How convenient for the economists!

Rob

I believe the numbers are being manipulated for reasons that are beyond politics.

Changes in political administrations do not result in changes in our financial leadership or direction. Our current treasury secretary, nominated by President Obama, was handpicked by his predecessor – who served under President Bush. Ben Bernanke was nominated to succeed Alan Greenspan as Fed chairman by President Bush, and President Obama nominated him to continue on as Fed chairman at the expiration of his first term.

Our nation’s financial future is not subject to political whims.

CPI was never intended to be accurate for anyone’s personal economy. It is – from the BLS site – “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” Commercial property owners, commercial property tenants, Social Security recipients – and scores of others – would disagree with you that CPI is really no good for anyone. They may agree that it is a poor measure of inflation, but it has a major impact on millions of daily financial transactions.

Inflation isn’t an issue – yet. Many believe it will be a huge issue in the near future. Last week the Daily Telegraph reported that the Royal Bank of Scotland has advised its clients “to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.”

Our national debt has grown to such stratospheric levels that many believe we will soon be unable to find buyers for our ever rising debt, and that we will have to print money – debase our currency – to pay what we owe.

I find it interesting that you say economists aren’t smart enough to come up with a better solution to CPI. If this is so, why are you so willing to accept at face value the BLS data and analysis on how Americans spend their time? Why do you cite data and analysis of economists here in your blog, and encourage readers to take to heart what they have to say?

If this is so, what is your opinion of the economists employed by our Treasury Department and the Fed, who are relied upon to provide data and analysis on which important national financial decisions are based?

If economists aren’t smart enough, who is?

Last week the Fed published a report by one of its economists in which he opined “neither non-economist bloggers, nor economists who portray economics…as a simple enterprise with clear conclusions are likely to contribute any insight to discussions of economics and…should be ignored by an open-minded lay public.”

This economist also says that “writers who have not taken a year of PhD coursework in a decent economics department – and passed their PhD qualifying exams – cannot meaningfully advance the discussion on economic policy.”

So Pop, who are we to believe – the bloggers, or the economists?

As far as CPI goes, it’s kind of a rough estimate anyway that’s ultimately not accurate for anyone’s personal economy. I mean, my parents have owned the same home for 20+ years. Would inflation as calculated by the change in CPI have been accurately reflected for them if it included the drop in prices in the 90s (in their area), the rapid run up in the 2000s and the 20% drop they now face? Of course not. Housing is purchased at once but consumed over decades. And then after it’s consumed, it’s sometimes sold for a good portion of what it cost you.

So, basically, CPI is really no good for anyone. But I still think it’s because economists aren’t smart enough to come up with a better solution—not because they’ve been instructed to hide something. But hey, to each his own.

My misstep does not negate the fact that there is a great deal of debate over how far off CPI is from the real rate of inflation. Some credible analysts believe it is off by as much as 100%.

The BLS says it uses owners equivalent rent “(b)ecause the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons.” This mindset, evaluating financial transactions in light of their investment potential, leads to trouble. It is not based on how real people behave.

It is largely responsible for the pervasive assumption in the mortgage security market – prior to the mortgage meltdown – that home prices would always go up.

The vast majority of home buyers do not buy homes for investment. They buy homes to live in. Many have concluded that the use of owners equivalent rent in CPI led our economic leaders to believe there was no housing bubble.

The BLS site states, “Clearly, the rental value of owned homes is not an easily determined dollar amount, and housing survey analysts must spend considerable time and effort in estimating this value.” This just creates even more opportunity for totally skewed, not-based-in-reality numbers.

Whether or not we attribute nefarious motives to CPI or other BLS data, there is no arguing with the facts.

It is a fact that CPI has a huge impact on the financial lives of millions of Americans. It is a large component of consumer confidence. It is used to calculate changes in cash payments for innumerable financial transactions, including commercial rental rates, payouts on insurance contracts, and Social Security benefits.

It is a fact that the BLS has gone to great lengths to substitute real life data with massaged data in its calculation of CPI. It is a fact that over time the data continues to be massaged in new ways, further removing the results from real life. The more substitution that is made and the more massaging that takes place, the more unreliable the inflation data becomes.

As you state, there is indeed a more effective way to goose inflation numbers – just stop publishing them. This is what the Fed did in 2006. They stopped publishing M3, the metric that is the best measure of the money supply.

It is a fact that the BLS continues to manipulate CPI, and that the Fed stopped publishing M3. Is it possible that our financial leaders no longer want us to know the true extent to which our currency is being debased?
Hmmm…

And regardless, owner’s equivalent rent makes up 25% or so of CPI. So even if it’s lower than what it would be if home prices were reflected, it wouldn’t be 1/3 lower.

Most economic releases are on a set schedule (as the time survey is). I think it’s really a stretch that the federal government has twisted data on a relatively obscure study to support anti-obesity efforts.

Anyway, I’m just saying that skepticism is great, but where you choose to be skeptical is going to go a long way to determining how much everybody else is going to listen to said skepticism. Also, I consider blogging to be a productive activity (for me) because this conversation wouldn’t have even happened if I chose to watch the Real Housewives instead. : )

Thanks, as always, for the comment.

The Bureau of Labor Statistics is famous for manipulating data, using questionable methodology, and for releasing data in an attempt to sway public opinion. One of the most glaring examples is what they have done to CPI – the Consumer Price Index.

The BLS has removed homeowner housing expenses from the CPI calculation, and attributed as income to homeowners the amount of rent homeowners could get if their homes were rented. Homeowner housing expenses typically run about 1/3 of total outlay, so for homeowners this skews CPI 2/3 lower than it really is. CPI as published by the BLS creates the perception that inflation is much lower than it actually is.

Could it be that the reason this data was released is because recent research shows a correlation between obesity and the amount of TV viewing? Hmmm…

Correlation is not causation. TV watching does not cause obesity. Perhaps the reality behind the numbers is that since obese people find it difficult to engage in physical activity, they spend their leisure time engaged in passive pursuits, the most common one being TV watching.

And since we are asking questions, why is it that blogging is considered a productive leisure activity, but watching TV is not? Why is it that watching an art film in a theater is seen as laudable, but watching sports or an action adventure flick on TV is not?

Topics like this can help us think about how we spend our time, and help us to be mindfulof the choices we make.

But what we choose to do with our time is a personal choice. I choose to not sit in judgment of those who choose to watch TV – or any other choice they make for their leisure time.

We need to occasionally just let random thoughts into our heads, to enjoy non-structured time. I have found that taking long walks works great for this. I always learn something from talking things over with myself on a long walk. Always.

You don’t get this with television. The hours just go by with nothing to show for them. Television requires just enough of your attention to keep your brain from working on anything other than what is taking place on the screen.

Rob