Simpol Forum response

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Crash's picture
Crash
Status: Silver Member (Offline)
Joined: Nov 26 2008
Posts: 171
Simpol Forum response

Hi there,

 

I posted a description of the Fuzzy Numbers chapter on the Simpol (Simultaneous Policy) forum in order to raise the awareness of Chirs' fantastic crash course and elicited this response and thought I'd post it here and see if anyone wanted to reply, either here and I will relay the message to the Simpol group, or better still, visit the Simpol forum and sign up and reply there, http://www.simpol.org.uk/forum/index.php?topic=70.0.

 

for more about the Simultaneous Policy visit www.simpol.org.uk.

 

Here follows the message:

 

Quote:

From the explanation here, I'm not convinced that the 'accurate' figure
for inflation is any more useful than the 'fudged' figure. Inflation
measures prices of a basket of goods. If salmon is in there and
increases significantly in price should it be allowed to skew the
figures? The price may have increased due to a nasty parasite wiping
out farmed stocks. If people do switch to buying something else, then
what does it gain us from sticking to pricing something that may be
subject to exceptional factors?

The argument of doggedly
sticking to the basket of goods regardless, seems to be abandoned in
the crticism of the television, however. To compare like with like, the
price of last year's television (or one from the 1960s?) should be
sought out. And if one can be found remaindered somewhere it will, no
doubt, be much cheaper, having a deflationary effect. But people don't
buy and shops don't sell (for long) outdated equipment. Putting in the
latest model and acknowledging it is not a like-to-like comparison
(which would show deflation) through hedonics, is not really that
illogical or dishonest.

Aside from considering what is being
measured, what is done with the data is important. If the 'accurate'
figures suggest that the US economy has been in recession since 2000,
what difference would it make? I have the same question over the
'beyond GDP' proposals. How would they change behaviour? At present,
the thought of a recession seems to be making it a self-fulfilling
prophecy as businesses and consumers prepare for slowdown. Should they
have done that 8 years ago? Or if the 'beyond GDP' figure was being
used, would things actually look rosier?

 

 

thanks for reading,

 

Crash

 

Simpol promotes the Simultaneous Policy, which aims to deliver social
justice around the world, resolve global problems like environmental
destruction and regulate the economic power of international capital
for the good of all. Simpol seeks solutions to problems that individual
national governments cannot resolve by acting alone. This is because
the problems transcend national boundaries, and because the global
competitive system means that any government that acted alone to try
and resolve such problems could effectively make its country
uncompetitive.

 

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Simpol Forum response

Hey crash,

Just a couple of quick thoughts here. The real issue I think isn't so much that steak is replaced by ground beef or salmon is replaced by Captain John's breaded fish food products but that this is done by the government to specifically decieve the public and misrepresent the strength of the economy.

The basket of goods is a foolish touchstone as well. While it may be useful to some to see how the price of a basket of goods containing fundamentals such as milk, eggs, and bread changes over time, the truly useful data comes in the form of the grand totals and then specific itemizations. So just tell me what the numbers are for all food with the ability to look up any specific item.

Of course, one of the most telling signs of inflation is the fact that people aren't buying "the best" anymore within a given category. So it's the height of cynicism to argue that salmon or steak shouldn't be included in the basket because no one's buying them anymore and that to include them is misleading. Well, why isn't anyone buying them anymore. Because the inflation on them is too great!

If this logic is carried to its logical extreme then eventually the vaunted basket will contain only Maruchan ramen noodle products and cat food. Since those products are cheaper than almost anything else one could buy, well, gee golly, there's actually been no inflation at all.

The last paragraph of the response you posted is terribly cynical, I'm afraid. The person asks what difference would it make if people knew we had been in a recession since 2000? Well, obviously people (not that they would have) could have changed their financial behaviour so that they'd be better prepared for the fifty-foot standing wave we're all headed into. Though I guess this individual -- as they allude to the powers of psychological manipulation -- would recommend that the government announce that they've discovered computing errors as of late and that GDP actually grew by 4% last quarter and unemployment is at a forty year low. Since what we're experiencing now is just a self-fulfilling prophecy these lies would most certainly instantly cure the global financial crisis.

