It ain't inflation 'less the government says so!

Wednesday, April 12, 2006 at 05:43 PM

For the millions of us who have watched inflation eat away at our ability to live, economist Mason Gaffney offers up a digestible explanation at The Progress Report.

The actual Cost of Living (COL) has been noticeably rising for some time, yet the major government measure of that, th Consumer Price Index (CPI) has risen much more modestly.  So....

A. Why Would the Government Want to Conceal Inflation?

  1. To mask the degree to which consumer purchasing power has actually fallen; stagnant wages are one thing when inflation is in check, quite another when inflation is flying.

  2. To mask the fall of "effective" interest rates, which might otherwise put a damper on the willingness to lend and save (as if savings needed another disincentive).

  3. To keep income tax brackets from being adjusted upwards (they're tied to the CPI), which would lower tax revenues from lower-income taxpayers.

  4. To keep Social Security raises--also tied to the CPI--lower than they otherwise would be.

  5. To minimize other wage raises tied to the CPI (union contracts, the fed minimum wage, and others).

  6. To give the false impression that the Fed Reserve System has been remarkably effective in keeping inflation in check.

How Are They Concealing It?
Largely through two devices:
  1. In 1983, the government dropped actualhousing costs from the official computation of the CPI, replacing it with a nice, subjective, totally unverifiable item called the "rental equivalent" of housing--what your house would rent for, or what you would pay to rent a similar house.  in 2004 housing prices rose by 13%, while "rental equivalents" rose only by 2%. Reagan may not have been able to turn ketchup into a vegetable, but he sure turned the cost of living down.  Think about that--the cost of housing, which takes up the biggest chunk of most paychecks, simply doesn't play an objective role in computing the CPI.

  2. In the mid-1990s, the government adopted a series of, again, subjective adjustments to the CPI, which had been thought up by those wonderful folks at the Hoover Institution.++

++This wonderful institution is part of the conservative think tank network that works overtime to produce this kind of crap report.  It's fellow traveller the Heritage Foundation has undertaken similar analysis of other issues, such as poverty.  They regularly produce crap about how American "poor" aren't really poor, if you just look at them the right way, such as this report

Called the "Boskin Commission Report of 1995," this gem concluded that the old way of computing the CPI actually overstated inflation, because it took no account of non-monetary concerns such as:

Substitution bias; presumedly, people automatically use less of a product when its price rises, so the price rise of that item should be discounted for CPI purposes.

Quality improvement bias; presumedly, quality improvements continuously occur to products that are not accompanied by corresponding price rises.

New product bias; presumedly, the CPI did not accurately reflect how new products improved our lives (microchip products were used as an example).

Discount bias; this supposedly "corrected" the erroneous presumption in the original CPI that products from "discount" stores were of lesser quality than products from full price stores."

For those who are interested, Mr. Gaffney goes to great lengths to point out the error inherent in the "quality improvement bias" theory.