This is part 2 of, "How the Government Lies About Inflation and the Gross Domestic Product (GDP)." Again, for this article I am borrowing heavily from chrismatenson.com; I highly recommend you check out his site, but as always be open minded and skeptical. In Part 1, How the Government Lies About Inflation; Substitution, Weighting and Hedonics I discussed how inflation numbers are manipulated. This article will explore the manipulation of GDP numbers. The GDP tells us how much stuff we have acquired by calculating economic value added transactions; every time you buy a car, food, a new bicycle, a computer that is added to the GDP. It is very common to compare debt or income taxes to show we have never had it so good.
I’m sure no one will be surprised that these numbers have also been cooked. GDP numbers are manipulated using what is called “imputations”, or when it (is) assumed that economic value had been created but no actual transactions took place. The big imputations are free checking and home ownership. The government figures that a checking account has value and the fact that it is offered for free means it is value added and is included in the GNP. Probably the most fraudulent imputation is when a home is owed out right, so there are no mortgage payments. The government believes that everybody or family either pays rent or makes house payments, if this is not the case they add the amount one would be expected to pay for rent to the GDP. That’s right, the fact that you own your house, means your house has added value because you don’t pay rent. Add just these two imputations and you increase GNP by over $1 trillion in 2003 dollars.
Next we have "hedonics", described in Part1 as “the absurd concept that if something costs the same year to year, but has added features or improvements, then you are paying less than its actual worth.” In this description Matenson used computers as a example. The price of computers has stayed pretty much the same for years, yet they are faster and have more and more bells and whistles. The government creates a value for the additional speed, bells and whistles and adds it to the GDP. Further the difference between GDP hedonics and inflation hedonics is with GDP it is added, but with inflation it is subtracted. So a hedonics value that had been subtracted from inflation is added to GDP; the amount in 2003 dollars is an unbelievable $2.3 trillion! “Taken together (imputations and hedonics), these mean that $3.9 trillion, or fully 35% of our reported (2003) GDP ($11 trillion), was NOT BASED on transactions that you could witness, record, or touch. They were guessed at, modeled, or imputed, but they did not show up in any bank accounts, because no cash ever changed hands.”
Finally all GDP numbers are supposedly always inflation-adjusted, but that is not necessary the case. Oh yes, inflation is subtracted from the GDP, but “for the past fifteen quarters the Bureau of Economic Analysis has been serenely and systematically subtracting lower and lower amounts of inflation, which simply flies in the face of both real-world inflation data and common sense.”
Matenson ends this portion by saying, “Suddenly a lot of things that were difficult to understand make perfect sense. Contracting businesses, rising foreclosures, job losses, rising budget deficits, falling tax revenues, declining auto sales; all of these are consistent with recession and not expansion.”
The issue here is even if the government started to show some maturity and faced this country’s economic problems we would have no place to start. The President would have to lower the GDP and raise the inflation levels, which when you think about it might be a positive thing; how could one imagine a more disillusioned public then we have today. Since everyone’s economic status would remain the same, only redefined in more plausible terms, it might even build confidence that someone is actually being honest and doing something. This is of course is what the citizens of the United Sates have been screaming for. Obama tapped into this need with his "Hope and Change", but failed to deliver what many view as a dishonest ends justifying means fashion. It’s the economy stupid. Please, please, it’s the economy. Our free market economy and the liberty we enjoy are two sides of the same coin, lose one and we lose the other.
Showing posts with label Chris Matenson. Show all posts
Showing posts with label Chris Matenson. Show all posts
Saturday, September 18, 2010
How The Government Lies About Inflation; Substitution, Weighting, and Hedonics
The article borrows liberally from the web site ChrisMatenson.com. Much of the site is dedicated to what he calls a “Crash Course” on why our economy will soon implode into it’s own footprint. The Crash Course is divided into about 20 sections; the first sections on money is right out of the Ron Paul playbook. He also is an advocate of the controversial Peak Oil theory. But the section on “Fuzzy Numbers” does a better than average job of explaining how GDP (Gross Domestic Product) and Inflation numbers are manipulated by the government. It is not uncommon for someone to remark that these are the cooked numbers, and Matenson explains how this is done.
