Are US Inflation and Employment Underestimated?
May 5, 2008 7:55 AM   Subscribe

"Hard Numbers: The Economy is Worse than You Know" [full article for Harper's subscribers, a different abridged version] discusses how the Consumer Price Index and other US economic statistics have been manipulated over time. Among other things, the article claims, these changes make Social Security checks 70% lower than they would otherwise be.

According to Barry Ritholtz of the Big Picture blog, "the longstanding official myth that [US] inflation is modest and contained is starting to be recognized for the fraud that it is." He believes that these bad statistics give false answers to even bigger questions, like "are we in a recession?"

A New York Times graphic shows what's in this basket of consumer prices, which prices are going up, and which are not. To learn more about what's not counted, visit Shadow Government Statistics, which tracks (for subscribers) what inflation would be under earlier formulas. (Previously.)
posted by salvia (73 comments total) 28 users marked this as a favorite

 
Fascinating article, I was aware of the 'unemployment' numbers con, but the other stuff was interesting too. Interesting times for sure...
posted by zeoslap at 8:14 AM on May 5, 2008


Well, that's all obvious, and the only question is, what do you do about it? If the public allow their government to lie to them (and by "allow", I mean not vote out, not impeach, not prosecute, and not hang lying politicians or public servants), then democracy itself becomes meaningless. Lies ruin democracy, the same way bad data ruins analysis, fraud ruins contracts, and perjury ruins court cases, for the same reasons.
posted by aeschenkarnos at 8:23 AM on May 5, 2008 [2 favorites]


I could have sworn this was a double, even the Shadow Government Statistics link, but I can't find it, so I'm going to assume it isn't and update my Signs I'm Going Crazy list.

Anyway, I've known for years that the public numbers were cooked, but it doesn't really matter, because Social Security checks aside, these numbers don't actually mirror anyone's life, and the people in the government who makes these numbers already know that. If you have always bought groceries at Walmart, you have experienced a completely different set of inflation curves than someone who shops at Whole Foods.

The purpose of these numbers is to publicly gauge the economy in a very rough check-your-forehead-for-signs-of-fever sort of way. This information is them used as a way to make gross adjustments to a tiny handful of variables in the hope of keeping the system alive.

Here's how you know the public numbers are crap. What is the price of something? For example, go buy a box of trash bags. Ever wonder why they sell boxes of trashbags in odd quantities, like 28 or 33? Same with diapers. 82 diapers in a box? Who picked that number? They do this because every so often they change the number of bags in the box without changing the price of the box. 31 bags becomes 28, the price is still $5.97. I've watched a box of diapers go from 144, to 128, to 108, to 96, to 82 over about 5 years. The box is still the same size. It's the same price. It's the same exact box but for the number in the corner.

And it isn't just dry goods. It wouldn't surprise me at all, for example, if the people who grew bananas knew exactly what mix of fertilizers and nutrients would produce one pound of bananas consisting of a few very large bananas (i.e. high ratio of yummy center to peel) and what mix would produce one pound of bananas that consisted of many stubby bananas with think peels (low ratio). And it wouldn't surprise me if the grower's costs were higher in the first mix. So potash is expensive this year? Next year you get more shorter bananas. Fertilizer prices collapse? Compete with other growers by growing bigger yellower bananas.

Just an example.

What people should really care about are what prices they are paying when they shop in their usual routine, which requires them to track a budget, which requires them to know how to make a budget, which is not something anyone is eager to teach American kids, judging from this recent AskMe thread. If people do this, they don't need the government's inflation number, and they, in aggregate, will make adjustments to their own budget with greater accuracy and more pronounced effect than the Fed ever could.
posted by Pastabagel at 8:24 AM on May 5, 2008 [10 favorites]


[This is a do-over of a recent thread. Go about your business, etc. Thanks.]
posted by cortex at 8:25 AM on May 5, 2008


It's been ages since I've taken the announced unemployment figure at face value. For one, the announced figure for a given month is routinely re-adjusted a month or two later, usually for the worse.

Secondly, as the graphic describes, the announced number does not reflect the true complexity of the employment arena, since it is based solely on unemployment claims. There's a not-insubstantial number of people who never apply for unemployment benefits for various reasons. Then there is the growing "underemployed" component that really should be factored-in, from a "health of the household income" standpoint, which, ultimately, has an effect on the whole economy, which I believe we are just beginning to see.
posted by Thorzdad at 8:26 AM on May 5, 2008 [1 favorite]


I don't have a lot to say about this, since I've had most of my visceral responses since the last thread went up, but I do have one question: if most major financial and industrial figures know the figures are deceptive, why do they seem to respond as if the numbers are transparently describing the actual economy? It seems like you'd expect greater caution from banks and investors in such a climate, yet they actually seem just as bamboozled as the rest of us. Is this a case of common knowledge as common ignorance, or are investors all assuming that other people will fall for the manipulated statistics and just trying to get out in front of the herd?
posted by anotherpanacea at 8:32 AM on May 5, 2008 [1 favorite]


Probably the most frustrating thing about this is that no one will have the will to change the accounting as it is guaranteed to make them look bad. The first person to give the actual numbers will be pilloried for allowing unemployment and inflation to "increase dramatically" under their watch.

My personal inflation index is a single 20 oz. of Pepsi. 4 years ago, convenience stores sold them for $1.00, then a $1.10, then $1.25, then $1.39. Now most places have them up around $1.49 unless if they're on sale.
posted by drezdn at 8:36 AM on May 5, 2008 [1 favorite]


[This is a do-over of a recent thread. Go about your business, etc. Thanks.]

That's easy for you to say. I thought my time machine was broken, so I was trying to recalibrate it. Now it's broken and I'm stuck in what appears to be Nazi-occupied Canada.
posted by loquacious at 8:37 AM on May 5, 2008 [7 favorites]


I was just getting ready for college at the beginning of the Bush administration. In my smug youth, I thought it was going to be funny and satisfying to see the world go to shit because all the dumb old folks were backing this administration with its crazy tax cuts and saber rattling.

Growing up sucks.
posted by es_de_bah at 8:38 AM on May 5, 2008 [2 favorites]


Just a little cui bono context.

There is an inverse relationship between unemployment and inflation.

Rich people care more about inflation. They have lots of money whose value is reduced by inflation. However, they're unlikely to become unemployed. They may even benefit from cheap labor when unemployment is high.

Poor people have less money. (It's one of their most defining characteristics). If employed, their wages will go up with inflation anyway. They tend to worry more about unemployment.

Therefore, rich people generally want you to think inflation is higher than it is, since that gives you more reason to fight it.
posted by TheophileEscargot at 8:42 AM on May 5, 2008


You can use the price of a slice of pizza in NYC as a good indicator of inflation. It's at 2.50 to 3.00 for a plain cheese slice right now. December it was 2.00. A couple of years ago, $1.75.

There was an article in the AMNY this morning interviewing the owner of Lombardi's, a pizza joint that's been around forever in Soho. He said that the price of a 50lb sack of flour went from $12 in March to $38 dollars now.
posted by spicynuts at 8:42 AM on May 5, 2008 [1 favorite]


My personal calibrator for inflation is 1 gal of distilled water at WalMart (I buy that a lot).

58c in 2005. 71c today = 20% inflation in three years.
posted by tachikaze at 8:44 AM on May 5, 2008


Rich people care more about inflation. They have lots of money whose value is reduced by inflation

Sure about that? Rich people have a lot of ASSETS -- things that produce income.

