“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”
-Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003
I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled “Don’t Like the Numbers? Change ‘Em.”
Fred Sheehan saved me the trouble with a brutal takedown of Boskin here.
For those of you who may be unaware, Boskin is the economist/weasel/fraud who helped to officially distort the CPI, making it more or less worthless as a measure of inflation. The Boskin Commission was an act of fraud, a backdoor method to suppress Social Security cost of living adjustments (COLAs). To be blunt, it was an act of cowardice. Rather than man up and say “fix this, its broken, we can’t afford it” the commission took a different route — they fabricated a series of nonsense adjustments that artificially lowered CPI by 1.1%.
The Boskin Commission’s massive government falsehood allowed former Fed Chair Alan Greenspan to take rates to absurdly low levels, as the official CPI data showed no inflation, despite double digit price increases.
As such, he is one of the contributors to the financial collapse.
The specific fraudulent methods of the Boskin Commission are laughable. That the Economics profession failed to kick him out of its membership is as much an indictment of the profession as it is about Boskin.
My two favorite pieces of Boskin intellectual fraud are substitution and hedonic adjustments.
Hedonic adjustments are addressing the improvement in quality as a form of deflation. For example, the price of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using hedonic adjustments, the government calculated the price of a new car had risen from $6,847 in 1979 to $11,708 in 2004.
These adjustments wildly distort not only CPI data but GDP as well. Bill Fleckenstein calculated that the hedonic adjustments of faster computer chips and dropping costs massively jacked up the productivity data and GDP data from 1995-2002.
Substitution is a nonsensical approach that adjusts inflation for consumer behavior. When steak prices rise, consumers “substitute” cheaper proteins such as hamburger or chicken. Thus, Boskin states, the consumer is spending no more than they previously were, and is not suffering inflation.
The reality is that consumers have been priced out of steak due to price increases. Oh, and somehow, the decrease in quality does not get hedonically adjusted when it raises inflation.
As I said, the Boskin Commission was a massive fraud. Fred Sheehan has more here . . .