“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

>

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 . . .

Category: Data Analysis, Economy, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

57 Responses to “Why Michael Boskin Deserves Our Contempt”

  1. cognos says:

    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.

  2. cognos says:

    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?

  3. rickety rick says:

    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.

  4. DL says:

    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.

  5. bman says:

    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

  6. Laurent B says:

    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.

  7. Mannwich says:

    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?

  8. call me ahab says:

    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?

  9. flipspiceland says:

    BR Thanks for naming names.

  10. red_pill says:

    exactly why you shouldn’t buy TIPS.

  11. Mannwich says:

    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.

  12. call me ahab says:

    “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

  13. Mike S says:

    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.

  14. Mannwich says:

    @ahab: No, “son of manny”.

  15. bman says:

    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.

  16. Moss says:

    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.

  17. call me ahab says:

    bman is right-

    impossible to find a basic car anymore-

    safety features are mandated- so can’t get around that- but to find a manual transmission- almost impossible- basic radio not to be found- roll up windows- nowhere to be found . . .

    all plush now- even pick-up trucks-

    I guess that says a thing or two about Americans- or maybe the manufacturer’s impression of American’s wants and needs

  18. Mannwich says:

    @ahab: I heart my ’01 manual Toyota Corolla. No power anything or luxuries inside. Just heat, AC and a radio. Runs like a champ. Only 78K miles on it. I will drive it until it croaks. I’m that cheap.

  19. Init4good says:

    test

  20. Aeolus says:

    While you can make a reasonable argument that some products like automobiles, digital cameras, and computer monitors have improved substantially, there’s a counter-argument that much of what we buy has declined markedly in quality as its manufacture moved to China and as our retail distribution system has been driven by the dominance of big box retail with its relentless emphasis on price over quality and a ruthless contempt for the suppliers.

  21. Aeolus — totally agree with that sentiment

    We were in Target over the weekend (always load up on paper goods, bottled stuff, detergent, etc.)

    In terms of dog stuff, we carefully check the manufacturing location, and no longer buy any products/dog food/raw hide/treats if they were made in China . . .

  22. rootless_cosmopolitan says:

    Sheehan claims (in the text to be seen after following the link):

    “The changes have lopped off far more than 1.1% in most years since 1997. From the time the changes were instituted through 2008, the compounding of an artificially low Consumer Price Index reduced payments to social security recipients by about half (according to John Williams, author of the newsletter Shadow Government Statistics).”

    And in what way is John Williams a reliable source for this claim? How is Williams supposed to know what the “real” inflation rate was? Looking at the SGS-inflation rate:

    http://www.shadowstats.com/alternate_data/inflation-charts

    it is apparently made up by adding some assumed linear trend to the CPI-U data. It’s not plausible to me that there would be such a trend in the inflation data. I doubt that Williams has the necessary data available to calculate any real inflation rate. Well, there may be enough fools, anyhow, who are willing to pay for a subscription of his newsletter where the “truth” is being revealed.

    Barry Ritholtz claims:

    “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.”

    From the BLS-website:

