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Lies, Damn Lies, and Statistics
Old 03-01-2006, 08:19 AM   #1
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Lies, Damn Lies, and Statistics

Here's a link (http://www.weedenco.com/welling/lilogo.asp) to an interview with an economist who studies how the government generates (manipulates) economic statistics.

This has some worrisome implications for retirees who depend upon COLA persions, I bonds and social security for income.* I personally think that the current rate of inflation is closer to 7 to 8% than the official 2 to 4%.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:09 AM   #2
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Re: Lies, Damn Lies, and Statistics

Look for threads called "invisible inflation". Some of us agree with you.

It does depend on what part of the country and what your lifestyle is though. Some people may be seeing zero or the fabled 2-4%.

I'm seeing something in the 7-8% range easily here.

A great spot check is to ask a real retiree getting social security how their "inflation adjusted" social security payment is working out for them. My dad's been retired ten years...he feels he's lost at least 20, and maybe 30% of the buying power he used to have. That means an average 2-3% variance? Greenspan, before he left, said that he thought CPI calculated at least 1% too HIGH.

But thats what happens when one group measures something, gets dinged if the measurement is too high, and then has to increase monetary payouts as the thing they're measuring goes up.

Say your electric company said "we're never coming to your house again. Report your electric meter results on our web page and we'll bill you. Note that if your electric use rises 10% from one month to the next, that we'll double your bill."

How many people report the honest number? How many of the honest ones stop being honest the first time they're about to get their bill doubled?
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:11 AM   #3
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Re: Lies, Damn Lies, and Statistics

I think that inflation rates depend highly on what resources you consume. If you keep fairly good records on your expenditures like I do, you can see how inflation has impacted you personally.

I know for a fact it is nowhere near 7-8%. (unless you're looking at my heating bill)

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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:21 AM   #4
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Re: Lies, Damn Lies, and Statistics

Uh oh, dont go down that "if you take out food and energy, inflation is pretty tame!". I want to pop every economist that tries to take the stuff that went up out of the equation :

Yeah...around here at Casa De Bunny we eat food and turn the heat and lights on from time to time...
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:23 AM   #5
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Re: Lies, Damn Lies, and Statistics

Cute n' Fuzzy Bunny's father is right. *Here's a quote from the interview. *".... if the same CPI were used today as was used when Jimmy Carter was President, Social Security checks would be 70% higher."
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:31 AM   #6
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Re: Lies, Damn Lies, and Statistics

A couple of comments:

I saw studies showing that when people prospered they didn't feel richer. I wonder if the same thing is true with inflation. We remember that health care is going higher but forget that cars and TV's and most manufactured stuff goes down in price. The so called selective memory effect. More generally service prices are rising and goods prices are falling. Of course if you are a heavy user of medical or any other services your rate of inflation will probably outstrip the CPI.

I remember the discussions, which I agreed with, that Greenspan and others had on CPI substitution and that CPI at that time overstated inflation. If I get a full CPI (without substitution) increase every year I will be better off if prices don't all rise uniformly. That's cause I can choose to substitute the less expensive items for the more expensive items. The question that remains unanswered is... What is the true value of the CPI allowing for substitution. That's where the psuedo-science comes in. *
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 09:37 AM   #7
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Re: Lies, Damn Lies, and Statistics

Stuff thats going down is either non-essential or is bought every 5-10 years.

Stuff thats been going up is essential and is bought frequently.

My food, clothing, energy, gas costs, housing values and car costs have gone up in aggregate about 30% in four years.

What *I* pay to live is up 7-8%.

You have to start at the basic premise and operate from there. CPI is supposed to show the effects of inflation on purchased goods. While I understand the mechanics of someone who cant afford something substituting a cheaper item, I fail to see that mechanisms place in detemining cost of goods.

Further, the application of hedonics, where something is believed to be "better" causing a reduction in the net cost, makes no sense to me either. We're not measuring quality of life, we're measuring costs. A car that costs twice as much as it did ten years ago but is twice as good does not cost the same. It costs twice as much. Period.

Whenever I read government inflation stuff, I feel like i'm watching two guys with scarves, juggling balls and waving their top hats around going "dont look at him, look at me...now look at whats in my left hand...".

Just make up a basket of goods that people have to purchase to live, measure the cost of those items. Divide and show the percent up or down in cost.

