Comments on: Does the Government Understate Inflation? — Don Boudroux & Russell Roberts Say No

By: Mike McCune

Mike McCune — Sat, 28 Jun 2008 19:26:03 +0000

It’s not called the Consumer Value Index or Consumer Quality Index, it’s called the Consumer Price Index. I believe we have “experimented” with hedonic “adjustments” the last couple decades as a means of minimizing expectations to affect desirable behaviours. If you are transparent and tell the public there is a big white shark swimming around off the shore of your beach, then your expectations of the expectations of the public are that they will not patronize your beach and you expect to sufffer economic consequences. Or, you can fool the public (and perhaps yourselves) but only for a relatively short while until reality catches up.

Value is equal to Price divided by useful service life (Quality). But then, Quality can also be defined with performance, ie. speed, capacity, beauty, brand name…or any other subjective variable one can dream up. Price is the only objective variable. By using subjective variables expecting to create desireable behaviours through expectations, one risks simply producing propaganda. But, it is the unknown unintended consequences yet to come from the attempt to influence behaviours through expectations that I wonder about.

If you want to measure quality, then call it the CQI. But I personally think there should be another factor to consider and that is: Complexity. Complexity inflation is a kind of contra-quality factor where as if one can’t master complexity it is a definate cost, but if one does master complexity it acts like a barrier to entry for others. Think the tax code. Complexity hurts the lower end and accentuates the upper end. Think complex financial derivatives. CCI anyone?

By: Steven

Steven — Sat, 28 Jun 2008 00:09:52 +0000

Here’s my layman’s perspective. The CPI, as with a number of government indices, are not accurate simply because they try too hard to be all encompassing. They try too hard to be perfect, and they end up being anything but perfect. Without getting into the minute detail, I offer up, as an example, the Department of Labor’s jobs report at the beginning of the month. If you want to gag at bureacratic stupidity, get a whiff of the ‘assumptions’and ‘exclusions’ included in that little index, and then tell me why you think the goernment gets it right with the CPI. Look, people are not stupid enough to believe the government has a crystal ball in terms of tracking prices, or employment. But alot depends on these numbers they create, and for them to bastardize them to the extent they have with their exceptions, and that’s an understatement, is an egregious disservice to the populace. If you’re going to track gasoline prices, track gasoline prices; if you’re going to track rent, track rent; and if you’re going to track food prices, track the damn food prices. Whatever they do, they need to stop adding or subtracting their stupid assumptions that have no basis for reality.

By: Kurt Brouwer

Kurt Brouwer — Fri, 27 Jun 2008 20:41:17 +0000

Barry — Do we need to do an intervention? You sound kind of bummed. I take it from this that you don’t think the BLS should do any quality adjustments.

How would you calculate the CPI? Would you just take a basket of goods circa 1975 and stick with it? Would you adjust the basket, but not adjust for quality? What about using pricing data from Wal-Mart, which apparently BLS does not do? It makes sense to me that we would use pricing information from low cost retailers? What about product substitutions?

Rather than saying — in your inimitable fashion — what’s wrong with CPI or what’s wrong with the ideas of Boudroux & Roberts, how about telling us how CPI should be calculated? That’s worthy of a post or two on Big Picture. I’ll gladly link to it.

By: Barry Ritholtz

Barry Ritholtz — Fri, 27 Jun 2008 19:10:17 +0000

I don’t understand why people equate normal progress — something that has been the birthright of mankind since before the wheel and fire were invented — as somehow offsetting price increases or a decrease in purchasing power.

Improvements, progression enhancements is the natural outcome of competiton in the marketplace.

The fact that my computer is faster, my tv is sharper and my car has ABS does not reflect on the montary phenomena of rising prices and falling purchasing power.

It is a scam, a myth a misdirection, propagated by liars and hucksters, for the purpose of convincing the naive that rising prices aren’t.

And, if you are going to adjust for improvements in quality, what about the opposite? How do we adjust for the crappy chinese fabrics? How do you hedonically adjust for toxic dog food? What about the wait time on the phone, the absence of human help in retail stores?

Press one for this is nonsense, press two for your time is worthless, press three for this car is a lemon.