    “Critics of the BLS often erroneously assert that reflecting substitution behavior in the CPI amounts to tracking a declining standard of living. Their argument can be summarized as follows: “the BLS assumes that if steak becomes too expensive, consumers will shift to buying hamburger, so the CPI reflects a tradeoff of hamburger for steak, not steak for steak.” The trouble is that that logic fails to recognize the point made at the beginning of this section: that the BLS employs the geometric mean formula only within basic CPIs, such as the index for ground beef in Chicago. Still, despite the fact that it is wrong, the idea that the CPI’s use of the geometric mean reflects substitution between hamburger and steak has attained the status of a sort of urban legend, repeated by numerous bloggers and commentators.
    When the price of a certain type of beefsteak rises, CPI-U and CPI-W methods allow only for substitution to other types of beefsteak, not to hamburger or other, cheaper alternatives to steak. A 1998 article in the Monthly Labor Review emphasizes, “the geometric mean formula will not be used to combine the basic indexes in the CPI, such as those for ice cream products and apples, into the overall index.”20 As mentioned earlier, those indexes are combined into the overall CPI-U or CPI-W under the assumption that there is no substitution between ice cream products and apples or between steak and hamburger.
    In addition, the critics’ argument takes as its premise that steak, the more desirable product, is getting “too expensive.” As has been noted, the CPI’s assumption about substitution is that consumers shift their purchases toward items whose prices are rising less (or falling more), not necessarily toward less desirable goods. For example, within the CPI category “ice cream and related products,” the assumption is that if the price of premium ice cream falls relative to the prices of cheaper store brands, consumers will shift toward the premium brands. Within the beefsteak category, the CPI implicitly assumes that, on average, consumers would shift up from flank steak toward filet mignon if flank steak prices rose by a greater amount (or fell by a lesser amount) than filet mignon prices. If all prices change proportionately, then no substitution is assumed.”
    (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf)

    Funny, that Barry literally reproduces the example that is called an urban myth in the article by the BLS economists who deny that substitution is made in this way.

    As for the hedonic adjustment. Someone calculating another price of a new car than the government statisticians, who use hedonic adjustment, isn’t a prove for “intellectual fraud” either. What is the logic supposed to be here? Because the official CPI-U is lower, it must be true that it was manipulated, which already has been the assumption in the first hand?

    I don’t have any particular view on the validity of hedonic adjustment, substitution, or generally, the official inflation rate. However, I don’t see prove by assertion (and if it by quoting someone else who just makes the assertion), urban myths, or circular reasoning as suitable to make any convincing argument.

    rc

  23. cognos says:

    I also made the argument that healthcare products improved substantially.

    While I dont disagree that quality can also deteriorate, I would make the arguments that food products have far less chemicals and preservatives than in 1970-1989. In 1980… we were just starting to think about this.

    Most durable “appliances” also fall into this as they are much more efficient. That old 1970s, 1980s refrigerator used much more energy, no? This alone may make the current “cost of ownership” of todays refrigerator less. (Not to mention size, light, features, etc… remember that 1980 fridge? Not worth $100 today either).

    Whatever you think about the quality (going up or down)… it seems a very important adjustment and of an order of magnitude equal to the basic prices increases themselves.

  24. cognos says:

    Rootless_Cosmo — Awsome post. Hilarious that BLS covers the exact argument as “urban legend”.

  25. Its Me says:

    Staying with the car example:

    I can’t substitute with Hedonic pleasures. I can’t buy a crank start car with a 25 HP air cooled engine with a non-synchronized manual transmission. I can buy a basic Ford though.

    I can’t buy a radio with tubes I can buy a radio with transistors or maybe not, just microchips.

    So a 1900 copper mine uses mules and men to extract the metal at $.50/ton. A 2010 mine uses hydraulic excavators and large mine trucks to yield copper at $20.00/ton. By Boskin’s method he would have grad students call area ranches to find the annual cost for a mule, then extrapolate out to a Terex mine truck. Comparing $.5 to $20 would dismiss our hedonic gains.

    I can’t quit articulate this but it seems that the Boskin method asserts that there is unequal advances. That the society as a whole is not more efficient only items at the tail end. Only the retail items. Workers themselves are not more efficiency. Corporation and methods aren’t more efficient only the retail item.

  26. LeeX says:

    Excluding food and fuel makes perfect sense because those things are just luxuries.

  27. I don’t want to dispute the proposition that the Boskin Commission has perpetrated a massive fraud. But i think it is the one that politicians of both parties have happily gone along with.

  28. FrancoisT says:

    I tried to read the Boskin piece.

    After the first paragraph, I have a bad case of this warm and fuzzy feeling called nausea.

    Politicians and scientists who don’t like what their data show lately have simply taken to changing the numbers. They believe that their end—socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française—justifies throwing out even minimum standards of accuracy.