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Simpol Forum response

One more thing, Crash. The idea of using shifting methodologies -- and then using the results of such different methodologies for comparitive purposes -- is completely anti-scientific. It's like reporting the temperature one day in Celsius and then the next in Fahrenheit.

Crash's picture
Crash
Status: Silver Member (Offline)
Joined: Nov 26 2008
Posts: 171
Re: Simpol Forum response

Hi mainecooncat,

 

Thanks very much for your speedy response. I didn't actually reply to the quoted response, myself, and indeed found it synical and am glad I deffered to this forum. I have posted your eloquent reply on the Simpol forum. I will post any response here,

 

thanks again,

 

Crash

drb's picture
drb
Status: Bronze Member (Offline)
Joined: Oct 11 2008
Posts: 95
Re: Simpol Forum response

Hi Crash, 

I won't claim to have a suitable response to the Simpol Forum's comments - but felt compelled to weigh-in with a comment.  

First off - the responder seemed to express little concern over an 'accurate' figure for inflation.  Perhaps they merely expressed an incomplete thought.  It is possible they were trying to say  that as long as a consistent and repeatable measurement approach for calculating inflation was utilized from one decade to the next - then (perhaps) any error in the measurement relative to a 'perfected' calculation model is of no large concern. 

In response I would have to say that I would agree that picking the 'right' basket of goods (to use for tracking pricing changes) is going to be difficult and subject to challenge from multiple quarters. However,  I am not at all convinced that badly calculated inflation rates (even if the calculations are repeatable and have a consistent error bias) are to be discounted as irrelevant in the long run.  In the US - CPI numbers are used to establish cost of living wage increases, if there is a persistent low bias in the reported CPI then millions of workers are subject to a slow - but persistent (and compounding) - decline in their standard of living.  The corrolary to the decline in the employee earning power (that arise directly from misleading low CPI figures) is a slow but persistent (and compounding) increase in the earnings reported by companies (and allow them grant exhorbitant salaries and bonuses to management).   The government benefits from having a peristent low bias in the CPI figures by allowing them to minimize the cost of living adjustments to Social Security recipients and numerous other entitlement programs.  [Does any of this sound familiar? - anyone who has been employed over 25 years has 'lived' this reality - the number of college graduates entering the job market today that have had only 'one' of their parents needing to work full time is depressingly low].  

The concern I have with the methodologies being applied is that the 'intent' behind applying the downward adjustment in the CPI metrics is expressed as a desire to achieve a more accurate measure of how the average consumer is impacted by price changes, but this pursuit for 'accuracy' is made without accounting for the impact on the 'quality' of the average consumer's life style.   'My' quality of life would be greater if I could eat steak 2-3 times a week vs eating chicken  (my cholesterol would be higher too - but lets not go there).    The application of hedonics, in fact, seems to require a cynical disregard of the quality of life issues.  The fact that there are significant financial advantages to the government (and to the lobbyists and companies who help get them in power) to keep the reported CPI values below 'actual' inflation rates guarantees that CPI rates will remain 'fuzzy' lying numbers.

Daniel

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Simpol Forum response

Some great points here, Daniel.  

drbarbour wrote:

However,  I am not at all convinced that badly calculated inflation rates (even if the calculations are repeatable and have a consistent error bias) are to be discounted as irrelevant in the long run.  In the US - CPI numbers are used to establish cost of living wage increases, if there is a persistent low bias in the reported CPI then millions of workers are subject to a slow - but persistent (and compounding) - decline in their standard of living.  The corrolary to the decline in the employee earning power (that arise directly from misleading low CPI figures) is a slow but persistent (and compounding) increase in the earnings reported by companies (and allow them grant exhorbitant salaries and bonuses to management).   The government benefits from having a peristent low bias in the CPI figures by allowing them to minimize the cost of living adjustments to Social Security recipients and numerous other entitlement programs.  [Does any of this sound familiar? - anyone who has been employed over 25 years has 'lived' this reality - the number of college graduates entering the job market today that have had only 'one' of their parents needing to work full time is depressingly low].  