We can talk about price inflation all day but without wage inflation something's gotta give, and that something will be, first and foremost, rents.
posted by tachikaze at 8:47 AM on May 5, 2008


If employed, their wages will go up with inflation anyway.

This isn't necessarily always the case, and if wages go up, they don't always go up fast enough to reach the rate of inflation.
posted by drezdn at 8:50 AM on May 5, 2008


My BS sense went off early in the Phillips article, when he wrote, "Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members of the military as "employed" instead of outside the labor force." Um... how are members of the services not employed? Why weren't they counted as being employed before?
posted by Halloween Jack at 8:50 AM on May 5, 2008


I don't see a real problem with the unemployment numbers. If you look at the first chart in the first link, they all track together, with the highest curve only 3-4 points above the lowest curve (3 when unemployment is low, 4 when it's high, roughly). So, in my view, the complaint that the official numbers don't reflect reality is pretty weak. It's like complaining that the Fahrenheit scale provides a poor measure of temperature compared to Kelvin, even though it's trivial to convert between the two. If the complaint is that it's bad economics, I don't necessarily buy it. On the other hand, if the complaint is just that government officials try to put spin on statistics, well then that's a very interesting and novel thesis that I've never considered.

As for the inflation numbers, that's a different story. Somebody I work with recently complained that the latest round of annual raises weren't enough to keep up with inflation. Another coworker jumped in to defend the raise, "That's not true, it was 3.5%." I just rolled my eyes.
posted by dsword at 8:58 AM on May 5, 2008


If employed, their wages will go up with inflation anyway.
Unless, of course, their employers don't kick-in any wage increases, even so much as a COLA. I can introduce you to some white collar workers who haven't seen a pay raise or COLA in 3-4 years.
posted by Thorzdad at 9:01 AM on May 5, 2008


My personal inflation index is a single 20 oz. of Pepsi. 4 years ago, convenience stores sold them for $1.00, then a $1.10, then $1.25, then $1.39. Now most places have them up around $1.49 unless if they're on sale.

You can do the same thing for a pint of milk (say, at Wawa): four years ago, you could get one for 85¢. It's gone from that to 89¢ to 95¢ to 99¢ to $1.05 to $1.15. Several increases happened in the space of about six weeks.

If employed, their wages will go up with inflation anyway.

You clearly haven't been following the stagnation in the minimum wage.
posted by oaf at 9:04 AM on May 5, 2008


I am just pulling the blanket over my head at this point. Wake me up when it's all over.
posted by desjardins at 9:09 AM on May 5, 2008


A can of chickpeas was .59 (.89 at the worst) in 1998. Just yesterday I saw one for 1.59. Comparing .89 to 1.59, that's 6% per year. The Coke example above is 10% inflation. The milk example above is around 8%.
posted by salvia at 9:11 AM on May 5, 2008


You clearly haven't been following the stagnation in the minimum wage.

I am proud that my state has elected to increase its minimum wage.

The federal govt. is becoming irrelevant in many regional matters, and I'm all for it. Because, you know, they weren't doing such a great job.
posted by Mister_A at 9:14 AM on May 5, 2008


Hey desjardins, Jesus just came by and gave everyone laser guns that shoot diesel fuel, electricity, and butter, so problem solved! You can come out.

Thanks Jesus!
posted by Mister_A at 9:15 AM on May 5, 2008 [1 favorite]


Mmm.... I Can't Believe It's Not Lasers!
posted by nebulawindphone at 9:32 AM on May 5, 2008 [1 favorite]


Holloween Jack: The reason that members of the military are considered "outside the labor force" instead of "employed" is that military "employment" is quite different from the rest of the economy.

1) If you want to get into the military, chances are, they will take you. There's no competition for the position of "recruit."

2) You cannot leave the military at your choosing, unlike other jobs.

3) The military does not have to adhere to workplace safety standards.

More seriously, the whole problem with counting the military as "employment" is that for many, the military is an employment of last resort; that is, it doesn't give a good idea of how well the free market economy is doing because it is not part of the free market economy. As I joked, almost anyone can get in.
posted by BrianBoyko at 9:34 AM on May 5, 2008 [1 favorite]


You can use the price of a slice of pizza in NYC as a good indicator of inflation. It's at 2.50 to 3.00 for a plain cheese slice right now. December it was 2.00. A couple of years ago, $1.75.

Christ, I don't get back to the city for a few months and look what happens. I saw the 2.00 -> 2.25 transition going on in the fall (also reflected in the price of pies to the point that when I placed a delivery order the guy warned me "you know that's really expensive now, right"), and 1.75 -> 2.00 was back in late 2003. 2.50-3.00 is just another sign the country is falling apart, and it's dragging the city down with it.
posted by TheOnlyCoolTim at 9:37 AM on May 5, 2008


This isn't necessarily always the case, and if wages go up, they don't always go up fast enough to reach the rate of inflation.

However, every wage increase for someone is a price increase for someone else. That is: inflation.

It doesn't make sense to say "I want wages to go up and inflation to go down". You need to pick the one you're worried about the most.
posted by TheophileEscargot at 9:40 AM on May 5, 2008


Halloween Jack,

I was talking about this article with my wife and discussed that same odd data point. We speculated that maybe service members were not considered either employed or unemployed before, and that adding in that many people all at once drove down the unemployed percentages. Maybe.

Mister_A,

Thanks for the link. I had no idea over half the states had higher minimum wages (though I knew mine did) then the Fed. What's up with the states that have lower minimum wages? How does that work?
posted by hackly_fracture at 9:40 AM on May 5, 2008


You need to pick the one you're worried about the most.

corporate retained earnings and shareholder dividends are the third leg of that stool.
posted by tachikaze at 9:47 AM on May 5, 2008


the whole problem with counting the military as "employment" is that for many, the military is an employment of last resort; that is, it doesn't give a good idea of how well the free market economy is doing because it is not part of the free market economy. As I joked, almost anyone can get in

Same thing with our imprisoned citizens, 2 million+.
posted by tachikaze at 9:49 AM on May 5, 2008 [1 favorite]


You can use the price of a slice of pizza in NYC as a good indicator of inflation. It's at 2.50 to 3.00 for a plain cheese slice right now. December it was 2.00. A couple of years ago, $1.75.

I think there was an NPR story about how the pizza price signs used to be in neon because the price was constant, and things are really different now because the price changes fairly often. Yes I am one of those Oooo!! NPR told me about this!!! asshats.
posted by Tehanu at 10:07 AM on May 5, 2008 [1 favorite]


So if the rate of un- and underemployment is 8-9%, slightly more than 1% of our national population is in prison and 12% of our population is over the age of 65, then we can say that roughly 20 to 25% of our population either lives very close to poverty or on government handouts, or, more likely, both.

When you factor in another 30% of our population coming up for retirement in the next two decades -- I think I can say, without reservation, that things are looking up!!!!1111 :D

If employed, their wages will go up with inflation anyway.

Heh....ehehheh.......heheheheh.......hehehhehehHEHEHHEHEHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAAHHAHAHAHAH

Fuck were so doomed.
posted by Avenger at 10:23 AM on May 5, 2008 [2 favorites]


I have the same question as anotherpanacea:

if most major financial and industrial figures know the figures are deceptive, why do they seem to respond as if the numbers are transparently describing the actual economy? It seems like you'd expect greater caution from banks and investors

I mean, they track inflation for a reason -- because it erodes the future buying power of money. If inflation is going up by more than the interest you're receiving, you're losing money by not buying things now. Why would anyone buy a treasury bond at 2-3% interest when the cost of canned goods are going up by 6%? Shouldn't we all be using our savings accounts to stockpile gas, corn, chickpeas, and 2 liters of Coke?
posted by salvia at 10:25 AM on May 5, 2008


if most major financial and industrial figures know the figures are deceptive, why do they seem to respond as if the numbers are transparently describing the actual economy?

I'm no expert, but to me this suggests the spin job is working.

If "good news" from the government actually does cheer consumers up and make them spend more, then it's literal good news, no scare quotes needed, for a lot of businesses.
posted by nebulawindphone at 10:46 AM on May 5, 2008


salvia -- "Why would anyone buy a treasury bond at 2-3% interest when the cost of canned goods are going up by 6%?"

Good question, but although the Treasury pays a constant interest rate (in nominal terms), the rate of inflation is variable across the horizon. Might be 6% this year, more next, and less, perhaps much less the year after. By purchasing a bond you are, in effect, taking a view towards the expected rate of inflation across the term of the instrument.

Of course no single individual knows what inflation will be from year to year, although we have several market based mechanisms that let us leverage the collective wisdom of thousands, perhaps hundreds of thousands market parcipants.

CPI Futures - futures contracts with the Consumer Price Index ( or CPI) have been traded on the Chicago Mercantile Exchange since February 9, 2004.

Treasury Inflation Protected Securities, or TIPS were introduced in 1997. These securities pay out based on the inflation rate observed during the term. While the interest rate is helpful, its really the spread, or difference between Treasurys and TIPS of identical maturitys that provide the most information about inflation expectations.

There are pluses and minuses to each that detract from it's predictive power; for example, many academics consider TIPS inefficient indicators due to market dynamics that tend to distort their yield.

CPI Futures are relatively illiquid, and we see sizable bid/ask spreads - both factors also tend to distort predicted inflation.

But none of these indicators - TIPS, CPI Futures or CPI itself - will help you gauge inflations impact on your own unique financial situation. For example, official CPI (or RPI, as I live in the UK) data doesn't help me much as I don't drive, nor do I consume most of the basket of good they include in their pricing.

I run my own budget, and carefully track MOM and YOY changes. I put my own, personal rate of inflation at roughly 18% YOY. Most significant drivers to date seem to be energy (no surprise there), followed up by fresh vegetables & fruit.

If it helps, I previously explained the relationship between nominal and real interest rates when discussing power of the The Yield Curve to predict recessions or economic recovery.
posted by Mutant at 10:53 AM on May 5, 2008 [1 favorite]


Thanks, Mutant. So, if your YOY inflation is 18%, do you put any money in savings, or do you just try to stockpile oil and natural gas in your basement (or whatever the closest financial instrument is)?
posted by salvia at 11:06 AM on May 5, 2008


I'm being serious, by the way, in case I sound facetious. If right now you could buy your fruits & veggies (can and freeze them) and prepay your energy needs for next year, that would be a nearly-guaranteed 18% return, which would be pretty stunning.
posted by salvia at 11:10 AM on May 5, 2008


ftrain thanks you. really, he does.
posted by mwhybark at 11:16 AM on May 5, 2008


Core vs. non-core in CPI has always made plenty of sense. Because sustained changes in food and energy costs should feed back into the prices on the core basket, core didn't so much ignore food and energy as mute their volatility.

If that correlation starts to break down -- and perhaps it could if dramatically higher energy and food suck all the demand away from the core basket -- then we'll have to think again.

However, it's important to remember that ultimately buyers determine price, not sellers. There would be no $3 pizza slices, or $4 gas gallons, if people just wouldn't pay that price. Every surge in inflation is, at an important level, a measure of popular priorities, not a measure of business oppressing the powerless.
posted by MattD at 11:17 AM on May 5, 2008 [1 favorite]


ultimately buyers determine price, not sellers.

yeah, but when those buyers are commodities traders rather than end-consumers, what then? the commodities trader has an economic incentive to see commodities prices increase in order to get a return on investment, don't they? well, doesn't that place upward pressure on pricing before a product ever reaches the market?
posted by saulgoodman at 11:28 AM on May 5, 2008


salvia -- "Thanks, Mutant. So, if your YOY inflation is 18%, do you put any money in savings, or do you just try to stockpile oil and natural gas in your basement (or whatever the closest financial instrument is)?"

I can look at this question two way; what would I do, and what behaviour should a perfectly rational market participant engage in, with 18% inflation being observed.

Myself, well I prefer liquidity and was planning to take a year off work (I'm in banking, and now seems like a perfect time to duck some of the nastiness that's going about) so I've kept excessively large amounts of cash in my savings.

Not current account, but higher yielding savings, structured as three accounts. I try to keep as low a balance as possible in my current account, allowing me to benefit from higher (nominal) rates where possible. I also trade directly with my banks treasury desk, 7D money, and pick up 50bps (i.e., 1/2 of a percent pa) above street yield.

But the perfectly rational market participant?

Ideally, this individual would keep as little cash about as possible (subject to idiosyncratic factors such as I outlined for myself), with the bulk of assets diversified into a mixture of market driven, liquid and ill-liquid assets (e.g., equities, some bonds, commodities & real estate).

You're always going to lose some value to inflation - that's just a ramification of an expanding money supply - its just a measure of how much value you'll lose, and how to most effectively mitigate or circumvent this erosion.

Choose your assets carefully, your entry and exit points even more carefully, and you can grow your wealth in real terms. Pick the wrong assets to hold across the wrong horizon and the opposite happens.

Case in point: going long most bonds (issues about credit worthiness aside) is a good trade while The Fed cuts interest rates (this instrument becomes more valuable as prevailing market rates decrease, therefore face value of the bond increases as newly issued bonds yield less). Hold the same bonds in an increasing interest rate environment, and you'll take a hit (as the prevailing market rates increase, your bond becomes less valuable as there are higher yielding bonds being issued).

Another case in point: Housing. Most G7 countries have been going through a housing bubble where the growth in real values easily outstripped inflation. This is the natural result of a speculative bubble.

For those who were prescient enough to enter and exit this market at the appropriate times, they made bucketloads of money. Now with prices collapsing and inflation more than likely still increasing, folks that exit will realise a loss (in real terms).


On preview: MattD makes a very good distinction between core and non core rates of inflation.

While this distinction is controversial, it is necessary to be aware of it to get an idea of your personal rate of inflation.
posted by Mutant at 11:50 AM on May 5, 2008 [2 favorites]


Money. Humph. I don't use it anymore because it's so confusing, and...

I don't have any.
posted by Guy_Inamonkeysuit at 12:10 PM on May 5, 2008 [1 favorite]


If right now you could buy your fruits & veggies (can and freeze them) and prepay your energy needs for next year, that would be a nearly-guaranteed 18% return, which would be pretty stunning

In related news...
posted by tachikaze at 12:37 PM on May 5, 2008


Every surge in inflation is, at an important level, a measure of popular priorities, not a measure of business oppressing the powerless.

