Wednesday, December 21

My $0.02 on Krugman's and Delong's Inflationista Potshots

Here's Delong's OH BOY: NIALL FERGUSON PRACTICING ECONOMICS WITHOUT A LICENSE DEPARTMENT

And my comment (which for some reason won't load onto Brad's blog so I'm posting it here):
I'll readily admit that I'm not an expert on CPI methodologies, and I am inclined to believe that the BLS has many well intentioned and highly educated professionals using defendable methodological practices. However, I share Ezra's feeling that something doesn't smell right on inflation numbers.  
Over the past decade how can official cost of living figures have gone up so little when they supposedly take into account the following items: 
-Housing
-Medical
-Fuel
-Food
-Education 
These are some of the largest cost items for most consumers, and in the last decade up to the financial crisis many saw double digit price increases (in some cases in a single year). 
The BLS's CPI calculator says that $1 in 2001 has the same buying power as a $1.17 in 2007, so yes, the BLS is picking up at least some of the perceived inflation in these categories. However, do the BLS number capture the full picture? 
One thing is for certain: the CPI was utterly useless with respect to the housing bubble as it does not include housing prices, only rent. This despite the fact that nearly 70% of all American homes are owner occupied.
It's convenient to dismiss anyone questioning official government statistics as a conspiracy crank. However, under reporting of inflation by a government bureaucracy would be useful in terms of reducing that same government's expenses in the form of lower cost of living adjustments for government workers and TIPs expense. Under reporting inflation also provides ammunition for the Greenspan-Bernanke Fed to not have to raise interest rates and thereby dampen exuberance. 
In other words, many stand to benefit from the under reporting of inflation. It is therefore reasonable to cast a skeptical eye on these numbers, especially when they fly in the face of everyday experience.
A final point I'd add is that economics is too important to be left to economists, particularly with most of the 'license' holders (econ PhDs) having completely failed to identify in advance the biggest economic event since the Great Depression.

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