    Here is an economist who is such an arrogant piece of fairy shit that he has the dare to accuse professionals of a field he has no fucking idea about to fake their data.

    Ever heard a climate scientist tell you that as an economist, your methodology suck ass and your data is faked?

    No, right?

    Therefore I hereby direct you to go fuck yourself Michael Boskin!

  29. FrancoisT says:

    Reading the first sentence of Boskin piece was enought to know that it wasn’t worth my time.

    This guy is a (*&#(^@#(*@%&#()@%.

    Sorry Barry, but your filters went berserk when I tried to post what I REALLY think.

  30. bman says:

    Cognos,
    Health care has not improved substantially. The cost has risen exponentially but the care is about the same. You check into a hospital you are about as likely to get an infectious disease as you were in 1960. Cancer still has no cure. You can have all the high tech gizmos you want, the doctor is still a person, often a busy person. Due to the economic squeeze put upon said doctor by factors such as erronious CPI’s and other financial slights of hand, he has more patients then he did in the 60′s and they are less likely to be able to pay for his time. The chance that he will make a misdiagnosis or an error is greater than back in the 60′s.

  31. cognos says:

    @Its Me — The unibomber managed to avoid hedonic improvements. He lived like it was 1900 and it cost him about $300/yr. Shacks and outhouses remain very inexpensive.

    @bman — Yet we all live much, much longer than 1960. Hmm, that must be all the exercise we do.

  32. FrancoisT says:

    While I’m at it (gee! indignation stimulates the creative juices, it’s not even funny) Boskin’s career reminds me of this Aesop quote:

    “We hang the petty thieves and appoint the great ones to public office.”

  33. FrancoisT says:

    Boskin also has the unbelievable nerve to bag together politicians and scientists (!!!) as fraudsters who fake the data.

    How about that? An <ECONOMIST think he’s so goddamn smart and cognizant that he can opine on scientific matters of extreme complexity and peremptorily conclude that they are fraudsters.

    Excuse me??

    Who the f*&k is this guy? Who let this asshat freely roam the streets?

  34. jjay says:

    I drive a 1986 Nissan 300 ZX that I bought brand new.
    It has 365,000 miles on the clock.
    I replaced the original clutch at 250,000 miles.
    I just now need to recharge the AC for the first time.
    About half of the light bulbs on the car are original.
    California just raised the registration to $100 a year.
    I change the oil and filter every 3,000 miles.
    I do a $1,000 major service every 60,000 miles.
    I paid $18,000 for it back in 1986.
    Can anyone top that?
    I think I got my monies worth so far!

  35. Darmah says:

    “hedonic adjustments.” What crap. I’m not an economist, but isn’t the expectation that improvements are made over time one of the pillars (or whatever you wanna call it) of the free market? Isn’t competition supposed to keep prices down? “Hey we can improve this and sell it for more than the competition.”

    I own a 1993 Miata, MSRP = $15,200. At 2% inflation per year (you know, the supposed target rate), a 2010 should cost $21,283. Actual MSRP is $22,810. So Mazda has done a good job holding price while improving the product. Isn’t that what’s supposed to happen in a free market?

    And what about the Model T? Did not its price go down over the years as Ford improved quality (but with few, if any “upgrades”) and efficiency which it passed on to the consumer?

    I have to agree with the argument that the changes were just a way to hide the true costs. No free market. Just more and more transfer of wealth to the rich.

  36. Darmah says:

    Meant to say:

    “Hey we can improve this and sell more for less than the competition.”

  37. cognos says:

    @Darmah — Bet the new one has GPS navigation and 5 airbags, improved fuel economy and lower emissions.

    Just saying.

  38. Its Me says:

    @Cog

    So we should have a LPI? a Latrine Price Index. How much does it cost to have a pine outhouse built on your own property?

    Oh, but a sanitary disposal permit is required by the county and was not in 1900; thus a permit is a hedonic expense. But I can’t legally build a latrine without a permit. I have no choice in the mater. Its the present cost to me of what it cost to crap in my backyard. Or my Craping Price Index. Why else would my money’s buying power decline if it weren’t for changes in the what the minimum is?