Whats so hard about that? Why do we need other 'levers' or 'buttons'
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 10:12 AM   #8
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Re: Lies, Damn Lies, and Statistics

Quote:
Just make up a basket of goods that people have to purchase to live, measure the cost of those items.* Divide and show the percent up or down in cost.

Whats so hard about that?* Why do we need other 'levers' or 'buttons'
Well just for fun lets say our basket of goods is made up of chicken and steak. Lets suppose that they are priced the same and that you value each the same. Therefore you probably would purchase equal amounts of ssteak and chicken. Well if chicken triples from one year to the next while steak keeps the same price, the 2-item CPI goes up by a factor of 2.

If you are compensated for this 2-item non-substitution CPI then you'll get twice as much money. You could purchase the same basket of chicken and steak as last year. But more likelely you'll buy much more steak and much less chicken. You could if you wish buy only steak and have twice as much as the year before. If you were to choose only to eat steak then you'll be twice as well off as before.

Price is a strong indicator of your demand for an item.

To really make my point consider if chicken price went up by a factor of 10 or 100 while steak remained constant. If you are compensated for the price increase of every item in the basket then you'll really be better off.

That's the logic behing the substitution modified CPI.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 10:13 AM   #9
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Re: Lies, Damn Lies, and Statistics

You can substitute hamburger for steak when it becomes too expensive, but what ido you do if hamburger becomes too dear?* Substitute dog food?

The goverment's creativity with statistics isn't limited to the CPI.* They also manipulate unemplyment numbers, the GDP ...

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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 10:20 AM   #10
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Re: Lies, Damn Lies, and Statistics

Quote:
You can substitute hamburger for steak when it becomes too expensive, but what ido you do if hamburger becomes too dear?* Substitute dog food?
That was the posted article's throwaway line.

Keep in mind that there are lots of items besides dog-food that can be substituted.

Quote:
if the same CPI were used today as was used when Jimmy Carter was President, Social Security checks would be 70% higher
."

Well that's a great indicator that the traditional CPI overstates inflation. Just think of the bigger mess this country would be in if SS had to pay out an extra 70 %.

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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 10:23 AM   #11
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Re: Lies, Damn Lies, and Statistics

Quote:
Originally Posted by Sue
You can substitute hamburger for steak when it becomes too expensive, but what ido you do if hamburger becomes too dear?* Substitute dog food?
Cat: the other, other white meat.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 10:34 AM   #12
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Re: Lies, Damn Lies, and Statistics

Quote:
Originally Posted by MasterBlaster
Well just for fun lets say our basket of goods is made up of chicken and steak. Lets suppose that they are priced the same and that you value each the same. Therefore you probably would purchase equal amounts of ssteak and chicken. Well if chicken triples from one year to the next while steak keeps the same price, the 2-item CPI goes up by a factor of 2.

If you are compensated for this 2-item non-substitution CPI then you'll get twice as much money. You could purchase the same basket of chicken and steak as last year. But more likelely you'll buy much more steak and much less chicken. You could if you wish buy only steak and have twice as much as the year before. If you were to choose only to eat steak then you'll be twice as well off as before.

Price is a strong indicator of your demand for an item.

To really make my point consider if chicken price went up by a factor of 10 or 100 while steak remained constant. If you are compensated for the price increase of every item in the basket then you'll really be better off.

That's the logic behing the substitution modified CPI.
See? Thats what makes me crazy. People equate CPI with inflation. Not with what they'd buy instead if something gets too expensive. Its supposed to measure the price points and costs of living, not how peoples buying habits change in response to them!

If people didnt post stuff like "Well, I have these CPI indexed bonds, so i'm inflation proofed" or "I'm getting a 'real' return from my CPI indexed blah blah", I wouldnt even blink.

And yes, I know basket substitutions and hedonic adjustments make only modest changes to the real numbers.

