The Free Market 15, no. 5 (May/June 1997)
My Latin professor once taught me the golden rule of Roman emperors, Vulgus vult decipi, ergo decipiatur. It means the masses want to be cheated, so let’s cheat them. Machiavelli built his theory of government partially on this credo.
Our modern emperors and Machiavellis use the same wisdom today. Why bother the masses with something they don’t understand? If they did understand it, they would only be upset. So they spare us the truth, and it is enough to listen to Sunday talk shows to know how far they’re willing to go in this effort.
The latest case is inflation. According to our emperors, the “truth” is that inflation is under control. In fact, we might need to worry more about deflation, because the economy is even more productive than the government data show. “We are beginning to reach a point,” says former Fed governor Wayne Angell, “where the lack of inflation is baked into the system.”
The Fed’s low interest rate policy has produced optimism among investors who are presently enjoying the best of times. As the stock market goes up, people feel richer and more optimistic, so they buy more. The increased demand pushes up production and employment, and the stock market goes ever higher, increasing the good feeling and so on ad infinitum. If the Fed loosens the money supply even further, predicts Angell, “stock prices will go higher.”
Well, as Lew Rockwell says, “academic fraud has never been more acceptable.” To prove that the government can create a permanent prosperity by creating money, our best and brightest economists are not just telling us that inflation is low, but that the government is even overstating it. To sound scientific (that is, precise), they tell us it is exactly 1.1 percent overstated. The government admits that inflation is running 3 percent. Keep in mind that these are people who don’t have the slightest idea what is happening in real life.
Congress and the White House may have temporarily abandoned the attempt to fiddle with the data (for purposes of bringing in new revenue and lowering cost of living adjustments). But this issue is far from gone. We can expect it to be brought up at every subsequent budget negotiation.
Now, followers of Ludwig von Mises know that it is impossible to measure “inflation,” even in the long run. To pretend to “measure” it from month to month is simply ridiculous. It is even more ridiculous when you consider how inflation is actually measured. Reading the Wall Street Journal’s account of how “federal sleuths” find out the inflation rate, you have the feeling of reading the Tirana Daily (Albania being famous for its scientific approach to economics).
“Government gumshoes” cover hundreds of miles monthly and visit hundreds of shops to find out changes in prices. Using “arm-twisting tricks,” they “interrogate” shop-owners, landlords, salesmen, even chiropractic receptionists to reveal the true prices. Then, “each month some 90,000 prices are shipped to Washington, plugged into a computer, scrutinized, aggregated, adjusted for seasonal ups or downs, and then spit out as the monthly CPI report.”
That’s it: thousands of housewives and other part-timers collect some dubious numbers, federal government bureaucrats perform a statistical magic trick, and we get the CPI. Is it really possible that a country with literally billions of products and services, with most of their prices changing daily, would pretend to know average prices on a monthly basis? Well, Vulgus vult decipi, ergo decipiatur.
So, I decided to perform a little experiment on my own. My method of “measuring” inflation could not, methodologically speaking, be much worse than the government’s. Another reason for my suspicion was my car. In June of 1993 I bought a brand new Cavalier for $9,000 (excluding taxes). In June of 1996, the same dealer invited me to visit the premises and promised to change my oil for free. He wanted me to trade in my old Cavalier and buy a new one. I chose the same model of Cavalier, with the same amenities as in 1993, and took it for a spin. (Typically, he would not discuss the price before I tried it.) When I came back, he hit me with the total—$13,500. In three years the price of my car had gone up 50 percent. And the government, and the economists, were telling me that the inflation rate is 3 percent a year?
So I went to check some other prices, and found some other surprises. On January 20, 1993, a gallon of unleaded gasoline was 79 cents in Marion, Indiana; on January 20, 1997, it was $1.29—more than a 50 percent increase. Next I went to change my oil, and asked the shop owner to check the prices for the oil change in 1993. It was $7.95. This time he charged me $25—an increase of more than 220 percent.
I asked a financial officer at my university to give me the prices of tuition, board and room at our university. They rose from $11,648 to $14,402—an increase of approximately 25 percent. And they have soared more than 250 percent since I started teaching in 1986. Government “admits” that tuition rose 141 percent from 1980 to 1990, or on an average annual rate of 8.6 percent, while the overall inflation was 3.1 percent.
During a visit to my dentist I asked him to give me the prices of some of his “basic” services. He agreed. The cleaning went from $55 to $70—an increase of 27 percent. Root canals went from $405 to $503—an increase of 24 percent. Composite white filling went from $114 to $149—a 30 percent increase. X-rays went from $48 to $64—a 33 percent increase.
I went back to the Wall Street Journal and compared the Markets Diary on January 20, 1993, and the Commodities Index was 202; on January 20, 1997, it was 242—an increase of close to 20 percent. Gold was $330 an ounce in 1993, and $354 in 1997. Gold was one of the main reasons for mainstream economists to declare inflation nonexistent.
Then I checked stock prices. The market went from 3241.95 to 6843.87—more than a 100 percent increase. The asset inflation, as Alan Greenspan himself is now realizing, can be as dangerous as any other inflation, and he is warning the investors about “irresponsible exuberance,” only to be told, according to The Wall Street Journal, to “butt out.”
So, the prices are rising, but the government doesn’t want to bother us with the details. If you have to buy a car, have some kids in college, have bad teeth, travel a lot, and want to invest some money, your life could be some 40 percent more expensive than four years ago, but you can sleep in peace—inflation is under control—overstated even!
Still, “academic” economists sing nearly in unison: the CPI overstates the inflation by 1.1 percent. The Wall Street Journal did find one dissenting voice. The chief economist of Morgan Stanley Group, Stephen Roach, maintained that “the mother of all CPI biases,” housing, “accounting for about 40 percent of the basket of measured goods and services, is vastly understated.”
While government estimated that “the CPI’s housing component rose by just 3 percent,” Roach showed that “the average price of a newly built home rose by about 5 percent, the sharpest gain in seven years. And “prices for existing residences jumped by 6 percent, the largest gain in five years.” So, according to Roach, “the CPI is not 3 percent but 3.4 percent or 3.6 percent.”
But what if academic economists are wrong and inflation is much higher? First, the Fed would have to raise interest rates, since the real interest rates would presently be below zero. (The fact that cheap money is already wreaking havoc on the market is best seen by the number of bankruptcies. Bankruptcies are up nearly fourfold since 1984. More than one million Americans filed for personal bankruptcy in 1996.)
Second, contrary to the New Era thinking of the mass media, the house of cards called the stock market will collapse. Banks will be stuck with bad loans, and another serious recession will threaten. Most importantly, the Clinton-Rubin-Greenspan economic miracle will be shown as another example of monetary cranks devising a method for making everybody prosperous by expanding credit.
As Mises explained, people unfamiliar with economic law think that increasing the quantity of money in circulation can bring about permanent prosperity without the ill-effects of business cycles or rising prices. “This theory is utterly illusory,” writes Mises. “But it guides the monetary and credit policy of almost every contemporary government.”
Ivan Pongracic teaches economics at Indiana Wesleyan University