    The permit has changed what it cost to to business in my backyard thus my CPI goes up. Taxes would do the same thing as permits and regulations.

  39. Darmah says:

    @Cognos
    “@Darmah — Bet the new one has GPS navigation and 5 airbags, improved fuel economy and lower emissions.

    Just saying.”

    Obviously, you missed my point and don’t know much about MX-5 Miatas either.
    Just saying.

  40. bman says:

    The data is there, why doesn’t somebody do a real CPI over the last fifty years as it was figured 50 years ago?

    That could at least put the numbers into perspective. Then you can talk about added value due to technological improvements until you’re blue in the face, because noone will care.

  41. rootless_cosmopolitan says:

    Darmah,

    The CPI is supposed to be a statistical representation of the average price changes of all consumer goods. It is calculated after sampling about 80,000 prices every month.[*] The price changes of the individual goods are not identical with the average number. Instead, they are distributed around this one statistical measures. In what way could choosing one single consumer good and its price change as example and comparing it with the average number show that the methodology of calculating the statistical measure was faulty? That’s not possible.

    BTW: If you want to compare the price change of your car to the average inflation rate, then you will have to use the real inflation rate and not just some 2% you arbitrarily assume.

    You base your assertion of a malicious intend on a logically fallacious argument.

    [*] http://www.bls.gov/cpi/cpifact2.htm

    rc

  42. davver1 says:

    1) Of course some hedonistic adjustments makes sense, improving quality is a real benefit. It is very difficult to quantify though. Should a computer that is twice as fast be 1/2 as expensive according to CPI? Quite frankly, my mom wouldn’t need the extra speed, buying a faster computer wouldn’t help her check e-mail faster. On the other hand improvements in some products might be understated. Should declining quality (chinese imports) raise CPI? The issue is highly subjective to the person deciding what to include/exclude and how much is bound to be controversial.

    2) The issue with substitution was never substitution within categories, but substitution between categories. As the BLS write up states, if flank steak increases in price slower then filet, it assumes people will substitute flank steak for filet. Thus the weight of flank steak within the CPI basket increases, and since its price increased less then filet you are overweighting those items which increased in price less. Its not a question of comparing the prices of two different items, its a question of which products get weighted more heavily and the bias that introduces.

    3) The biggest fraud of the CPI is the concept itself. Consumer prices are just one place inflation can go. Inflation over the last few decades has been in assets because that’s where the debt increase has gone (money = debt). Thus things like “owners equivalent rent” are the biggest scams.

    4) Mankiw’s statement is correct, the CPI is all about entitlement accounting. Nobody blindly uses it, certainly not the Fed. If it did Bernanke would never have lowered rates in the face or rising CPI in 2008. He saw through it for all its flaws and limitations, its just a number.

  43. rootless_cosmopolitan says:

    FrancoisT,

    “Boskin also has the unbelievable nerve to bag together politicians and scientists (!!!) as fraudsters who fake the data.

    How about that? An <ECONOMIST think he’s so goddamn smart and cognizant that he can opine on scientific matters of extreme complexity and peremptorily conclude that they are fraudsters."

    You are right about Boskin with respect to that. He makes assertions that aren't based on facts, presumably because of his own political/ideological bias. It's funny that he exactly does the same thing of what others are accused by him.

    Too bad that most arguments presented here, and that includes Barry's opening posting, according to which the CPI was based on fraud, aren't of any higher quality than the ones presented by "climate skeptics" who assert global warming was just a fabrication by evil climate scientists.

    rc

  44. Darmah says:

    @rootless

    My argument was/is:

    Product improvements are inherent within the context of a free market. If so, then “hedonic adjustments” are not necessary. I put this argument in the form of questions in hopes of getting some yeas or nays.