What happens to this metric when, for everyday folks, "popular" priorities are basic staples of living: sustenance, clothing, shelter? Is it safe to call inflation oppressive then?
posted by Blazecock Pileon at 1:22 PM on May 5, 2008 [1 favorite]


here's the previous post fwiw :P

also see:
The National Association for Business Economics sounded a warning on a topic near and dear to its heart this morning: economic indicators.

A statement from the chair of the NABE’s statistics committee, Haver Analytics President Maurine Haver, asserted that “just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.”

Ms. Haver catalogs the casualties of budgetary tightening [and] goes on to say the association may ask readers to write letters to representatives “in support of agency budgets as the subcommittees meet to review fiscal 2009 funding.”
and btw: "...globalized economies have become much more dynamic and fluid and fast-moving, which makes them much harder to measure. But at the same time, statistical agencies have become intellectual backwaters, home to underpaid and underfunded technocrats who receive roughly zero in the way of thanks or glory and who are much more likely to be on the receiving end of budget cuts than they are to get the significant increases in funding..."

which is a shame when it should be so easy (e.g. XBRL, cf. "The amount of financial data available publicly is astonishing. That doesn't mean it's all useful."), like you could even make it part of tax reform!*
...there would be no separate tax accounting basis — the IRS would use GAAP... Can you imagine how many accountants, attorneys and actuaries would be unemployed by this? ...A proposal like this, that makes taxation more immediate, and more transparent, would make people more concerned about where their taxes go, because they would feel it more acutely...
so you'd reconcile cash with accrual (and the assumptions used to make it so) then put it all up online so people can make up their own mind on what it all means. that's the promise of the internet -- by exposing databases and APIs to the public, they can aggregate and disaggregate data to their hearts content and make it useful to them.**

take inflation: there are prices online for everything. it *should* be relatively simple to collate your own personal inflation rate, esp when the average isn't that useful, using the basket of stuff you buy every month (or whatever periodicity, like i'm sure wal-mart or whoever gets this in real time) and then see how that stacks up against everyone else -- for your basket/demographic/region/etc. [or like employment: sure there are alternative measures but what if, say, you wanted to control for the prison population? across countries?]

what's more: "Exploit technology and put the prices online where they can be easily adjusted... If all prices are perfectly flexible, markets will behave optimally on their own and there would be no need for the Fed to intervene to stabilize the economy," viz. "Our long-term plan... ought not be to canonize central banks, but to render them obsolete." imagine a world without the fed...

transparency is what this should be about. if everything were transparent née flat, if we all had perfect information*** (gates' 'frictionless capitalism'), we could effectively invert the corporation in the coasean sense -- utilising tools for big love and our cognitive surplus -- for individual control to stop living in the matrix :P

cheers!

---
*i'm reminded of richie roberts (police detective-cum-prosecutor/defense attorney) in _american gangster_: "You know, I don't think they want this to stop. I think it employs too many people. Judges, lawyers, cops, politicians, prison guards, probation officers. They stop bringing dope into this country, about 100,000 people are going to be out of a job."

**like if i wanted to know how much financial institutions have written off in the credit crisis so far, i could go to wikipedia, but i should also be able to (easily) go to the source.

***we may finally come full circle back to schumpeter: "...if distribution can be described by means of the social marginal utilities of the factors of production, it is not necessary, for that purpose, to enter into a theory of prices. The theory of distribution follows, in this case, directly from the law of social value... that is much more lucid and attractive than that derived from an intricate and cumbersome theory of prices..."

posted by kliuless at 1:22 PM on May 5, 2008 [1 favorite]


"Shouldn't we all be using our savings accounts to stockpile gas, corn, chickpeas, and 2 liters of Coke?"

The Wall Street Journal thinks so.
posted by ewagoner at 1:26 PM on May 5, 2008 [1 favorite]


for many, the military is an employment of last resort; that is, it doesn't give a good idea of how well the free market economy is doing because it is not part of the free market economy. As I joked, almost anyone can get in

Until they bring back the draft, it's still an employment bargain, albeit an unusual one, between two consenting adults. Moreover, for many just out of schoolers it is also the employment of first resort. It can help on the resume in later life.

(What are the current accepted vs turned down stastistics for the military these days? Not so long ago, they were getting kind of choosy. Things change when danger rears its ugly head, of course, but I've not seen the numbers.)
posted by IndigoJones at 1:47 PM on May 5, 2008


$1 for a Lemon!?!?!?! $.70 for a lime!?!?!?!?

a bag of Tomatoes for $7?!?!?! Dont tell me there is no inflation.

By the way, I still make the same I did last year when lemons were cheaper and limes were afforable.
posted by subaruwrx at 2:16 PM on May 5, 2008


I still make the same I did last year when lemons were cheaper and limes were afforable.

Time to ask for a raise then.

The PtB know they can't inflate away that $9T national debt unless we get 70s style price-wage inflation spiral going. Do your part, patriot! Get that raise!
posted by tachikaze at 3:30 PM on May 5, 2008


What are the current accepted vs turned down stastistics for the military these days?

18% needed conduct waivers in 2007
posted by tachikaze at 3:32 PM on May 5, 2008


subaruwrx -- "$1 for a Lemon!?!?!?! $.70 for a lime!?!?!?!?

a bag of Tomatoes for $7?!?!?! Dont tell me there is no inflation. "


A personal anecdote: I got married last September, in Las Vegas no less. Mrs Mutant & I eloped from London, did the deed and returned. Fair enough.

But my mother couldn't attend for a variety of reasons, so Mrs Mutant & I headed to Western New York the first week of April.

I hadn't spent a significant amount of time in The United States for a good ten years. By that I mean more than a week or two, outside of a city such as Washington, New York or (where we were married Las Vegas).

Maw likes to eat at Friendly's, a chain restaurant in the US. So as this was her party we did what The Old Dear wanted to. Ate at Friendly's. Every day. Three times a day (hey! The Old Bird is nothing if not smart, as eating out surely beats cooking and washing up, eh?).

I was floored at the prices. It was easy to break $10 / person for breakfast and tough to avoid spending that much per person for dinnner. At a diner, in Western New York.

Now I don't mean to compare these prices with New York or London or Amsterdam. No, with no small degree of objectiveness (being outside the United States for over a decade does that) I'm pointing out that when I left the country in mid 1997, you could go out to dinner in New York (Lower East Side) and get a meal for $10 / person. You'd no doubt have to eat at a downscale place, perhaps a Polish Diner or Dominican restaurant, but $10 per person without alcohol was doable (and that statement isn't meant to infer these particular types of restaurants served lousy food, no, nothing like that at all; GREAT, inexpensive food, no reservations, no attitude and a wonderful meal. Especially missed as I'm frugal, and pretty much lived at El Sombrero while living in Losiada - Margarita con sal grande y fuerte por favor!).

Now, even in relatively cheap remote areas of the United States like Western New York, it's downright expensive. Ok, maybe we had it easy as we funded our trip via a mixture of Pounds and Euros, but for folks living there, I'd say $10 or more per person per meal adds up.

I'm not sure how wages have kept up, but the prices? I was more than a little surprised.
posted by Mutant at 3:34 PM on May 5, 2008


Oh. My. God. The amount of uninformed, alarmist crap in the FPP article is astounding. Let me give one small example. I spent four years as an economist at the BLS, in the office responsible for researching methodologies for calculating the CPI. I worked on the article's principle target: hedonic adjustments to the CPI. The CPI uses code I wrote to make hedonic adjustments. So I feel somewhat qualified in saying that the article is just plain wrong in its criticism of hedonic adjustments - that the late adoption of the methodology is a sign of political opportunism. There may have been some political pressures to adopt the procedure, and the Boskin commission was certainly not free from political influence. But the fact is that the project was a major undertaking for a highly understaffed office in an agency that still - still - stores its production data on a VAX system in New Jersey running SAS 6.

