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Sentence of the Day
And for someone so hostile to speculation, Phillips sure engages in a lot of it.
Daniel Gross reviewing Kevin Phillips' new book, Bad Money.
Posted by Alex Tabarrok on August 3, 2008 at 08:03 AM in Books | Permalink
Comments
Gross: "There’s a discussion of peak oil, and a side trip into the thicket of government statistics, from which he emerges with the plausible charge that the government’s tally of the Consumer Price Index probably understates inflation."
Argh!!! The opposite is more likely true for all the Boskin reasons and more. Phillips' argument for this is a sequence of compounding confusions. Sad to see Gross find it plausible.
Posted by: Will Wilkinson at Aug 3, 2008 2:32:51 PM
Name your basket, Will. Does it include individual, non-group, non-governmental, medical insurance?
Medical care is the piano over our heads, in terms of inflation and financial planning. Future cost of living is unknowable without knowing future health, a gamble. Stay well, and all is good. Sickness in the family suddenly changes the basket, possibly for good.
(BTW, the 25# bag of flour that was $4.75 three years ago is still sitting at $15.95 at my local Smart and Final.)
Not that is not possible to go off the rails about inflation, and Phillips might. The thing is, anyone can always make the argument that 'since nuts worry about X, then X is only for nuts. Heck, plug 'libertarianism' in as one of your Xes.
Posted by: odograph at Aug 3, 2008 3:41:27 PM
I predict the "health care bubble" pops in 2010 or thereabouts. Of course there's always the possibility of a new "new deal" from the next administration. If we can't chump the sovereign wealth funds into buying more treasury debt them we'll be forced to print it. Who knows though, since neither candidate dares mention the coming financial crisis.(or is it already here?) Perhaps I just can't hear them because of the tin-foil over my ears,huh?
Posted by: daddysteve at Aug 3, 2008 8:14:43 PM
I'm no expert, but here's a go.
The CPI and PCE show dramatically different "inflations." Predictably, the FED watches the lower. Which one is wrong? Are both overestimating inflation? For the reasons given by Boskin?
From ye all knowing Wiki
The report highlighted four sources of possible bias:
* Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.
* Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.
* Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.
* New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.
None of these actually address inflation. They only address shifting prices. Inflation is when the average overall cost of living goes up. Things like the CPI are substitution variables that aspire to represent this. Inflation is the cost of things rising, product substitution is what consumers do in response. Quality improvements are what consumers demand in response to unacceptable quality.
Substituting a cheaper product does not completely substitute for ones desires. I might get a Zune instead of an I-pod, but I'm instantly less cool. Fast food is cheaper than fresh fruit. I don't understand what is meant by outlet substitution. Many new technologies increase costs. Improvements in quality are NOT (in my book) about inflation, they are technology. Substitutions to other products are not about inflation, they are technology. New products are obviously technology. They aren't always a positive! New medical products RAISE medical costs. New game consoles make Christmas more expensive. New auto fuels raise overall fuel costs. Has more or less money been spent on Televisions since flat screens came out? I'd guess more.
Posted by: Andrew at Aug 4, 2008 3:49:37 AM
"Name your basket, Will. Does it include individual, non-group, non-governmental, medical insurance?"
For any static basket of medical goods, prices are down just like almost everything else in the long run.
The problem is that everyone wants the state of the art. Which is totally understandable, but cannot be properly used to try to prove that 'real' inflation is higher than the CPI. Innovation costs money.
Posted by: Sebastian at Aug 4, 2008 7:19:30 PM
Is that actually documented Sebastian? I'd be surprised of a standard visit, x-ray, and cast combo was cheaper today than it was 10 (or 40) years ago.
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