    I then gave two auto examples: one where the product came nowhere near the inflation rate for autos overall, yet has improved quite a bit over the years — the Miata; the other, the Model T which went down in price. I picked 2% because that’s the target rate. The actual inflation rate just makes that example better. In fact, it doesn’t matter what the rate is, only the delta caused by the adjustment. And I’m arguing that the adjustment is crap because improvement, or lack thereof, is germane to the concept of a free market and should not be used when creating a CPI index that tracks prices.

  45. cognos says:

    Nah… the funny thing is, many seemed to be biased to look for any excuse that inflation is higher than shown. BR is somewhat guilty of this.

    BR… werent you tell people to focus on headline CPI, that core was biased to the downside in 06/07? The academics will say, “core is unbiased but just doesnt fluctuate with violatile food and energy”. Turns out they were right and headline hit -2% YoY… a YoY level a full 3% lower than ever seen before (at least since 1980).

    These same “headline CPI” pushers were not out there telling the new “deflation” story based on their preferred metric. They just switched the story to talk about gold… or some other measure they thought showed inflation.

  46. StarvingEcon says:

    Here is an academic paper (forthcoming in QJE) that discusses how quality improvements affect the CPI might be useful to look at though i know you guys hate economists.

    Abstract:

    Much of CPI inflation for consumer durables reflects shifts to newer
    product models that display higher prices, not price increases for a given set of
    goods. I examine how these higher prices for new models should be divided
    between quality growth and price inflation based on: (a) whether consumer
    purchases shift toward or away from the new models, and (b) whether new-model
    price increases generate higher relative prices that persist through the model cycle.
    I conclude that two-thirds of the price increases with new models should be treated
    as quality growth. This implies that CPI inflation for durables has been overstated
    by almost 2 percentage points per year, with quality growth understated by the same
    magnitude.

    http://www.econ.rochester.edu/Faculty/BilsPapers/growth_qje_revision_August_2008.pdf

  47. rootless_cosmopolitan says:

    Darmah,

    Just to make it short. I’ll use an analogy, since the reference to climate science has already been made here. Your argument, according to which a single example would disprove the validity of hedonic adjustment, is equally fallacious as the arguments by “climate skeptics” who believe the fact that some stations and regions on Earth could be found, which haven’t shown any significant warming so far, disproved that the globally averaged temperature has increased.

    rc

  48. bman says:

    Cognos,
    It’s the monthly statements. Anyone who tracks their spending knows they’re paying twice as much for their expenses as they did 10 years ago.

    We’re not biased, we just keep scratching our heads and say wtf? when we hear that the cpi remained steady for the last quarter.

    A scientist takes data to learn what it can tell him, an economists fakes data to earn what he can’t sell you.

  49. Transor Z says:

    Just so everybody knows, as a consumer I made an informed choice back in 1985 to have the 12 oz canned items in my “basket of goods” mysteriously whittled down to containing only 10 oz of product in 2010. For the same (ever-increasing) price.

    Does the CPI account for a 17% decrease in actual quantity purchased?

    And I now have GM produce that has crowded out different cultivars on ginormous agribusiness farms so we all get the same bland generic tasting produce.

    Whatever.

  50. Darmah says:

    rootless -
    Thanks for the response, but I don’t think I’m getting my point across very well. I’m saying that quality improvements or the lack of improvements is an intrinsic part of the pricing mechanisms of capitalism, of supply and demand. Therefore creating a delta for such improvements when tracking prices is not necessary, but distorting and deceptive.

  51. Init4good says:

    I think we ought to replace one CPI for another. We’ll use the “cognos price index” since he/she seems to know the most here.

