Response to BLS Article on CPI Misconceptions
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Some of these guys have the whiff of crackpottery which should give us a bit of pause. Nevertheless...
We can track down a few of the strange problems that I identified last time.
Education basically is miscounted : "The inclusion of financial aid has added to the complexity of pricing college tuition. Many selected students may have full scholarships (such as athletic), and therefore their tuition and fixed fees are fully covered by scholarships. Since these students pay no tuition and fees, they are not eligible for pricing." discounting financial aid makes some sense if you are trying to measure the consumer's expense, but not if you are trying to measure the cost of the good; just because someone else paid for part of it doesn't make it cheaper. But really I imagine the biggest problem with education cost is that they effectively count college as being free for people who can't afford college. That is, people who can't afford it don't buy it, so it's not in the basket (doesn't contribute to the "quantity" in the CPI metric). A better way to measure inflation would be to assume that everyone would go to college if they could afford it. (also it seems that non-acredited technical school time places are not counted at all)
Health care is simply not counted at all, by design : "The weights in the CPI do not include employer-paid health insurance premiums or tax-funded health care such as Medicare Part A and Medicaid" The only thing they count is out-of-pocket / discretionary health care expenses, which are obviously just a tiny fraction of the total.
Real estate has the funny owner's cost to rent thing which makes it very hard to tell if that is being gamed or not.
Obviously anything based on "core" inflation (without food or energy) is ridiculous. The standard argument that those fluctuate too much seasonally is absurd, you could just use a seasonally-adjusted moving average, you don't need to remove them completely.
The other really obviously fishy parts are :
"Substitution". A while ago the CPI was changed to use geometric averages of prices within a category. This seems pretty innocuous, but it basically causes a down-weighting of higher priced items. And in fact the geometric mean is always lower than the arithmetic mean, so this change can only make inflation seem lower, which is a dirty trick. For example :
(1+1+8)/3 = 3.333 (1*1*8)^(1/3) = 2.0pretty big difference even though they are both "means". Now, they hand wave away and say that this reflects consumers' ability to choose and substitute cheaper products. But it is totally unscientific.
Furthermore, newer measures like the CPI-U or Fed's PCE also explicitly include substitution. This just seems like it obviously does not reflect inflation. When a product gets expensive and the consumer substitutes for something cheaper, they are by definition getting something of lower utility (because it wasn't their first choice), so you can't say that no inflation happened, they are getting less for their money.
"Hedonics". These are poorly documented pure bullshit ways of pretending inflation is lower by claiming that we got more for our money. This is just pure nonsense for various reasons :
1. The whole definition of "better" is so vague and open to interpretation that it has no business in a metric. For example they consider air travel to be massively improved since the 70's. Sure it's safer, more efficient, but also much much less pleasant. Personally I think that the same trip is actually worth much less now than it was in the past, but they say it's worth much more. Similarly for the quality of buildings and clothing and cars and so on; yes, they're safer, faster, more durable, whatever, but they aren't hand crafted, they aren't made of hard wood and steel and chrome; I think most of those things are actually much crappier now than ever, made more cleverly but also more cheaply. Anyway, it just has no business in there. The idea that you can measure the hedonic quality of some product and say it improved by 0.1% from April to May in 2010 is just absurd.
2. Using quality of goods at all just isn't right to begin with. Inflation should be a measure of the cost to buy a standard set of goods at the expected quality level of the era. Just because technology gets better over time doesn't mean you can discount the inflation! For example if computers get 50% better every year and our money is inflating by 50% would you say the cost of computers is not changing? Of course not, the cost is going up 50% , yes they are also getting better but that is not part of the discussion.
It's just wrong on the face of it. If a median decent car was $5k in the 70's and now is $25k , then the price of cars has gone up by 5X. But oh no they say, you have air bags and more power and fuel economy and so on, the modern car is 5X better, so in fact there has been no inflation at all. Well, wait a minute. I *expect* the quality of life and technology to go up over time. Are you telling me that in a world with 0% inflation that technology does not get better over time? That's a strange way to measure things. And it's not really what you want to know when you ask about inflation. You want to know how much money do I need to afford a decent house, car, food, etc. at the expected standard of the time that I buy it.
Obviously we wish there was some item that had absolute constant value that we could measure against. Also obviously measuring inflation is very complicated and we are only scratching the surface. But it's very fishy. Rotten fishy.