I still feel like i'm watching a magic show when the people involved change stuff or go on tv and say "but if you take all this stuff out, its okay!". :P

Basket - measure it. A quarter later, Basket - measure it.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 11:09 AM   #13
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Re: Lies, Damn Lies, and Statistics

MasterBlaster

You're right that there are substitutes besides dog food.* The point I wanted to make was that when you're living on a fixed income and that income doesn't fully adjust for inflation, your standard of living will eventually go down even if you are able to substitute.*

I agree with you that if social security payments were 70% higher, it would be difficult for the government to met these increased financial obligations.* But this problem is only going to become worse when the baby boomers retire.* If the government use statistical manipulations to paint* a rosier picture of our nation's economic health than is warranted, I think it's better to know about this deception before it negatively impacts one's economic security.*

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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 11:34 AM   #14
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Re: Lies, Damn Lies, and Statistics

Here's an interesting perspective...
http://nontrivialpursuits.org/saving...easurement.htm

The idea of trying to measure inflation is a good one. Theoretically, if we could measure inflation accurately, we would be able to say with great precision just how much we are ‘getting ahead’ or ‘falling behind’ with respect to the Cost Of Living. The only problem is that the measurement we use (the CPI) is so poorly thought out, it is almost completely worthless as a tool of 'adjustment.'

Consider the fact that it is quite possible for different socio-economic groups to experience different inflation rates. This is almost always the case. Since the Republican Party began to cut the income tax rates of the wealthiest income earners in American in the 1980's, we have seen very substantial price inflation in those markets that serve the rich, while average prices for many in the lower classes have held somewhat steady or have even dropped somewhat (due to imports of cheaper foreign products and the loss of good paying jobs).

Because this variance in inflation rates across income groups exists, a far more useful CPI publication would provide different price index numbers for different income groups (meaning different ‘market baskets’ that are relevant to the different income groups). This kind of data would require an enhanced data-collection effort, but the result would be worth it. With data on the varying inflation rates that affect different income groups, policy makers would be able to fashion policy proposals that respect the varying circumstances of different citizens.

Once we have come to realize that it is actually possible for one income group to experience significant inflation while another income group is experiencing deflation, it no longer makes sense to compile an 'average' price index that supposedly affects ‘everyone.’ Doing so up to now has buried a lot of important information behind a single number. If the BLS were to publish a spectrum of index numbers that pertain to maybe ten different income groups, both citizens and policy makers would have a much clearer picture of what is happening to the economy.

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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 11:41 AM   #15
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Re: Lies, Damn Lies, and Statistics

While your income-indexed CPI concept has some merit. One would also have to account for inflation differences by age, race, geographic location, sex, hobbies, spending habits, taxes and so on and on.

Clearly if you are buying things that are going up faster than the index realtive to everyone else then your personal rate of inflation will be higher than an index and vice versa.

Besides what you are proposing would only benefit higher income groups who already have quite a few advantages.

So maybe we just better stick to what we have
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 12:05 PM   #16
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Re: Lies, Damn Lies, and Statistics

Its not my concept, proposal nor do I even necessarily agree with it; I posted it for its interest factor.

It is a point of interest that WE are a higher income group, so according to the article, may be getting the shortest stick from the CPI.

What I *have* proposed is picking a basket of goods, measuring the price, then measuring the price of the same basket of goods, no funny adjustments, no 'taking things out'.

What exactly is wrong with that idea? Or maybe someone can explain what CPI is really supposed to measure? I thought it was supposed to measure inflation.

Another interesting article, for those who dont have all the background...

If you think Enron-type accounting is dead, think again. No, it’s not a Fortune 500 company where made up numbers and slick tricks are still in vogue, it’s the US government with its Consumer Price Index (CPI) numbers, released every month. Traditional media, however, still has no clue. Not surprising since most newspaper writers are English majors and couldn’t tell CPI from GDP. As for your TV anchormen and women, well, let’s just say that looks are more than everything and finding the right makeup is more important than finding the right story.

CPI is the benchmark for measuring inflation, and is important because social security, and pension benefits for many companies are automatically indexed to adjust for the increase in CPI. But our government is unique in how it determines CPI. Instead of just measuring the change in prices for a set basket of goods (the way it used to do it), the government makes hedonic adjustments too. What are hedonic adjustments? Simply put, they factor in changes in the quality of what is measured. A standard entry model computer can do much more today than what a entry model computer could do a year ago, and in theory this sounds somewhat reasonable, but reason stops when adjustments are made to everything from textbooks to motel rooms. Take a history textbook for example. Since every year, there is more history to report on (the year 2005 is now history), the government says the QUALITY of textbooks also increases every year, and so higher prices for these new textbooks are adjusted downwards to reflect the gain in quality from adding 2005. How about motel rooms? Now that more motel rooms have internet access, the quality of these rooms are better, or so says the government. Again, prices are adjusted downward. And what about cable television? The government thinks that including an additional 100 useless music channels means that the quality of cable has improved, no matter that I’ve never tuned into one of these channels and can live perfectly without these “improvements”. Another downward adjustment for inflation. Are you getting the picture?

