Wednesday, July 1, 2009

Government Statistics Lesson 1: The Boskin Commission

This is the first part of a series that we hope to continue somewhat regularly. Besides the fact that government manipulation of official statistics makes us mad, reminding us of George Orwell's 1984, the fact remains that investors eagerly await official government announcements about the economy and other things that affect our lives. However, nobody ever seems to discuss these issues; probably they are just not interesting enough to our reality TV saturated culture.

In 1995, the Senate Finance Committee appointed the Boskin Commission to study potential flaws in the government's measurement of the CPI. In short, the Commission determined that yes, in fact, we have been systematically Overstating inflation since the beginning of time, and that our methods of measurement were due for a change. In Commission-like fashion, this group of people issued a "final report", which was humorously entitled "Towards a More Accurate Measure of the Cost of Living". That report is hundreds of pages long, so instead we have provided below the three page Congress-style sheet that was ultimately presented to the US House of Representatives. Now, there are two reasons that the government would want to claim we have been Overstating inflation, or in other words, two reasons that the government would want to report lower inflation going forward. First, a whole swath of mandatory(that's right, there is mandatory spending;and it actually comprises the majority of the federal budget) government spending is indexed to the CPI, with Social Security topping the list. Lower "official" inflation was an instant money saver for Uncle Sam-alternatively it freed up more money to spend on other things - always a popular idea amongst politicians. The second, and more political reason, is that Wages are typically reported as "real wages" i.e adjusted for inflation. If you artificially lower your reported rate of inflation, then real wages will appear to grow, even if they are simply keeping up with the actual rate of inflation as experienced by consumers. Presidents love to brag about real wage growth during their Administration (we don't recall hearing that one during the past decade however...).

Boskin Commission Findings Sphere: Related Content

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