Hedonic adjustments attempt to account for changes in product quality over time. The CPI (basically) measures the cost of purchasing a representative "basket" of goods, and the amount by which the cost of the basket changes over time is reported as "inflation". But some goods in the basket disappear as they are discontinued and replaced by newer models. Think audio equipment: in the '80s, the basket might have included your favorite cassette player. When CDs gained market share, your cassette player might have been discontinued. This poses a problem for calculating inflation - the old basket of goods cannot be obtained at any price if the good is no longer available for sale, and inflation is technically infinite. So the CPI generally just replaced the old good with a newer model - say, your new favorite CD player. Problem: the CD player costs more (indicating positive inflation), but it also provides characteristics preferred by most consumers. Because most CPI users (mistakenly) think of the CPI as a cost of living index, which should measure the cost of obtaining a certain level of "happiness" or "satisfaction" or "utility" for a representative consumer, the CPI was actually overstating the increase in the cost of living due to its failure to account for the increase in quality of the market basket. A pure cost of goods index is rendered useless by the disappearance of one of its goods; a cost of living index is overstated if the change in goods does not account for a change in quality of goods.

The principal reason the CPI did not adequately account for changes in quality of goods is that the data required to estimate those changes was unavailable until retail scanner data became economically obtainable. You need a huge amount of price and characteristic data to estimate hedonic values. The BLS simply could not obtain such data much before the '90s, and could not have processed the data in a timely fashion, either. And each product type requires detailed studies on which characteristics are important, measurable, and prevalent enough to gather product pricing data for estimating an hedonic model (not to mention extensive modeling exercises to develop the best - or even an acceptable - hedonic model).

Sure, certain changes in government statistics might have been favored or prioritized over others for political reasons. But are they lying to us? Is it a lie to publish six different measures of unemployment (one of which is admitted to be "nearest to real-world conditions" in the FPP)? Is it a lie to attempt to improve measurements of notoriously nebulous concepts, after extensive research including research by top scholars and funded by the government, while detailing those changes in public disclosures? And does the article give any justification for relying on older methodologies that clearly do not measure what we want them to?

The article author's ignorance is revealed most starkly by his talk of "the real numbers". How does he define "inflation" - as a true cost of living index? For whom? Using which goods? In what geographic regions? What if different retailers offer the same goods at different prices? There is no such thing as "the real numbers". The BLS generally tries to present a summary of a large, unwieldy amount of data in the least intellectually indefensible way it can - and it tries, at the same time, to let the public know how it comes up with those summaries so that the users of the data can take the appropriate grain of salt. The author of the FPP link, though, seems to think he's got a better handle on the numbers - but fails to disclose his methodologies for dealing with the substitution problem, quality changes, etc. - probably because he doesn't have any, and probably doesn't even understand those issues to any reasonable degree. I hope the full Harper's article is better, because the linked version is a misleading crock of stinking misdirection and misinformation.
posted by dilettanti at 9:45 PM on May 5, 2008 [78 favorites]


Every wage increase for someone is a price increase for someone else. That is: inflation.

In an economy with only one moving part that would indeed be the case. In an economy with one moving part all the economists would agree on everything and dance in the moonlight with pixies and unicorns.

Back on the planet Earth, consider Henry Ford circa 1914. He started paying his workers about twice the average wage (based in part on the logic that if he was going to make any money, people like his workers needed to be able to buy cars). Other industrialists howled about this but ultimately were forced to follow suit lest he steal all their best workers. Instead of runaway inflation the twenties were a period of unprecedented prosperity.

Why? Because most factories don't work at anything like capacity and, ergo, only get partial advantage of economies of scale. Well paid workers make goods fly off shelves, allowing increases in productivity, yielding higher profits, allowing higher wages, causing more goods to go flying off the shelves, etc.
posted by Kid Charlemagne at 10:05 PM on May 5, 2008


The part that leaped out at me indicating that Kevin Phillips is an ignorant fool is when he said "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher" — meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are."

Apparently he does not know that initial Social Security benefits are indexed to the increase in wages, not CPI. Wages generally rise faster than CPI so benefits rise faster than the CPI. It is only after you start collecting that future benefits are indexed to the CPI. So no, even if you believe his alarmist claims, checks for most people would not be 70% greater.

And even just using common sense, don't you think that seniors would notice if they were receiving only 30% of the buying power they once had. Most of them would be living in cardboard boxes on the streets. It's mostly tinfoil hat nonsense.

And thanks, dilettanti, for the nice explanation.
posted by JackFlash at 11:07 PM on May 5, 2008


Kid Charlemagne, Henry Ford was certainly a great propagandist. But his wage increases were necessary to address his tremendous staff turnover problem. From here:
In 1913 "Ford required between 13,000 and 14,000 workers to run his plants at any one time, and in that year over 50,000 workers quit." At the end of the same year, in order to add 100 persons to the workforce in one factory, the company found it necessary to add 963 workers.
Ford was a businessman and he didn't just pay high wages out of the kindness of his heart.

The Twenties need to be seen in context. The World War One years had seen a large rise in inflation. In the period after that, prices came back down, particularly agricultural prices. However that hurt farmers considerably: their income and wages fell right back.

The boom of the late Twenties also contributed to a market correction in 1929...
posted by TheophileEscargot at 2:42 AM on May 6, 2008 [1 favorite]


I love this part:
Transportation 18%
Gas is 5.2% of spending
nationwide, but only 3.8
percent in the New York area.
Meanwhile, trips in the subway are about twice the national average.
posted by Civil_Disobedient at 3:32 AM on May 6, 2008


dilettanti: I worked on the article's principle target: hedonic adjustments to the CPI.

I remember when I first heard about this argument, I went to take a quick look at how those hedonic adjustments were done. Some adjustment does seem appropriate, but on looking at the results, in every case of consumer products I've been using for years it seems wrong in varying degrees, but usually way over-done. For my money, televisions of today are just not *that* much better than those of the 1990's. Now perhaps I just don't value the improvements as much as the market as a whole does, but it is hard to believe there's such a huge difference.

Anyway, there was somewhere a description of how the hedonic adjustments were done that left me with the impression that you got it all wrong. As I understand it, the difference in market value between a CD player and a cassette deck for example was established by the relative market prices of the two when they were both on the market. This was a relatively quick transition between the two, and I suspect that for most of it the sales of CD players was dominated by people who for one reason or another were early adopters of the new technology. Regardless of production costs, the new stuff is always going to sell for a higher price just because it's being sold to people who care much more than the rest of the market about the benefits of the new features. So, they're the ones that tend to set the price difference by which the hedonic adjustment is done, and thus it systematically over-estimates the improvement.

So that's just a guess as to why the results appear wrong to my intuition. In the one example of hedonic calculations I looked at in detail, no attempt was made to account for this. Probably because it's just too hard; it looks like they just measured what was easy to measure, never mind that it bears little resemblance to reality. It'd be nice if you, or anyone who's done the work to find out how these calculations are done, could tell me that I'm all wrong about this.
posted by sfenders at 5:12 AM on May 6, 2008


A couple months back Harpers ran an article on the housing/tech boom, and on how the US economy has come to depend on these sorts of bubbles, credit, and never ending growth. I haven't finished the article yet, but it's been an interesting read so far: The next bubble: Priming the markets for tomorrow's big crash.
posted by chunking express at 6:48 AM on May 6, 2008


sfenders: It'd be nice if you, or anyone who's done the work to find out how these calculations are done, could tell me that I'm all wrong about this.

You're only a little bit wrong. You are correct that there are a lot of non-"hedonic" reasons for prices for higher "quality" goods to be more expensive - supply costs for newly developed components are higher, demand for new products is slow to develop (low demand = high price). Luckily, discontinued items are usually replaced in the index by the next-most-outdated product available - so the early-adopter bias is somewhat reduced, though it still influences the adjustments made for particular characteristics somewhat. See p. 22 of the CPI methodology document (Chapter 17 of the BLS Handbook of Methods) [pdf] Another approach to minimize problems with hedonic adjustments is to periodically reweight products based on updated consumer expenditure data - that is, a product will begin to have more effect on the index when more people start to buy it. This further reduces the "early adopter" bias. There are a ton of problems with how we incorporated hedonic adjustments - but our basic methodology was not driven primarily by political concerns - it was a result of lack of resources to do any better. But "resemblance to reality" (whatever "reality" might be in discussing inflation) was a driving concern - we only incorporated the adjustments after testing its effect on CPI revision volatility, among other things. And really, criticizing problems with the hedonic adjustments is like complaining that the levees in New Orleans were ugly. There are much, much larger problems with the CPI. For further reference: see CPI-related publications on the BLS website, the CPI data, and the BLS stats site generally.

An aside: "hedonic" denotes that the adjustments are an attempt to estimate a "representative consumer's" willingness to pay for individual product characteristics. For example, if you bought a new laptop, you would be getting a bundle of characteristics including processor type, processor speed, screen size, screen resolution, graphics memory type, graphics memory capacity, RAM, optical drive type, etc. Hedonic estimates attempt to break the price of the laptop into components related to each product characteristic. Sometimes hedonic values can be easily bracketed - if you paid $900 for a laptop with 2 Gb of RAM, when the identical model with only 1 Gb was available for $850, then you were willing to pay at least $50 for an extra Gb of RAM. One problem is that "at least" - another is that there are people who buy the cheaper model, so that questions of representativity of the consumer gets entangled with hedonic estimates (and you're right that "early adopters" are a non-representative class of consumers). Another issue is that hedonic values are usually estimated using a log-linear function of a bunch of dummy variables where the data available for the characteristic space is not exactly robust (values for certain characteristics are difficult to obtain because there are very few products with sufficient diversity of characteristics actively available in the market). And there are sampling problems, and data collection biases, and all sorts of other issues. Professor Ariel Pakes at Harvard wrote a few papers detailing a few reasons why the hedonic approach is misguided, and I think his criticisms are some of the most compelling (see, e.g., his most recent paper on the pure characteristics demand model). Ideally, we'd calculate the equilibrium surface that Pakes describes, but as you can see the academic literature is still just developing this approach - it would have been impossible for the BLS to adopt such an approach following the Boskin report in 1996, much less in the 1960s and '70s, as the FPP article suggests.

I have also been informed by a former co-worker that the BLS moved off the VAX system sometime in the past few years - sorry for the misinformation. At any rate, the research done to develop initial hedonic adjustments was done on the VAX, requiring fault-intolerant JCL and batch jobs run overnight to minimize CPU costs (often resulting in borked jobs, requiring another day or more to re-run).
posted by dilettanti at 6:57 AM on May 6, 2008 [4 favorites]


dilettanti, while you're here explaining the CPI, can you explain why they don't directly use mortgage + interest + home insurance + tax insurance, and instead use what the owner would receive as rent instead? I am guessing the logic is that if prices are too high, people will just sell their house and rent instead. But some people (a lot of them) feel it's important to buy for non-financial reasons, for example, knowing they won't have to move their family if the landlord randomly raises rents.

The housing bubble directly affected many people's cost of living. Home purchase prices are a huge reason some places are more expensive to live than others. Why aren't these changes over time and space important data? To me, these online cost of living calculators sprung up to fill the gap. And the incentives created by rapidly rising housing prices ("buy now or you'll be priced out forever") certainly influenced how people compared the return on their investments (nothing in those early days appearing as valuable as getting into the housing market while you could still afford it).
posted by salvia at 8:32 AM on May 6, 2008


salvia: dilettanti, while you're here explaining the CPI, can you explain why they don't directly use mortgage + interest + home insurance + tax insurance, and instead use what the owner would receive as rent instead?

I'm a bit slammed at work right now, so this will be rather abbreviated, but... as it happens, I left the BLS to work on estimating home price indices (among other things). I am not an expert on how BLS calculates rental equivalence, and am not prepared to defend it (I understand it is quite controversial), but the main reason a rental equivalence measure is more appropriate than PITI for use in the CPI is that the "good" in the market basket is shelter services, and PITI includes an investment or store-of-value component over and above shelter services. That is, when you pay down a mortgage, you're getting more than just housing for a month. You're also getting equity. Including PITI on a normally-amortizing loan would also include the amount of money you're paying into equity, which is normally required simply to receive housing services. Think of the pre-balloon payments on an interest-only loan as a rough approximation of rental equivalence. If you wanted to use a property solely for shelter, one measure of rental equivalence is how much it costs to carry the property, without tapping into its change in sale value. The interest payments on an IO loan approximate that - if you purchased a property with a 100 LTV IO loan, paid the interest while living in the property, and then sold the property to make the balloon payment, the difference in the sale price and the balloon payment (original principal) is the value of the investment services provided by the property - its increase in value. So the remaining portion, the carrying costs or interest payments, are essentially what you're paying to live in the house, which is what the CPI is trying to measure. There are a whole ton of caveats here, naturally... numerous reasons why actual rental values might depart from such a measure (landlord service costs, option value of being able to move more easily, sale/refi closing costs and frictions, local market conditions, local regulations, the cost of moral hazard risk built into IO borrowing costs, etc.). But the point is that the BLS is attempting to measure the price of obtaining housing services, and nothing more, and PITI overstates that cost - typically by a large amount.

