Are the econ stats cooked?
Thu May 15, 2008 at 09:51:02 AM PDT
The short answer is no. The longer answer is it that econ stats are widely misunderstood and easily abused for political purposes. So it really does pay to understand them.
First of all, this is likely to be a pretty dry, boring diary. Few subjects have the lack of zing as National Income Accounting. Even bringing up the subject raises images of Ben Stein droning on about "Fiscal and Monetary Policy". So, Ferris, you are excused. The rest of you-if I can beg your indulgence and your patience-you might find this be worth the time and effort it takes to understand this issue.
If you want to self educate go to The BLS website which does a good job of explaining many complex issues.
OK. Let's start with the obvious problem. It costs about $12 a tank more to fill up my gas tank than it did roughly a year ago. If I buy 1 tank of gas a week, that is $48 more a month. If you are unfortunate to commute longer distances, you gas tank bill might have gone up by something more like one to two hundred dollars a month.
So how can the BLS make the ridiculous claim that inflation was only 4% per year?
Let's look at it this way. Take all your expenses and add them up: food, groceries, housing, entertainment, etc. How much did all this cost you this time last year? How much does it cost you this now?
Let's say last year you spent $2000 a month and this year you find it costs you $2080 a month for the same goods and services. If in the meantime you did not get a raise, you are going in the hole by the rate of $80 a month (which is in fact exactly what is happening to a lot of people right now-especially those fabled low income, non college educated people voting for Hillary). Now let's say that you are not an "average" family-you drive more or less than average. You eat aragula rather than iceberg lettuce, or vice versa. How you experience inflation will differ.
Why? Because the CPI (consumer price index) is just that-it is an index of the **average** change in all prices for the **average** consumer. It measures just what it claims to measure.
In the meantime the unemployment rate measures exactly what it claims to measure. Economists have known and acknowledged for a long time that demographic and structural changes in the economy cause us to mis-estimate the actual severity of the unemployment rate. Add to this, we disagree about how serious it is to be unemployed (I would say very serious) and about what causes unemployment (I say simply put-lack of effective demand combined with major structural changes-i.e. deindustrializtaiom-in the U.S. economy).
What it does measure is changes and it has accurately picked up on the upward tick in unemployment.
Does the current situation feel a little like stagflation to you? Does "that 70's show" suddenly seem a little too familiar?
As it happens, the statistics are in fact accurately picking up on the fact that we are indeed currently experiencing at least some stagflation (rising unemployment and a rising inflation rate).
OK-now comes my Ben Stein imitation. Fiscal policy-changes in federal taxation and spending-helps to stimulate the economy directly. Monetary policy-changes in interest rates-stimulates the economy indirectly.
Through the combination of fiscal and monetary policy the government attempts to maintain some balance between unemployment and inflation.
Now, flash back to the 1970's. Carter appointed chair of the FED Paul Volcker decided to take on stagflation and enacted a monetarist experiment. Unemployment rose to 10.8% by 1981.
Now today, for all his other faults, Bernanke has decided not to be an alarmist about inflation. Instead, he has chosen to focus his efforts at keeping total spending from falling into the tank. And that is a good thing that progressives should be supporting.
Allright-if the picture is so good why do you feel so gloomy? Well, first of all, no one said the picture looked good. The stock market went up because people believe Bernanke isn't going to morph into Paul Volcker and start making us pay 20% for used car loans.
Second of all, nobody said the picture was good.
There have been major structural changes and the actual purchasing power of wages for many Americans continues to fall. It continues to be hard to find a job or to replace a lost job. This helps to explain why people in rural PA, WVa and Southern Ohio while not exactly bitter, are in fact frustrated and turn to what is familiar: Hillary Clinton as a symbol of good economic times.
Shilling for monetarism however is not going to solve the problems.
Progressive activists owe it to themselves to really understand what the CPI and the Unemployment rate do and do not measure.
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