The concern I have with the methodologies being applied is that the 'intent' behind applying the downward adjustment in the CPI metrics is expressed as a desire to achieve a more accurate measure of how the average consumer is impacted by price changes, but this pursuit for 'accuracy' is made without accounting for the impact on the 'quality' of the average consumer's life style.   'My' quality of life would be greater if I could eat steak 2-3 times a week vs eating chicken  (my cholesterol would be higher too - but lets not go there).    The application of hedonics, in fact, seems to require a cynical disregard of the quality of life issues.  The fact that there are significant financial advantages to the government (and to the lobbyists and companies who help get them in power) to keep the reported CPI values below 'actual' inflation rates guarantees that CPI rates will remain 'fuzzy' lying numbers.

Perhaps if the government is going to employ shifting methodologies there should be another statistic created that measures the quality or desire-ability of the products contained in our basket. So if the government substitutes hamburg for steak to keep inflation down then the quality coefficient or something or other would also lower. This way we'd be able to see that while we're not experiencing significant inflation (as far as my example goes here), we're more or less paying the same amount or a slightly inflated one for increasingly inferior goods.

Should also mention that at some point the idea of substitution becomes exhausted. So in terms of the oft-mentioned red meat entree category, what's the next downgrade after ground hamburg? This can only go so far before we're substituting -- as I quipped earlier -- cat food for human food. Obviously, this won't happen (trying not to be cynical here), and then at this point there'll be no wiggle room for further fudging and the reality of rising prices will be inescapable.

drb's picture
drb
Status: Bronze Member (Offline)
Joined: Oct 11 2008
Posts: 95
Re: Simpol Forum response

Maincooncat,

Your observation that there is a limit to substitution is perfectly valid - and maybe I'm being too cynical here - but I have a lot of confidence in the creativity of our bureacrats to solve that problem and thereby ensure the charade can continue.   What we need, however, is an 'insider' in the BLS who can share the conference table discussions over what goes in the 'basket' or how to justify the lower priced substitute (hmmmm - water from the kitchen faucet is practically 'free' and is just as good as 'milk' (isn't it?) ) I remember awhile back that the Reagan Adminstration initially classified 'catsup/ketchup' (pic your spelling)  as a valid vegetable portion in a school lunch menu (!!!) (shout out to all of you Government Employees reading these blogs - what really goes on behind the scenes?)

Regarding the 'effective' lower price of product improvements due to technological advances  (such as computers, TVs, cellphones, etc..)  the argument that improvements translate into a  lower effective cost is hard for me to swallow without gagging.  Lets take computers - I'm old enough to remember when 128K Ram and a 40 Megabyte harddrive were only on the 'high end' computers - system cost when first sold, round $1500. Then, of course, newer software came out - newer OSs came out and the old PC wouldn't cut it anymore (programs took up too much RAM and took up too much disk space, wouldn't run the games I wanted to run, etc..) - the next 'high end system' was ...$1500...another couple of generations later (about 5 years) and the high end system of the day ran around (drum roll).. $1500.  The fact I could buy something closer to $500 didn't mean it could meet my needs and (more importantly) the fact that I 'wanted' the $1500 system that had all the bells and whistles didn't mean I could 'afford' its real on the street price at that time (after having a few kids by then) though I might have bought it for the hedonically reduced price if I could have bought one on hEdonicBay.

Daniel

Crash's picture
Crash
Status: Silver Member (Offline)
Joined: Nov 26 2008
Posts: 171
Re: Simpol Forum response

Thanks guys for an interesting discussion. I have left a link on the Simpol Forum so people can come here to view it.

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