Inflation is determined in a report from the Bureau of Labor Statistics (BLS) called the Consumer Price Index (CPI). The BLS tracks the price of a certain "basket" of goods and services and documents the rise of fall of the prices of the "basket" to determine the inflation rate. But during the Clinton Administration this was changed by something called the Boskin Commission and three additional formulas were added to the mix; substitution, weighting, and hedonics. The effect of these formulas was to reduce the official rate by almost two-thirds. As an example, lets say the BLS using the pre-Clinton method, reported an inflation rate for 2007-2008 at 11.3 %.
Matenson explains, “...we no longer simply measure the cost of goods and services from one year to the next, because of something called the "substitution effect." Thanks to the Boskin Commission, it is now assumed that when the price of something rises, people will switch to something cheaper. So any time, say, that the price of salmon goes up too much, it is removed from the basket of goods and substituted with something cheaper, like hot dogs. By this methodology, the BLS says that food costs rose 4.1% from 2007 to 2008”.
Next there is “weighing.” This uses the argument that if some item or service price increases too fast, than people will either buy less or find a cheaper alternative. Therefore you’ll be happy to know that when your healthcare or gasoline prices go up and start eating more of your paycheck that will not be counted as inflation. The last item is hedonics, which is the absurd concept that if something costs the same year to year, but has added features or improvements, then you are paying less than its actual worth. Here’s an example;
“a 27-inch television selling for $329.99 was selling for the same price as last year, but was now equipped with a better screen. After taking this subjective improvement into account, the price of the TV is adjusted downwards by $135, concluding that the screen improvement was the same as if the price of the TV had fallen by 29%. The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would cost you to buy, but $195.”
Matenson says that hedonics are now used to adjust as much as 46% of inflation. More over, this fraudulent reduction of the inflation numbers have cheated any person who receives an entitlement or pension with a COLA (Cost Of Living Allowance) tied to the inflation rate, such as Social Security or Medicare. “Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are.”
So indeed the government is cooking the books and the result is people all over the country are struggling, but the government citing these manipulated inflation rates tells us everything is just fine. My next article will discuss how the same misdirection is used on the GDP to try and convince the public they’ve never had it so good.
Inflation is determined in a report from the Bureau of Labor Statistics (BLS) called the Consumer Price Index (CPI). The BLS tracks the price of a certain "basket" of goods and services and documents the rise of fall of the prices of the "basket" to determine the inflation rate. But during the Clinton Administration this was changed by something called the Boskin Commission and three additional formulas were added to the mix; substitution, weighting, and hedonics. The effect of these formulas was to reduce the official rate by almost two-thirds. As an example, lets say the BLS using the pre-Clinton method, reported an inflation rate for 2007-2008 at 11.3 %.
Matenson explains, “...we no longer simply measure the cost of goods and services from one year to the next, because of something called the "substitution effect." Thanks to the Boskin Commission, it is now assumed that when the price of something rises, people will switch to something cheaper. So any time, say, that the price of salmon goes up too much, it is removed from the basket of goods and substituted with something cheaper, like hot dogs. By this methodology, the BLS says that food costs rose 4.1% from 2007 to 2008”.
Next there is “weighing.” This uses the argument that if some item or service price increases too fast, than people will either buy less or find a cheaper alternative. Therefore you’ll be happy to know that when your healthcare or gasoline prices go up and start eating more of your paycheck that will not be counted as inflation. The last item is hedonics, which is the absurd concept that if something costs the same year to year, but has added features or improvements, then you are paying less than its actual worth. Here’s an example;
“a 27-inch television selling for $329.99 was selling for the same price as last year, but was now equipped with a better screen. After taking this subjective improvement into account, the price of the TV is adjusted downwards by $135, concluding that the screen improvement was the same as if the price of the TV had fallen by 29%. The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would cost you to buy, but $195.”
Matenson says that hedonics are now used to adjust as much as 46% of inflation. More over, this fraudulent reduction of the inflation numbers have cheated any person who receives an entitlement or pension with a COLA (Cost Of Living Allowance) tied to the inflation rate, such as Social Security or Medicare. “Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are.”
So indeed the government is cooking the books and the result is people all over the country are struggling, but the government citing these manipulated inflation rates tells us everything is just fine. My next article will discuss how the same misdirection is used on the GDP to try and convince the public they’ve never had it so good.
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