The Crash Course - Chris Martenson [57]
President Nixon bequeathed us the so-called core inflation measure, which strips out food and fuel, to create a measure of inflation “ex food and fuel,” which financial commentator Barry Ritholtz says is “like reporting inflation ex-inflation.” For the rest of us, it’s very strange to think about inflation as consisting of the prices of our essential daily needs minus the eating, driving, and heating parts.
By adopting the Boskin Commission recommendation on inflation, President Clinton bestowed upon us the labyrinthine statistical morass that’s now our official method of inflation measurement, which we’ll discuss in detail below.
These are just some examples of a pathological instinct to buff the numbers into a rosier hue that has been a feature of every presidential administration since Kennedy. At every presidential turn, a new way of measuring and reporting was derived that invariably made things seem a bit better than they actually were. I know of no examples where a new economic measure was adopted that served to make things seem a bit drearier or worse off. The process of debasing our official statistics has always been strongly biased. Economic activity was always adjusted higher, inflation was statistically tormented downwards, and jobs were made to seem more plentiful than they actually were.
Unfortunately, the cumulative impact of all this data manipulation is that our measurements no longer match reality. In effect, we’re telling ourselves lies, and these untruths serve to distort our decisions and jeopardize our economic future. A few economic fibs during the good years seemed harmless enough, and they probably were. However, with the current and emerging economic difficulties, we will find them to be as severe a liability as defective cockpit instruments would be to a pilot navigating a gap through the Rockies.
Next let’s discuss in detail the way the most important indicators that we rely on for understanding our economic picture are adjusted, measure-by-measure.
Inflation
We’ll begin with inflation, which is reported to us by the Bureau of Labor Statistics (BLS), in the form of the Consumer Price Index (CPI). If you were to measure inflation, you’d probably track the cost of a basket of goods from one year to the next, subtract the two, and measure the difference. If you did, your method would, in fact, mirror the way inflation was officially measured right on up through the early 1980s. It’s a perfectly logical, defensible, and sensible method.
But in 1996, Clinton implemented the Boskin Commission findings, which championed the use of three new statistical tools—substitution, weighting, and hedonics—that are applied to measured prices after they’re collected but before they’re reported.
The cost of goods and services are no longer simply measured and reported from one year to the next, now that we have adopted the use of the “substitution effect.” Thanks to the Boskin commission, our measurements now assume that when the price of something rises, people will switch to something cheaper. So any time the price of something goes up too rapidly, it’s removed from the basket of goods and a cheaper item is substituted. For example, if rib-eye steaks go up too much in price, they’ll be removed from the basket and replaced (“substituted”) with, say, sirloin steak (or whatever form of steak is the cheapest).
To illustrate the impacts of these statistical tricks, let’s imagine that our goal is to accurately assess whether a group of 20 of our former high school classmates have gained weight (in other words, inflated) or lost weight since high school. Following current government statistical conventions in our experiment,