dagblog - Comments for "Camoflation"

My attitude is that the

DF — Wed, 10 Nov 2010 23:07:04 +0000

My attitude is that the argument you've presented has some serious flaws, which I've tried to detail based on substance. Your attitude is to apparently to just brush those critiques aside. You can respond to them or not. I trust that whether you do or not will be apparent to the readers of this post.

Seriously: I left a long comment with a number of substantive critiques. Your response to that was a quote from FDR, that economists didn't call the bubble (they sure did) and that Dean Baker's "stuff" was about inflation, not stagflation (which doesn't even make sense, nevermind that the Baker article I linked was precisely about the the events regarding the altering of CPI in 1990s that you spent an entire post on). And I'm the one with an "attitude"?

Can you not read the part of

DF — Wed, 10 Nov 2010 22:38:41 +0000

In reply to Nominal and real track pretty

Can you not read the part of that graph where it says that the figures are calculated based on the CPI, which your whole post has brought into question? Can you honestly not see the inherent conflict between these arguments? Seriously, how can you question the methodology behind CPI, then turn around and use it to try to prove your argument?

If you keep up with the

Donal — Wed, 10 Nov 2010 22:35:29 +0000

In reply to Umm, I did. Among them Baker

If you keep up with the attitude, there will be a lot of components I don't respond to.

Nominal and real track pretty

Donal — Wed, 10 Nov 2010 22:33:58 +0000

In reply to Oil is dollar denominated.

Nominal and real track pretty closely in that time period.

http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg

Oil is dollar denominated.

DF — Wed, 10 Nov 2010 22:23:51 +0000

In reply to Where is the supply shock?

Oil is dollar denominated. You're claiming very high inflation, which causes the nomimal (read: NOT REAL) price of a barrel of oil to rise. I need to see a shock that isn't substantiated on conflicting arguments.

Where is the supply shock?

Donal — Wed, 10 Nov 2010 22:16:06 +0000

In reply to Not sure where to start

Where is the supply shock? For decades we had an economy based on $20 or $30/bbl oil. In the past three years oil went from $60 to $140, back down to $50 and is now brushing up against $90. How much shock do you need to see?

Umm, I did. Among them Baker

DF — Wed, 10 Nov 2010 22:06:00 +0000

In reply to "In politics, nothing happens

Umm, I did. Among them Baker (who called it WAY before anyone else, BTW) and Krugman. And Stiglitz. And many others.

I believe the unemployment rate is 8% as measured. Donal, this is not about what we believe. If you want to debate the methodology behind measures, fine. My point is that this debate has occurred and you're completely blowing off the other side of the argument. You write your post as if Greenspan did this behind closed doors with clandestine political motivations.

So, is U-6 higher? Yeah, it is. Do some economists think that's a better measure of unemployment? Yeah, they do. Are there open, honest debates about the models and methodology here? Yeah, there are. Are you addressing ANY of that in your statement here? No, you are not. All of the same things that can be said about the unemployment survey and subsequent estimates can be said about CPI. You seem to prefer a conspiracy.

As for the Baker "stuff" - Baker, BTW, called the bubble back in 2002 using the Case-Schiller data - you haven't analyzed stagflation here AT ALL. Stagflation is what? Concurrent inflation and unemployment, which changed minds about economic theory basically because that wasn't supposed to be possible. But what was the root cause? A supply shock. Can you answer whether you see evidence of a supply shock currently?

Futhermore, I answered you with Baker on the CPI because a.) He was there, actively engaged in those debates b.) He's a trained economist who actually knows these models and measures inside and out AND c.) He's disciplined enough to remember that partial analysis is bogus. Hence him having to remind the CPI critics that inflation doesn't just affect prices, but also wages.

Seriously, if stagflation = inflation + unemployment, then you cannot talk about stagflation without talking about inflation. In fact, that's what your whole post is about: The CPI, which attempts to measure inflation. If that has nothing to do with stagflation, then why is that what your whole post is about?

And I can be just as flippant about dismissing whole lines of argument on the basis of suspect motivations. In fact, I did: Williams' has a vested interest in selling alternative data. That's another component that you didn't respond to.

Roubini wasn't that fringe,

Doctor Cleveland — Wed, 10 Nov 2010 21:49:42 +0000

In reply to "In politics, nothing happens

Roubini wasn't that fringe, and you did hear plenty of people predicting the collapse of then housing bubble. Alan Greenspan and his ilk spent a good part of those years denying the existence of a housing bubble. he wasn't arguing against the existence of that danger because no one believed in that danger. Quite the reverse. And anyway, read Atrios's blogging from 2007 and 2008 to see the perfectly orthodox and mainstream prophecies of doom.

The 2008 collapse was not something no one was predicting. It was "something no one could have predicted" in the same way that deficits from the Bush tax policies could not have been predicted, or the quagmire of the Iraq war could not have been predicted, or the results of a category 5 hurricane directly hitting New Orleans. Not something entirely out of the blue, but the uglier-than-expected outcome of something that any fool could say would get ugly.

"In politics, nothing happens

Donal — Wed, 10 Nov 2010 20:44:51 +0000

In reply to Not sure where to start

"In politics, nothing happens by accident. If it happened, you can bet it was planned that way." - FDR

Why did you not hear scores of economists predicting the economic collapse of 2008? Actually I did, but they were all fringey guys like Roubini and Williams. As for BLS being an honest broker, do you really believe the unemployment rate is only 8%? Somewhere in the BLS is a guy who answers to the administration.

As far as the Dean Baker stuff, remember I'm talking about stagflation not inflation.

Not sure where to start

DF — Wed, 10 Nov 2010 20:14:00 +0000

In reply to Camoflation

Not sure where to start here. I suppose that first I should note that the way this has been written has an overtone of conspiracy that I don't think is really necessary. It could have been avoided by a more grounded talk about when the CPI has been adjusted, who argued for it, who argued against it, etc. It's really not a conspiracy, but it sort of sounds that way here. For some context, the Greenspan argument had to do with the fact that SS COLA is tied directly to the CPI. If the CPI was overestimating inflation, then it follows that COLAs were more expensive than they needed to be.

Second, this has been argued to death, but I suppose we shouldn't let that stop us. The other side of the argument, what you'll hear from BLS, goes something like this:

The Bureau of Labor Statistics explains;
In contrast to the fixed quantity weights of the current CPI formula, the geometric mean estimator ... implies that consumers can alter the quantities of goods and services they buy, albeit within the narrow range of a CPI category, when the relative prices of those goods and services change. It is, in part, this property of the geometric mean estimator that led to the Boskin Commission recommendation of its use in the CPI.

In other words, the crime of a geometric weighting scheme is to assume that people change their behavior when prices change.

The supposed downfall of attempting to account for substitution effects in the CPI is that you'll end up substituting all the way down to dogfood. Except that keeping the geometric weights within narrow categories doesn't allow for broad substitutions across categories. Also: Is there any credible evidence that an invisible deterioration of the standard of living is actually happening? Krugman reminds us that the answer to this question is "no." So, what exactly is the grounding for this argument? I understand what Mr. Williams' motivation is here: He sells alternative data. If his data is not appreciably different than those from official sources, what does he have to sell?

Third, we are remiss if we discuss how inflation affects prices while ignoring how it affects wages. For this, I'll turn to Dean Baker, who wrote a book on this very issue:

The other point is that you do not just get to change the CPI and leave the rest of the world in place. If the CPI substantially overstates inflation, then everything we think about the world is very different. For example, a 1.0 percentage point overstatement means that real wages and incomes have been rising by 1.0 percentage points more rapidly than our data show. This enormously changes our assessment of the future and the past. It would imply that us middle income types grew up at a standard of living that is lower than the current poverty level.

It also changes our assessment of the future. If wages and living standards have been rising by 1.0 pp more rapidly than we thought, then presumably they will continue to rise by 1.0 pp more rapidly than currently projected. This means that our children and grandchildren will be far richer than we imagined possible with current projections.
Such future prosperity may make current concerns about the deficit seem rather silly. Why should be care if our grandchildren will have to pay another 10 percent of their income in taxes, if their standard of living will be 4 times as high current standards of living?

In absence of any real evidence of the posited substitution spiral, we get some contorted arguments about buying generic versus name-brand shredded wheat as a quality of life issue. It's not. Choosing not to pay the bills for Kellogg's ad department is not a quality of life or standard of living issue, at least not a serious one. It's worth noting here that there are at least one billion people living on this planet who would love to have this type of problem.

Also, you close with:

And while it might not be a bad thing to buy store brands instead of over-priced name brands, it is a change, it costs somebody profit somewhere, and it should be measured.

The changes in profit are measured by the revenue streams of the relevant firms. That's where it is measured and where it should be measured. Capturing changes in revenue streams of individual firms, which may or may not be at all related to substitution effects induced by real changes in the overall price level, are not what the CPI is for.

At the core, this is an argument about methodology, but I'll again defer to Baker about who's really trying to be an honest broker here:

On this story, I argue that we should leave the call to the umpire, in this case the Bureau of Labor Statistics (BLS), the agency that constructs the CPI. Of course BLS can and does make mistakes, but they have generally been an honest broker on this issue. When economists have presented solid research showing understatements or overstatements in the CPI, BLS has examined the issue and sought to make the appropriate adjustments (We were very fortunate that the Katherine Abraham, the commissioner in the 90s, resisted the political pressure to implement a politically convenient "fix" of the CPI.) I have my own criticisms of the ump, but at this point, I'm going to defer to the ump's call over the anecdotes of the CPI critics.

Hence why you do not hear scores of economists, especially the ostensibly "liberal" set, screaming about how the CPI is a deceptive measure of the standard of living. It's not perfect, but this is because what it is trying to measure is complex.

EDIT: Also, RE: stagflation - even if you prefer a methodology that places inflation at a higher rate, where is the supply shock?

EDIT #2: From BLS, via Wikipedia:

Some critics believe that changes in CPI calculation due to the Boskin Commission have led to dramatic cuts in inflation estimates. They believe that using pre-Boskin methods, which they also think are still used by most other countries, the current U.S. inflation is estimated to be around 7% per year. The BLS has demonstrated that these beliefs are based on misunderstandings of the CPI. For example, changes made since the Boskin Commission have lowered the measured rate of inflation by less than 0.3% per year, and the methods now used are commonly employed in the CPIs of developed nations.^[8]