Ten Percent, at Least

Wednesday, April 13, 2011

Somehow, this doesn't surprise me:

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.
I recall some years ago hearing that government bureaucrats had changed the inflation index for the plausible-sounding purpose of providing a more accurate gauge of how "consumers" were affected by inflation. In one sense, I suppose it can be helpful to know, based on what one is likely to spend the most money on, more precisely how one's purchasing power is dwindling in the near term.

But in terms of what inflation actually is in today's political context -- an increase in the supply of fiat money and, therefore, a mechanism by which the government can deprive us of the value represented by (and denominated in) currency units -- this is fraudulent.

So this re-indexing is about as "helpful" as a mugger informing me that he is planning to rob me of only ten bucks before taking my wallet, and as "honest" as him living up to his word. What am I supposed to say to that? "Thanks. See you tomorrow?"

Technological advances do indeed make many things cheaper for us (in terms of nominal price or improvements) or allow us to work much more efficiently (also making things cheaper for us in terms of the time or effort needed to work to obtain them). That is, advances in technology reduce our cost of living. That effect would be more pronounced under a stable currency, and it is a completely different phenomenon than a change in the size of the currency unit. As things stand, inflation partially masks this effect and this effect partially masks the effect of the government printing money. This latter would be true even without changing the collection of goods used to measure cost trends. The re-weighting of the CPI thus further masks the amount of government theft that is going on.

I appreciate their efforts to expose this sleight-of-hand, but even by the old measure, Shadow Government Statistics is itself underestimating the tax-that-isn't-a-tax we know as inflation. Perhaps the economists there could account in some way for the increased productivity we have seen due to technology since the 1980s.

-- CAV


Kyle Haight said...

The problem is that the concept of inflation is muddled in the popular mind. People think of inflation as an increase in the general price level, rather than as an increase in fiat money supply. Consequently when they try to measure it they look to price levels instead of currency levels. The first are at best a loose proxy for the second, as there are many other factors that play into setting prices besides the amount of currency in the economy.

Putting the point strongly, no measure of inflation that starts out looking at prices is correct, because it's measuring the wrong thing. It's a category error.

Gus Van Horn said...

Thank you for that clarification.

Kyle Haight said...

The other thing I find bizarre about the so-called "substitution effect" is its inherently self-contradictory nature. The CPI allegedly measures price increases. The substitution effect results in a measure that says prices did not increase because I bought substitute commodity B instead of commodity A because commodity A's price increased.

Wait, what? We measure prices as not increasing because I changed my buying habits due to price increases? In a rational culture that wouldn't even pass the laugh test. The entire idea of the substitution effect relies on the government ignoring the way its destruction of my wealth is pushing me down my value preference hierarchy. I prefer steak to hamburger. But because the government has stolen a chunk of my wealth through inflation I can't afford steak any more. The substitution effect says my preference for steak is irrelevant, since I can buy hamburger I'm no worse off.

I wasn't surprised to discover that one of the people responsible for this reworking of the CPI was Alan Greenspan.

Gus Van Horn said...

I wonder if that -- hamburger for steak -- is what Greenspan meant when he said our fiat currency should act "as if it's backed by gold."