    Cognos: you said the “CPI consistently overstates inflation.” Further, your posts seem to imply there is no real need for the Index. Maybe YOU have no real need for the index, but the average american absolutely has a need for it, and that is why it was created. It’s a shame it has been twisted and bent so far from it’s intended purpose. It was an idea, a good one, because without it there was/is no way to tell if your standard of living is going up or down. If it is going up, on average, over the course of many years, and your average pay is also going up at the same rate then you are doing no better than the average american. If your pay is going down while the CPI is going up then, on average your standard of living is going up. Now, you may say why compare yourself to others, and if you don’t like your pay then find another job that pays more. That’s nice if you want to live with your head in the sand, but in the real world, it matters how you are doing relative to an average wage earner. Why? Because it may make the difference in which country you desire to be a citizen, as well as which job market you strive for. If you really want the best and brightest to lead your country, and your leader is a true leader, then the average wage should rise relative to prices. In my mind it was a political decision to remove the “volatile food and energy” prices from the index, and I think Boskin is a complete fraud.

  52. MikeG says:

    much of what we buy has declined markedly in quality as its manufacture moved to China and as our retail distribution system has been driven by the dominance of big box retail with its relentless emphasis on price over quality and a ruthless contempt for the suppliers.

    Yes, indeed. I recently lost some weight and pulled out of a drawer some near-new Levis that I bought in 1994. Then I examined the Levis I bought last year — compared to the old pair they had thinner, flimsier denim, ugly aluminum buttons instead of copper, and wore through and faded twice as fast. Made in USA? No, Sri Lanka now.

    Perhaps we need a hedonic adjustment of Boskin’s paycheck to account for the decline in quality and integrity of economic analysis.

  53. rootless_cosmopolitan says:

    Darmah,

    However, didn’t you say yourself there was no “free market”? I quote your own statement:

    “I have to agree with the argument that the changes were just a way to hide the true costs. No free market. Just more and more transfer of wealth to the rich.”

    So if there is no “free market” what does it matter whether hedonic adjustment wasn’t necessary for a “free market”? (That it wasn’t necessary for a “free market”, if “free market” wasn’t only an idea in the mind of some people, but something that existed in reality, would have to be proven first as well, anyway.)

    rc

  54. VennData says:

    Boskin, another Right Wing tool.

    The loony Shadow Stats guy always blames this on Bill Clinton…

    http://www.shadowstats.com/article/consumer_price_index

    …why? To fuel the partisan emotions of the Far Right, Boskin is the culprit.

  55. Stephen says:

    A *huge* problem I see with this whole debate is that there seems to be confusion as to what the CPI is measuring and why. When you say ‘deflation’, are you talking about a change in the intrinsic value of our currency or are you talking about a drop in the cost of living? They can, and are quite often, completely uncoupled.

    If I woke up and there was a Star Trek replicator sitting in my garage, my cost of living would drop like a rock. If I started replicating things and flooding the economy with those things then prices would begin to change dramatically. But if I called up the plumber and asked him to come and fix my sink his price would still be the same until competition forced him to drop his price because the cost of living had dropped.

    The question is, who in the economy should benefit because I now have a replicator? (Hint: the replicator represents technological improvements in production)

  56. alfred e says:

    Getting in late, I find this thread totally depressing. For lack of history.

    Bush whacker? Think not.

    The President that destroyed the CPI for fed purposes was not Bush. Bush never touched CPI or SS.

    It was Slick Willie. And he had other agenda items that were easier to squash at that time. If it had not been for some fairly strong lobbying forces at the time, he would have wreaked much more havoc.

    He wanted to attack Social Security, on a population demographic basis, which I proved to be a lie.

  57. [...] Barry Ritholtz, Fusion IQ: (Instead of responding in an e-mail, Barry called up and bent my ear for half an hour. These are a couple of highlights from my notes.) If I had to pick the one that matters the least that people put the most stock in, that would have to be non-farm payrolls. (As Barry went on, though, it became clear he meant the headline jobs-lost/jobs-gained number; he finds other elements of the report such as temporary help employment, hours worked, and wages to be pretty informative.) Another we have to look at as not helpful at all is CPI. Thanks to the Boskin Commission, it has been rendered more or less meaningless. He (economist Michael Boskin) deserves credit for taking an otherwise valid economic indicator and pissing all over it. (Here's Barry going on at length about his disdain for Boskin.) [...]