice Ribeye at your downtown steak joint. No difference. At least that’s what my dog tells me.
“At least that's what my dog tells me.”
manny- that’s funny- hopefully it’s not a “son of sam” thing going on- lol
I don’t know. The bond markets don’t seem to think that we are understating inflation by huge percentages.
Not that the markets are always right, but if inflation was really 5% or so over the last decade, everyone who bought bonds has been screwed. I just don’t think that would be the case.
@ahab: No, “son of manny”.
Cognos what the heck are you saying? My most favorite car of all time was a 1972 Toyota Corrola. Steering wheel, stick shift, gas pedal. If I wanted music I threw the boombox in the back seat. Drove that car all over creation, bucket seats, great gas milage, great traction, great handling. Are you trying to say that the bloated vehicles that sell today are somehow better? Are you implying that they are actually worth more then the elbow grease I put in to rebuild the cylinder head when it was given to me as is? I disagree. These days It’s hard to find a car that compares to that old Corrola, in any way. Moores law has been around quite a few years, most people understand what it means. To try and take the credit for it and turn it around and say, see how much better off you are with this GPS you think is annoying is fraud, as this post is suggesting was done to the CPI. I hope I just misread what you meant. One other point I’d like to make, it doesn’t matter how modern your car is, if you don’t look where you’re driving, or are talking on your cell phone, your vehicle is one of the most dangerous vehicles on the road. Also buying a bigger vehicle doesn’t decrease your risk of getting in a life threatening accident, it only increases the risk to those around you.
Not sure it is fraud, deception is the name of the game since that is perfectly legal and requires critical thought to detect. Deception has now become the standard business practice and in some cases the best practice. Since all of this is so subjective and based on a desired outcome establishing the correct spin is essential.
bman is right-
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