A Papau note:More than you wanted to know about economic statistical lies

[papau]

Thanks to DU member idlisambar for the following links:
http://www.washingtonpost.com/wp-srv/business/longterm/cpi/cpi.htm
http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-05.html
http://moneycentral.msn.com/content/P72746.asp
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=31899
http://mwhodges.home.att.net/statistic-wizardry.htm
http://www.euractiv.com/cgi-bin/cgint.exe?204&OIDN=250108
http://www.financialsense.com/fsu/editorials/willie/2004/0130.html

I’ll try to make this a readable DU Post – but the source articles are written by real writers – so I refer you to the sources above if what I write below fails to make much sense.

1. On CPI, productivity, and GDP growth

Some background – The CPI refers to cost of living increases. Now over time what we use to live changes. Average folks obtain their transportation requirements no longer by horse and buggy, but by car. So over time the folks calculating the cost of living try to take note of this by changing the items they are measuring in the market basket that represents ones cost of living. So far no big deal. Folks also try to take into Hedonic improvements - the increase in quality of today’s item compared to the item we bought last year (in the 50’s under President Eisenhower each years new car was better made than last year, so it decreased the CPI, even as you paid more for basic transportation – but up to the mid 90’s this quality improvement effect was mild). In the mid-nineties folks tried to also note that when an item A got unreasonable costly relative to an Item B which provided the same utility or function as item A in our market basket of goods, folks would use more of Item B and less of item A. Again no big deal as it is a logical “weight” adjustment to the price of an item in our basket as we get to the total cost of living.

Seems that under Bush the above two adjustments have got out of hand (indeed one can argue that Clinton late 90’s numbers had gone beyond reasonable – but it seems that it is Bush that has really pushed the error into pretend land).

As Deutsche Bank Research has noted, while hedonic price indices are used in the USA (taking into effect the arm chaired percentage improvement in today’s product over the “same” item last year, traditional methods are applied in Germany. But the bank goes on to note that while an adjustment for this in the 90’s would have made the gap in the GDP and productivity growth in the USA compare to the EU , the US productivity growth would still rate as remarkable as it accelerated in the second half of the 1990s under Clinton. However the CPI changes under Clinton did cause the relationship between productivity and corporate earnings less closely correlated in the USA, because of the distortion caused by the USA price drop in computers and peripherals on a quality-adjusted basis (80% drop during Bush41 and Clinton), versus the EU market basket change effect of only 20%.

Hedonic pricing, which is based on econometric methods, works on the premise that an economic good (i.e., a product or service) can be described by a combination of constituent attributes and that changes in the price and quality of such a good can be described by the entirety of the trends in the prices of these constituent characteristics. This means that a product in the CPI basket of goods is not captured as a whole, but decomposed into attributes relevant to quality, thus statistically isolating the pure price effect from the quality effect. For instance, in hedonic pricing of computers, the clock speed of the central processing unit and the amount of RAM and hard disk storage capacity are explicitly incorporated as independent variables in the price equation. But it still costs the same dollars roughly to get a machine for the office – so does the quality improvement amount to a price decline? Dollar spending hardly changes, but GDP increases because “real spending” is rocketing up ? You can do more with today’s office computer than you could with the computer of 1985, but it’s improved productivity is certainly not on the order of going from a 0.02 giga-HZ machine to a 2.0 giga-HZ machine, as the Hedonic method would suggest.

The other CPI change, the substitution change effect, that was somewhat minor under Clinton has also gotten out of control as “same utility value” rules have become more loosely inforced. Mom used to buy steak and croissants but the price got so high that she now has to eat spam and dough balls fried in lard, but with a lose definition of “same utility value”, we do not recognize a decrease in the standard of living – and we claim that her cost of living has gone down.

The size of the Hedonic effect on our information technology business activity in Q3 of 2003 is interesting to look at. Official “annualized” GDP growth was claimed to be 8.2% for Q3 of 2003. Hedonic chain-weighted figures show $93.1 billion in IT spending, of which only $11.5 billion occurred in real terms. The remaining $81.6 billion, over 87% of the ledger item in the GDP calculation, was just speed improvements. The extra 80 billion in GDP flows nowhere, is available for business expansion nowhere, can be devoted to worker payrolls or benefits nowhere, and appears nowhere on any financial balance sheet. Indeed the combination of inflating the dollars spent on computers, and including software spending as a capital asset, has artificially inflated GDP by a sum of over $500 billion, or 32% of the reported GDP growth.


2. Job growth under Bush.

For the month of March 2001 the Bush administration announced in April 2001 that we had lost 86,000 jobs. What Bush did not say that was that his folks had added 145,000 fictitious jobs to their tally. Why? Because Washington assumes companies that it didn't reach in the survey are adding people to their workforce. Without those additional 145,000 jobs, the loss of positions in March would have been 231,000. This is the Birth/Death estimate that folks at DemocraticUnderground.com and the New York Post have been commenting on of late. Washington assumed small companies around the country that aren't surveyed are adding jobs because that was what the birth/death formula came up with. One would think that with the economy is slowing rapidly, perhaps those same invisible companies are laying off workers. And here is where the overstated GDP growth due to the understated CPI gets into the job growth number. The "growth in the GDP" is growth factor in the birth/death formula. Lie about the large growth in GDP via a lie about the small growth in the CPI, and you get to prove your numbers are consistent by noting that via that GDP growth lie you got a birth/death growth in jobs that gave you a really nice overall “seasonally adjusted” growth in jobs. Everything fits together and is reasonable, and you know the Bush administration would not lie to you! Since August of 2003 we have grown 1.5 million jobs per the payroll survey – of which half have been “pretend” jobs (caused in part by the overstated GDP numbers).

God forbid we discuss people who are out of work and who have become too discouraged to keep looking for a job and how that would affect the unemployment rate (although this statistic, people who are out of work and who have become too discouraged to keep looking for a job, is actually well estimated via the Household survey – that survey that Greenspan at the Fed said we should ignore as we take our job numbers from the payroll survey).

I do love economic statistics!

Agains thanks to DU member idlisambar for the great links.

[mhr]

1. Kick

eom

[KoKo]

2. Papau, thanks for this...as a DU Market Watcher these articles are ones

I've read, but think ALL DU'ers should sit down and take a look at.

Even if one doesn't have two nickles to rub together...one day you hope to and if so then reading financial articles that give insight into what's happening are worth the education.

For the rest of us who want to "stick our head in the sand" and hope that even if Chimp has screwed up everything else in America he's got to have at least gotten our financial stuff correct....WRONG!

The Chimp has thrown us into debt and we need to be very wary and figure out how we can beat him and his crooked Government manipulated statistics so we can SURVIVE!

:thumbsup:

[Wilber_Stool]

3. You’re certainly right about one thing.

It doesn’t make a bit of sense to me.