Can We Believe Any Government Economic Statistic?
Businessweek’s cover story, The Real Cost Of Outsourcing, reveals a real and significant flaw in the way the U.S. government calculates productivity and GDP. The article didn’t make clear (to me, at least) exactly how the flaw works. It doesn’t matter. It’s just further confirmation that you simply cannot use government-provided statistics as a basis for your financial decisions.
Most of my knowledge is in inflation and the CPI. I’ve written about inflation quite a bit (you can get to all the relevant posts in my archives). You don’t need to read extensively to know that the federal government’s calculation of CPI is broken for at least two reasons:
- They use flawed information
- They process the information in stupid and/or unrealistic ways
It’d be nice if these two things kind of cancelled each other out, but no such luck.
Three examples of how stupid the CPI is
The government uses something called ’substitution’ when calculating the CPI. Simply put, the substitution technique says if you eat steak and the price of steak rises too much, you switch to Spam. Undeniably, this occurs to some degree. But with no ‘rules’ for its use, it can be used to manipulate the CPI in undisclosed ways.
Here’s another great one. It’s called hedonic adjustment. The idea is that quality improvements suppress inflation. For example, since you’re new computer is twice as fast as last year’s model for the same amount of money, the actual price fell by half. That’s realistic, right?
Our final example is a biggie. The CPI assumes that everyone in America rents. [See my post The Reported Rate of Inflation Is a Lie for a detailed explanation] As I’m sure you are aware, over the last few years home prices have skyrocketed while rents have barely moved. So to suggest that because rental prices are steady, inflation must be tame is laughable.
In Government We Trust
Which brings me back to my point. We simply cannot trust the numbers put out by the government. What’s worse is that one federal branch can’t trust what’s put out by the others. From the Businessweek article:
For one thing, it calls into question the economic statistics that the Federal Reserve uses to guide monetary policy. If domestic productivity growth has been overstated for the past few years, that suggests the nation’s long-term sustainable growth rate may be lower than thought, and the Fed may have less leeway to cut rates.
If the Fed is making decisions based on faulty information (and they clearly are), aren’t their actions very likely counter-productive? I think the answer is clearly affirmative.
cpi, fed inflation
June 10th, 2007 at 8:55 am
Dude, you ride the government hard. Fight the Power!
June 11th, 2007 at 8:43 pm
yup, you’re right.
recently some democratic senators announced that the rich were hiding money in offshore accounts and that it was costing the IRS $100 Billion in unpaid taxes.
How the hell, did they come up with that number?
If they don’t know who’s hiding the money how can they estimate the upaid taxes. Or maybe they do know…. maybe its the rich senators like William Jefferson who’re hiding their money in offshore accounts. So all they had to do was go round the room asking all the senators and tally up the total. Divide it by 30% tax rate and they got their $100 Billion number!!!!