Of course, the real question is whether changes in PITI costs over time track changes in rental equivalents, and that I just don't know. My gut says no - the mortgage industry has changed significantly in the past two decades - but I don't have any data on hand, and I have to get back to work now.
posted by dilettanti at 9:26 AM on May 6, 2008 [2 favorites]


oops: "paying into equity... is normally not required simply to receive housing services." Also, I can't believe I used "principle" instead of "principal" in my original post. Grammar gods, be merciful!
posted by dilettanti at 9:58 AM on May 6, 2008




Dilettanti, I'm not saying that you've sold me on the way the CPI is calculated, but bravo for these detailed answers. I've flagged your comments as fantastic in the hopes of getting you a sidebar. Great stuff.
posted by mwhybark at 4:04 PM on May 6, 2008


mwhybark: I hope I haven't sold anyone on how the CPI is calculated - it's intellectually indefensible, really. There is no such thing as a "representative consumer", and "consumer surplus" is an otiose, if not entirely wrong-headed, concept (even if you accept the grossly over-simplified consumer psychology embedded in canonical economic models: see, e.g., chapter 7 of the enlarged (1983) edition of Samuelson's Foundations of Economic Analysis ("As for its [consumer surplus's] connection with the theory of index numbers, after the concept has been renovated and altered, it is simply the economic theory of index numbers….")). Moreover, even if you believe that what the CPI attempts to measure (a highly modified Laspeyres index) is meaningful or useful, there is error upon error built into the CPI - with many noted by the BLS itself [pdf]. One of my co-workers wrote a great paper documenting the effect of rounding error built into the CPI. My big problem is with people who claim to have a grasp on what the "real" numbers are - there simply are no such things. The best we can hope for is a moderately understood, simple and somewhat informative summary of a large set of complex data. So I am confused by people who insist that the CPI pre-1996 (or whenever) was somehow a more useful statistic than the current CPI. Both are wrong; the more recent CPI incorporates changes that, however bad or poorly motivated they were, usually move in the right direction - that is, they actually address recognized problems to some perceptible degree without creating new, greater problems at the same time.
posted by dilettanti at 8:32 PM on May 6, 2008 [3 favorites]


dilettanti, thanks for sharing all of that information. I want to read everything you posted more closely when I get a little time.
posted by salvia at 10:59 PM on May 6, 2008


Anyone who says that the hedonic adjustments are 'correct' is full of bullshit. I've gone around and around with someone here about this, a year or so ago, but it's fundamentally the case that you can't measure things accurately if your yardstick changes.

Now, the old method was to substitute in new goods every few years, as old goods were obsoleted. Now, they can instantly substitute anything they want, anytime they want. If carrots are up this month, but okra's down -- hey, no inflation! If beef's up, but ostrich is down, hey, no inflation!

The reason the inflation numbers started being tracked was to try to measure how much of your living standard is dropping from the monetary abuse of the government, which is a form of hidden taxation. This new system entirely abandons that idea. If sawdust has been going down, and that's all you can afford for dinner -- hey, no inflation! It no longer tracks declining standards of living, but rather a basket that can be cherry-picked to show the best possible results.

Yes, there are problems with goods substitution, but the "solution" they've chosen means that they soberly report numbers that mean absolutely nothing.

Another area of total bullshit is the 'core inflation' numbers. This is ABSOLUTE GARBAGE. Measuring inflation ex food and energy is like measuring your health ex heartbeat and respiration. Food and energy demand is highly inelastic; you need a certain amount of both to live, and this is not negotiable. Food and energy inflation are, thus, the ones that really hurt, and the ones you should be paying the most attention to.

Nobody riots because washing machines are too expensive, after all.

You cannot, cannot trust the government numbers. Trust your own pocketbook. And don't rely on any financial instrument provided by the government that's inflation-indexed. With the sheer amount of debt the government has, it has very powerful incentives to under-report inflation.

If you're on Social Security, well, you're pretty much fucked.
posted by Malor at 7:46 AM on May 7, 2008


Hi Malor!
posted by TwelveTwo at 5:33 PM on May 7, 2008


I've been side-barred; I guess I should take some time to temper and clarify some earlier statements and to address some concerns that a few of you have raised. First, two caveats: (1) I worked at the BLS as a glorified research assistant while I was in graduate school going for a Ph.D. in economics. I was not in a position to make any executive decisions, and I have never been authorized to speak on behalf of any part of the federal government. Opinions I have expressed here are strictly my own. (2) I quit the Ph.D. program after working at the BLS to pursue a job in the secondary mortgage market. I have published only one paper, and it has nothing to do with the CPI. I am now working as an attorney and am not involved with the BLS in any way.

I apologize for the harsh tone and language in my first post. I actually think that people like Phillips, Williams and the Shadow Stats organization offer a valuable service in providing alternative statistics and information about government statistics, to the extent that they are transparent in their methods and accurate in their criticisms. They may help others to understand statistics like the CPI better, and I certainly didn't mean to blunt that effort. But I was unable to find anywhere in any of the FPP links a coherent explanation of why the current CPI is worse than older versions, and no indication where I might go to find the technical details.

When considering the CPI, or any estimate of inflation, it is good to keep in mind Mutant's point that individual experiences of inflation can and will diverge (significantly) almost all of the time. Most people recognize the significance of how much purchasing power they themselves (or their families, or friends) are losing to rising prices; companies are sometimes concerned about their employees' experiences; policy debates sometimes focus on the experiences of people in particular geographic regions or of particular classes of people; etc. Experiences of inflation will differ widely across geography, class, culture, individual behaviors, etc., and what number or set of numbers best approximates the inflation experiences of groups of interest will differ accordingly.

Just about every notable economic theorist has considered the problem of the index number, and it is uncontested that there is no single, ideal formula for calculating "the" inflation rate [see, e.g., the semi-coherent discussion at Wikipedia]. It is also uncontested that inflation is an important issue and we really do need to have some grasp on what's happening to prices and purchasing power over time. There are, I believe, two chief approaches to producing relevant information. We could estimate a pure cost-of-goods index ("COGI"), and the US CPI started out principally as such an index. Such indices measure the change in cost of a particular mix of goods over time, sometimes with weights selected to emphasize the importance (to whom!?) of particular components. Alternatively, we can explicitly attempt to estimate a cost-of-living index ("COLI"), which tries to account for changes in welfare (as understood narrowly by most economic theorists) resulting from changing prices. The idea behind a COLI is that what we usually care about is whether changes in prices hurt or help people, something a COGI at best hints at, particularly when some prices go up, some go down, and the mix of available goods and services changes over time. The personal impact of price changes can be softened somewhat by substituting toward relatively cheaper goods, a phenomenon that is generally not accounted for in a COGI. For example, if the price of Wii games goes up, I am not constrained to pay the higher prices - I can shift some of my game-playing to Scrabulous, or I can spend some time outside in the sun. I'm still worse off, but not as much as if I simply had to maintain my former gaming patterns and cough up the cash for Guitar Hero III.

As it turns out, it can be shown mathematically that the two most common COGI formulae (Laspeyres and Paasche indices) provide upper and lower bounds, respectively, for the most common COLI measures, so that the two approaches are not unrelated. What index is most appropriate to use (if any) is genreally dictated by the question one is trying to answer. As a result, most governments, including the US, publish numerous measures, often disaggregated over smaller geographic regions (see the CPI's non-seasonally adjusted area indices), or classes of goods (see CPI's component goods indices), or sometimes classes of consumers (e.g., compare CPI-U to CPI-W, urban consumers versus urban wage-earners and clerical workers). I am of the opinion that the US government should also make their giant database of historical price quotes available to the public so that individuals and organizations might make their own indices. At this point, I can't imagine that making the completely disaggregated data available would be overly costly. I also think it would be a nice step toward transparency for the BLS to make CPI simulation code available for use with that data, so that people could test the effect of hypothetical price changes or tweak the code to incorporate features as they see fit. I reiterate my earlier statement, though: the best we can hope for from the CPI is a moderately understood, simple and somewhat informative summary of a large set of complex data. But I should also note that many governmental and non-governmental organizations often produce more general measures[pdf] of well-being and alternative price or inflation measures, including those in the FPP links.

