The Free Market 15, no. 2 (February 1997)
Academic fraud has never been more acceptable. Works of literature are purged of material contrary to the latest political fad. Photographs are airbrushed to exclude incorrect habits like smoking. Movies with the wrong message are cut.
The same is true in economics, and the most recent con job involves the manipulation of data that reflect poorly on the government. A special commission of economists, led by a former Bush administration employee, claims that inflation is almost nonexistent, now or ever. It was all an error. Thank you, and good night.
Washington cheered this brilliant discovery as a magic bullet. We’ll balance the budget, a third of which is tied to inflation. No more fights about budget cuts; the budget will cut itself. Heck, we’ll reduce the national debt by a trillion.
No more having to raise taxes; the IRS doesn’t adjust the tax tables for inflation that has been defined away. The people will never know it, and meanwhile, new tax revenue will pour in. We’ll save Social Security and Medicare.
And no more whining from the voters about falling living standards. With this statistical trick, standards of living will skyrocket. Everyone in his own mind gets an automatic 25 percent pay raise. We’ll even make it retroactive to the early 1970s.
It’s all so easy. Just change the way the CPI, the key measure of overall prices, is compiled. It presently shows 3 percent inflation. After these economists do their stuff, it will show only half that.
No wonder this is the most popular economic gimmick to hit the beltway in decades, and the joy has extended to the establishment media, always happy to be bamboozled by government-funded sophists. The Wall Street Journal and the New York Times say this statistical revision can come none too soon.
There’s only one thing these academic con artists forgot. We would have to be as dumb as a chicken to believe them. Average Americans are feeling the price squeeze as much as ever. Every time you turn around, everything’s more expensive, from butter and hammers to clothing and schools. That is also true of items not in the CPI, like taxes, insurance premiums, purchased housing, and much else.
The CPI has been overhauled on average every two years since 1966. Without exception, every revision has shown less inflation. That alone should prove that something’s fishy about government and its index numbers.
Ever wonder how Reagan brought inflation to a halt? Before 1983, purchased housing comprised 40 percent of the CPI. But the new administration claimed this “biased” the numbers, so it took purchased housing out. The real-estate boom of the late eighties wasn’t reflected in the CPI. Even better, look at the ballyhooed hooey of the “core rate” of inflation, defined as everything not going up.
What do these tricksters take us for? Anybody who goes to the grocery store, pays tuition, buys gasoline, ponies up insurance premiums, or shells out for books knows this is nonsense. Non-government sources show average people spending 6 percent more per year on the things they need, but even those sources understate the problem.
One interesting experiment is to track your household CPI, comparing the prices of 100 items you purchased in January 1997 to the same goods in January 1996. It’s a good bet you’ll find more than a 10 percent increase.
The CPI is a biased statistic all right: it’s so thoroughly politicized that it doesn’t include any of the costs of government. Using just federal numbers, the Princeton Economic Institute calculates a 20 percent increase in the cost of government per year for the last eight years.
So what’s the rationale for changing the CPI, dumbing it down to say whatever the government wants it to say? First, says the Boskin Commission, people buy at discount stores. True enough, but that means nothing. It takes time and money to avoid the inflated cost of retail. The frustration costs of this type of shopping very nearly consume the savings in the prices. It is inflation itself that has created a market for damaged goods and rejects from regular stores; in an inflation-free world, the demand for discount shops would plummet.
Second, these know-nothings say, when prices go up, people buy cheaper items. They want to count this as deflation, not as evidence of inflation. Lets see how this works. You used to buy a decent wine for $10, but thanks to inflation, it now costs $15. So you buy a jug wine for $5. These economists want to say that your personal price of wine has fallen 50 percent, counterbalancing a 50 percent increase, making the wine inflation rate exactly zero.
Far from being a caricature, the commissions head gives an even more absurd example. “The price of beef has gone up substantially,” writes Michael Boskin in the Wall Street Journal, “so you buy chicken instead.” You may think this is a sad state of affairs. But Boskin says you’re wrong. You have “partially insulated your family from the rise in beef prices.” Thus, your price of eating has gone down.
This is pure sophistry, along the lines of claiming umbrellas not only keep you dry but also reduce the incidence of rain. Boskin has confused the response to the problem (using a cheaper substitute) with the problem itself (everything is getting more expensive).
This is to distract us from the key point, which is that consumers want good wine and steak, not Chateau Homeless and wings. That consumers can’t have the quality they want is a sign that prices are going up and living standards are going down. Plus, cheap wine and chicken have also gone up in price, though perhaps not at the same rate or at the same time.
Break this commission’s argument down to its essentials, and we get the same baloney. Items that are going up in price should be ignored or taken out of our inflation calculations. Those going down in price should be focused on and given extra weight. Using this statistical trick, they could also show that there was no inflation under Nixon, Ford, and Carter.
Sensing that this argument is weak, Boskin shifts his rationale again, this time to technology. He points out that we now drive on radials instead of bias-ply tires, that VCRs have “many more features,” that we have color TV and “50 cable channels,” that we have less pollution, and that we live longer.
There’s just one problem with these “arguments.” They have nothing to do with inflation. Radial tires and VCRs don’t affect the issue at hand, which is the purchasing power of the dollar. It’s true that computers have gone down in price; everyone knows old technology sinks in relative market value. The relevant point is that top-of-the-line computers have been going up in price for twenty years, even in real terms.
Of course, with all the finagling it’s hard to know what’s real and what’s not. But we do know this: any economist who claims to know that the government is overestimating the real “price level” is fibbing. If he were telling the truth, we could abolish the CPI altogether and just have this guy make an announcement every month.
The truth is that since the U.S. went off the gold standard in 1973, the dollar has lost two-thirds of its purchasing power. The political slogan is perfectly true: it takes two family paychecks to achieve what one did. Arguments denying dollar depreciation qualify as junk science. And any index number claiming to show that the middle class is getting richer retroactively is an obvious fraud.
But there’s a method to this mendaciousness. Long term, the biggest effect of a bowdlerized price index is increased taxes—as much as 40 percent—thanks to the downsizing of indexation. Of course, the Boskin Commission doesn’t like to call it a tax increase. Piling absurdity on error, they say an exaggerated CPI has been giving taxpayers a subsidy for 20 years.
Boskin and friends are the kind of economists who think they can invent their own version of reality and then impose it on the rest of us. They would tell a person lost in the desert to enjoy the wide open spaces while he has the chance.
But there could be a golden lining to this CPI caper. It could permanently discredit the class of economists who see their job as serving government first and science last. Expediency and compromise are objectionable in their own terms; but they are utterly baneful when used to bilk the public.
So what’s the best way to get a reading of the price level, itself a statistical fiction? Pick as many goods as possible to put in the index number, never change it, and see what happens over time. That’s what you’d do if you wanted to get some idea of what the Federal Reserve is doing to our money.
But if you wanted political trickery, you would do something else: appoint a commission to say anything the government wants. It’s further proof of what the central state will do to keep the Federal Reserve—the official counterfeiter—off the hot seat, while frying the rest of us to a crisp.
Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute
