In today's Wall Street Journal, Kevin Warsh, one of the Governors of the Federal Reserve, brings back the M word to justify borrowing $75 million pro-liquid and pro-growth dollars.:

The New Malaise and How to End It

After a cyclical boost early this year, the current state of the U.S. economy is unimpressive: modest growth, high levels of unemployment, stagnant wages, low levels of consumer and business sentiment, and volatile financial markets. Extrapolating from recent data, many predict only a middling recovery in the next several years. They call it "the new normal." I call it the new malaise.

Usually, no one likes to talk about malaise, except the opposition party, of course. After President Jimmy Carter's well-received speech about tightening our belts, candidate Ronald Reagan gleefully beat Carter about the head with malaise. Even though Carter never used the term, the "malaise speech," and Carter's sweater, are now symbols of political failure.

For a Fed Governor to use the term is striking, because malaise goes hand-in hand with the stagflation Carter inherited due to an expensive war (Obama has two), an energy crisis (Obama has that, too), and Nixon's suspension of the direct convertibility to gold (aka the Nixon Shock). Of course a key part of stagflation is inflation, which is not supported by the 1.1% rate under CPI-U. Besides, Walsh intends to make the case that we need pro-growth policies, not anti-inflation policies:

Pro-growth policies include reform of the tax code ... more conducive to long-term investment. ... real regulatory reform ... succeed or fail. ... the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade. ... deleveraging ... is not a pattern to be arrested, but good prudence to be celebrated. Larger, more liquid corporate balance sheets and higher personal saving rates are the reasonable and right responses to massive government dissaving and unpredictable government policies. The steep correction in housing markets, while painful, lays the foundation for recovery, far better than the countless programs that have sought to subsidize and temporize the inevitable repricing. ... the adoption of pro-growth fiscal, regulatory and trade policies ... lay the essential groundwork for greater, more sustainable prosperity. ... Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies. Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies.

That was the justification, and here's the pitch:

Last week, my colleagues and I on the Federal Open Market Committee (FOMC) engaged in this debate. The FOMC announced its intent to purchase an additional $75 billion of long-term Treasury securities per month through the second quarter of 2011.

Correction: I had heard $600 Billion. Update: Apparently they're looking at an eight month plan. Though he did vote for it, another WSJ article makes it sound like Warsh is already backing away from the move. Talk about malaise ...

Fed’s Warsh Skeptical Bond Purchases Can Boost Economy

But back to stagflation. You can't have stagflation without inflation, which is measured by the Consumer Price Index (CPI), but consideration of the CPI is complicated because there are the CPI, the CPI-U, the CPI-W, the C-CPI-U and the CPE. Calculation of the CPI has been significantly revised in the past few decades. John Williams at ShadowStats has generated the chart above to show the divergence between the government's calculation of the CPI, and how he feels it was calculated about 1980, and how it should be calculated to really show the cost-of-living. Based on following Shadowstats, and other sites, and yes, my feelings, I felt that there is enough inflation in prices to say we are back in stagflation. Doc Cleveland has asked why he should believe Shadowstats instead of the normal CPI. The Bureau of Labor Statistics asked the same question back in 2008, and Williams responded here:

The Traditional CPI Concept Has Been Politically Mauled. At the heart of the differences over CPI reporting is the way CPI is viewed or defined. My basic approach to looking at CPI inflation is from the standpoint of common experience and traditional expectations that the CPI measures the cost of maintaining a constant standard of living, that reflects costs out of pocket to get a products or services in hand, not some nebulous benefits estimated by the BLS of having to pay for an expensive new gasoline additive when filling a gas tank.

The reason for the preceding is that inflation measures commonly are used as an indication of how much income has to increase, in order for living standards to be maintained, or of how much return is needed on an investment in order to stay ahead of inflation. Changing BLS methodologies have caused CPI inflation reporting to stray sharply from those needs

I contend that most people view inflation as being much higher than currently reported by the BLS, due largely to those methodological changes over the decades that have moved CPI inflation away from basic, traditional reporting. Changes tied particularly to quality, weighting and definitional issues have moved reported inflation ever further from broad, common experience, with resulting reporting biases in the CPI that usually are to the downside. Consumers have a pretty good sense of where basic inflation stands, and whether or not they are able to make ends meet, let alone maintain a constant standard of living.

One of the justifications in changing the CPI calculation was the idea that consumers were actually maintaining their standard-of-living by buying items that were cheaper, but just as good.

What happened was that geometric weighting (replacing arithmetic weighting) was introduced for narrow product categories in the CPI. The categories were narrow enough to allow weight shifts between different types of steak, but the "mimicking" of the steak versus hamburger or steak versus chicken substitution was not possible based on geometric weightings, since steak, hamburger and chicken all were in different categories.

Nonetheless, if steak prices were to rise, strapped consumers indeed likely would shift to cheaper meats, and such would be reflected in the broader weighting categories. The problem from the BLS standpoint, though, was that those weightings traditionally were recast only every ten years. So, the broad-category reweighting process was accelerated, with a reweighting in 1998, and, thereafter, reweightings were structured formally for every two years starting in 2002. This process moved the CPI closer to a fully substitution-based index.

These approaches, in conjunction with other methodological changes ranging from increased use of discount-store surveying to shifting quality and hedonic adjustments, resulted in meaningful downside adjustments to reported annual CPI inflation of roughly 300 basis points (3%), of which 28 basis points currently is estimated by the BLS as the effect of geometric weighting. The period involved here, from the early-1990s to date, was dominated by efforts to address the Greenspan/Boskin contention that the CPI "overstated" inflation.

In short, Greenspan saw buying store brands of shredded wheat, or going to discount plaza stores instead of the mall, as maintaining one's standard of living. Williams does not. I call it, "getting by."

Geometric Weighting is a Mathematical Adjustment, Not a Model of Consumer Behavior. The BLS touts the use of geometric weighting in the narrow CPI categories as a way of measuring shifting consumer preferences based on changes in prices in related items. The weights that shift based upon price changes (relatively higher price changes end up with relatively lower weightings) do so by straight mathematical adjustment that the BLS once described as "mimicking" substitution effects. The shifts are not calculated based on any consumer surveying done, for example, as to how candy bar consumption would vary given relative price changes.

The BLS claims support for using geometric weightings in the CPI, because everyone else does it. One also could argue that other sovereign statistical agencies, by their nature, have a tendency to want to reduce reported inflation as much as possible, as did Messrs. Greenspan and Boskin.

On page 6 of the article, the authors argue that the shifting of weights within geometrically weighted categories does not affect a consumer’s standard of living, since the earlier arithmetic weighting always overstated cost of living, based on common academic thinking.

"There is also no dispute among economists [except for John Williams as at least one] that the price index formula used in all of the basic CPIs prior to 1999 (called the Laspeyres formula) tends to overstate changes in the cost of living; specifically, the change in a Laspeyres is an ‘upper bound’ on the change in the cost of maintaining a [note: no "constant"] standard of living. …"

"The Laspeyres answer is correct, however, only if the consumer is completely unconcerned with changes in price …"

I would argue, to the contrary, that it is the so-called "overstatement" in the cost of living that enables the maintenance of a constant standard of living, where the consumer does not have to be concerned with changes in price. The BLS claims that with the geometric weighting, weighting shifts are measuring a "constant level of satisfaction," that there is no "declining standard of living" in the numbers, because geometric weighting is not applied to broad enough categories to allow hamburger substitution for steak.

Nonetheless, the geometric weighting shifts have impact on a constant standard of living basis, as discussed above. Further, as mentioned earlier, the increased frequency of the reweighting of the broader categories impacts the standard of living on the steak to hamburger issue.

As I see it, after what happened to Carter, no administration ever wanted to see that stagflation/malaise label  applied to them. (And I note that Palin is doing so right now). Greenspan reacted by redefining the calculation of inflation with a CPI that still moves up and down, but that would spit out more acceptable political numbers.

But when some exurbanite shops at Stop N Shop instead of Stew Leonard's, or Giant instead of Whole Foods, that is a real change in standard-of-living. And when you buy cheap socks at the Dollar store instead of better ones at Sears or JC Penney, or even better ones at American Eagle, that is a real change in standard-of-living. And when the box of crackers you bought last month is now 10 ounces instead of 12 ounces, that is change, not maintenance, of standard-of-living. 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.