Now you think these hedonic adjustments would be enough for our government to get the inflation numbers it wants, but not so! The government also adjusts for the “substitution” effect. In short, if beef prices rise, more consumers will switch to chicken, and the fact that they’ll make this switch means that they’ll gain more in utility (pleasure) from eating chicken then they would have from purchasing beef at the higher costs. Therefore, the CPI should be adjusted downwards to reflect this switching effect. While this is true in economic theory, it completely misses the point of having a CPI, which should measure increases in prices for a set basket of goods, not for an price increase in a set living standard or utility. This is cheating and is totally against what the CPI was created for in the first place!

And since the CPI is so important, even our GDP numbers are affected as GDP is always adjusted for inflation. The lower the CPI, the higher the GDP. The Economist, my favorite magazine, is on to this game. In the Feb. 16th issue, The Economist writes,

“Europe could rejoice in further upward revisions to growth if its governments were to adopt American statistical practices. Price deflators there take more account of improvements in the quality of goods, such as computers, and thus a given rise in nominal spending implies faster growth in real terms. By using higher inflation rates, the euro area understates its growth relative to America’s…On past experience, Europe’s statisticians should add half a percentage point to their first guesses of GDP growth. By also switching to American practices, they could boost growth even further. Instead, their cautious ways are making Europe’s economies look more dismal than they are, and gloomy headlines are discouraging consumers from spending. Perhaps Europe should outsource the compilation of its statistics to America, and then watch the boom”.

The fact that The Economist regularly understands and reports on these “tricks” and subtleties is why it puts all other news magazines to shame. And the fact that our government has to use Enron-type tactics to calculate inflation should put our elected leaders to shame. Perhaps you now know why I, along with other libertarians, distrust the government so much, no matter who is in power. These adjustments were first put in by the Clinton Administration.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 12:10 PM   #17
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Re: Lies, Damn Lies, and Statistics

Fun stuff: http://www.gillespieresearch.com/cgi-bin/bgn/
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 12:51 PM   #18
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Re: Lies, Damn Lies, and Statistics

Ahh CFB, I knew there was something we could agree on. The Economist rocks!

I think it would give a more honest picture if the CPI were broken up into sectors like food, transporation, utilities, housing, clothing, durable goods (like appliances), health care, professional services and what-not. Just like what the majority of folks on the board here do when tracking their personal budgets.

THOSE would be more interesting numbers, though I'm not sure how that would help address investments, pensions or raises that have CPI-linked yardsticks, since personal consumption differs. You could look at a way to weight the importance of the categories but then you'd get into a political battle nonetheless.

All the more reason that Italian economist wasn't so foolish focusing on "bread". I think all governments would like to report lower-than-actual inflation figures. Maybe the Europeans, rather than being pessimistic, are just being less "optimistic".
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 01:31 PM   #19
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Re: Lies, Damn Lies, and Statistics

After reading this interview, I'm much more comfortable with my Gold position.
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Re: Lies, Damn Lies, and Statistics
Old 03-01-2006, 03:26 PM   #20
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Re: Lies, Damn Lies, and Statistics

Quote:
Originally Posted by Cute n' Fuzzy Bunny
Price deflators there take more account of improvements in the quality of goods, such as computers, and thus a given rise in nominal spending implies faster growth in real terms. By using higher inflation rates, the euro area understates its growth relative to America’s…On past experience, Europe’s statisticians should add half a percentage point to their first guesses of GDP growth. By also switching to American practices, they could boost growth even further. Instead, their cautious ways are making Europe’s economies look more dismal than they are, and gloomy headlines are discouraging consumers from spending. Perhaps Europe should outsource the compilation of its statistics to America, and then watch the boom”.
This, and the national debt/trade balance, may be the reason there is a flight to foreign stocks underway.
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