Originally, the CPI was a (modified) Laspeyres COGI, which provides an upper bound on standard cost-of-living measures - that is, it always overstates the welfare effect of price increases, though by an a priori indeterminate amount. The Laspeyres index was originally used, in part, because it is cheaper and easier to calculate repeatedly over time (everything is anchored to a single basket of goods from a past period, and all that has to be collected are current prices). That is, the BLS chose the cheapest index to produce but also the most costly to the government in its use. More recently, the BLS has moved toward publishing a hybrid, amalgamated COLI to attempt to measure the welfare impact (understood narrowly) of changing prices more explicitly. Thus, the CPI has incorporated attempts to account for substitution behaviors among consumers, and changes in the ability of available goods to satisfy consumers' wants and needs. Some of these changes came about, in part, because they could - with cheaper and better computing power, data collection and data storage, it became relatively cheaper over time to calculate more complex formulae (the BLS, too, substitutes towards goods that grow relatively cheaper). It may also be that certain changes were prioritized or pushed for the reason that Malor and others have highlighted - lower inflation measures save the government money. All sorts of federal programs and benefits are indexed to the CPI in some fashion, from certain debt instruments, to income tax brackets, to benefit payments, to.... And any quasi-justifiable move away from a Laspeyres index will tend to result in lower inflation measures. But this fact doesn't help much in figuring out whether the CPI more or less accurately reflects the inflation experience of any particular individual or organization. And maintaining artificially high inflation measures wouldn't necessarily help Social Security recipients or bond holders. After all, it's precisely the growing SS outlays and debt-servicing expenses that are pushing the government toward reducing SS benefits, raising the retirement age, "privatizing" SS (making it less social and less secure!), and defaulting on its debt.

Given that the BLS is now explicitly trying to calculate some sort of cost-of-living measure, it makes sense to try to account for the change in quality of goods available. Change in goods quality over time is potentially a major factor in evaluating the costs of maintaining a particular standard of living. Quality changes are cost changes - getting a better product for the same price makes it cheaper to achieve a given standard, just as the disappearance of a favored product makes achieving that standard more costly. A COLI that fails to account for quality changes fails to be a COLI to that extent. Some people might challenge whether the BLS should be trying to produce a COLI rather than a COGI. My own take is that if a statistic is going to be used to adjust wages for the changing cost of living, then it seems to me a cost of living index seems appropriate, but if it's being used to deflate GDP, there are better measures. Deriving real interest rates from nominal rates? Probably something more specialized still is called for. At this point, I'd really like to see the BLS work on making more of its currently collected data and simulation code publicly available, in addition to increasing price points collected to enable production of more disaggregated indices.

I do want to address Malor's criticisms explicitly. First, changing yardsticks obviously does pose significant measurement problems when you're interested in making comparisons over time. So there is an obvious cost to changing how the statistics are reported. Sometimes, the BLS is able to recalculate older indices using its new formulae to mediate this cost. Chaining of indices introduces a similar problem, though some chaining is necessitated by the changing panoply of available goods. But there is also a potential cost to continuing to use an inaccurate yardstick just because that's the one you used first. The question is whether we can develop better measures, and how much better they are.

Malor: Now, they can instantly substitute anything they want, anytime they want.

I suppose that this back orifice is open for abuse (as, to some extent, it always has been), so some caution and skepticism is warranted. But as a practical matter, it doesn't much concern me. The reason is that in practice the substitutions are selected, not by political appointees or policy-making higher-ups, but by "data collectors" with the thankless job of actually going out every month and collecting price quotes from numerous sales outlets (or conducting surveys more generically in some cases), using a checklist of characteristics determined by a similarly non-political "commodity analyst". And the official, on-the-books policy on substitutions[pdf, see p. 22] is generally to pick the most similar item actually on the shelf. In addition, the goods in the basket are determined within reasonably narrow bounds by Consumer Expenditure Survey data (though the selection of actual models priced could certainly be improved with retail scanner data or similar data). And the BLS actually employs several people who are not entirely mindless puppets of or cheerleaders for the reigning administration. By the way, here are two papers, one authored by a former co-worker along with Professor Pakes, and one authored by one of my former bosses, suggesting that hedonic adjustments have had very little quantitative impact on the CPI.

Malor: It no longer tracks declining standards of living.... [T]he "solution" they've chosen means that they soberly report numbers that mean absolutely nothing.

See discussion above and links therein about how the CPI actually moved toward a COLI. Maybe the numbers are difficult to interpret, and they also incorporate numerous mistakes, errors, and biases, but a pure COGI pretty clearly misses the mark for producing numbers to use in making cost of living adjustments to wages and benefit payments.

Malor: Anyone who says that the hedonic adjustments are 'correct' is full of bullshit.

Finally, I note that the only time the word "correct" was used in this thread was by me - in agreeing with sfenders that hedonic calculations get it wrong. I am full of bullshit, too, as it happens, but I did not mean to imply that our work on hedonic adjustments was "correct" - merely that it was less politically motivated than was suggested in the FPP-linked article.
posted by dilettanti at 6:21 PM on May 7, 2008 [9 favorites]


Malor
You're starting to become a parody of yourself. In economic thread after economic thread, you come in with your crazy, and some expert like mutant or dilettanti comes along and gives long, extremely detailed, footnoted! and sourced rebuttal that utterly demolishes everything you say. Yet, you proceed to just ignore them and continue on about how they're just wrong. Come on, just admit that you have no idea at all what you're talking about.
posted by Sangermaine at 6:25 PM on May 7, 2008 [3 favorites]


BLS represent, yo. My first web project was getting the SOC on line.
posted by MrMoonPie at 7:52 PM on May 7, 2008


Metafilter: I suppose that this back orifice is open for abuse




I'm so very sorry</small
posted by Joseph Gurl at 6:33 AM on May 8, 2008


a misleading crock of stinking misdirection and misinformation.

wow. i've been struggling to arrive at a succinct definition of big media journalism, and by jove, i think you've nailed it!
posted by quonsar at 10:22 AM on May 8, 2008 [1 favorite]


oops, noticed that the "when the average isn't that useful" link was wrong (altho related); it should've been for a "new way to build a better estimate," which actually kinda bears on the discussion :P
...large data sets are producing more unreliable predictions, given current procedures. That's because maximum likelihood estimators use data to identify the single most probable solution. But because any one data point swims in an increasingly immense sea, it's not likely to be representative...

"Using maximum likelihood estimation, the most likely outcome would be very, very, very unlikely," Lawrence said, "so we knew we needed a better estimation method."

Lawrence and Carvahlo used statistical decision theory to understand the limitations of the old procedure when faced with new "high-D" problems [high dimensional unknowns produce enormous statistical uncertainty]. They also used statistical decision-making theory to find an estimation procedure that applies to a broad range of statistical problems. These "centroid" estimators identify not the single most probable solution, but the solution that is most representative of all the data in a set...
btw, here's tim duy on misunderstanding the CPI:
[T]he debate over the use of OER in the CPI is something of a false debate. In my opinion, it misses the point entirely. The debate is not whether housing costs are miscalculated in the CPI – the BLS’s basic methodology is appropriate to achieve their objective. The debate is whether or not the Fed should include assets prices, such as home prices, in their policy objective of price stability. Just because there is a valid argument that the Fed should be using a measure other than (or in addition to) consumer prices does not imply that the CPI is flawed. It implies that the construction of monetary policy is flawed. In effect, the BLS is unfairly criticized for the Fed’s policy error.
cheers!
posted by kliuless at 2:23 PM on May 10, 2008 [1 favorite]


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