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Academic Economists Serving their Political Masters

Politics / Economic Theory Jan 19, 2010 - 03:33 AM GMT

By: Submissions

Politics

Best Financial Markets Analysis ArticleFrederick Sheehan writes: On January 14, 2010, an academic economist took a rare stance. Tenured professors rarely lift the veil from numbers that governments invent. In "Don't Like the Numbers? Change 'Em," Michael J. Boskin, Ph.D., formerly, an economics professor at Harvard and Yale; formerly, chairman of the Counsel of Economic Advisers in the George H.W. Bush administration; currently, T. M. Friedman Professor of Economics at Stanford University; research associate at the National Bureau of Economic Research; senior fellow at the Hoover Institution; and board member of the Exxon Mobil Corporation, Oracle Corporation and Vodafone PLC (among others), wielded his sword.


The Wall Street Journal devoted a half page to Boskin's list of offenders. Politicians are interfering with the Gross Domestic Product calculations in France and Venezuela. They have toyed with the inflation rate in Argentina. In the U.S., the Obama administration has taken the phony numbers game "to a new level." Here, Boskin is writing of the current adminstration's calculations of jobs "created or saved" from its stimulus bill.

The "created or saved" job calculation is nonsense, but the very last person one would expect to decry the miscarriages is Michael J. Boskin.

In the early 1990s, Senator Patrick Moynihan from New York warned his fellow legislators about rising social security commitments. Then the worm crawled out of his hole, so to speak. Federal Reserve Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995. He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.

If Greenspan was correct, this was a godsend. Social security payments are increased each year at an inflation rate calculated by the federal government: the change in the Consumer Price Index (CPI). If the CPI could be increased at a lower rate in the future, benefits would rise more slowly, without Congressional action. This would reduce government spending and delight politicians, who knew of the looming crisis in social security but did not want to imperil their careers by reducing benefits, or, in this case, by cutting the rate at which social security benefits were raised each year.

The Boskin Commission was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President's Council of Economic Advisers (CEA) from 1989 to 1993, a post previously held by such government functionaries as Arthur Burns and Alan Greenspan.

Jumping to the conclusion, the Boskin Commission, as it was known (formally, the "Advisory Commission to Study the Consumer Price Index") found that inflation was overstated by 1.1%. Several recommendations were made by the Commission to the Budget Committee. These were instituted with great efficiency by the Bureau of Labor Statistics.

The changes have lopped off far more than 1.1% in most years since 1997. From the time the changes were instituted through 2008, the compounding of an artificially low Consumer Price Index reduced payments to social security recipients by about half (according to John Williams, author of the newsletter Shadow Government Statistics).

How the CPI calculation was changed is not important here. (Chapter 12 of my book Panderer to Power is devoted to the Boskin Commission.) One adjustment may help to understand Boskin's contribution to the impoverishment of older Americans. "Hedonic adjustments" by government number crunchers substitute imaginary prices for prices actually paid. Hedonic adjustments (purportedly, the "quality improvement" of an item) reduce the CPI. (Hedonic adjustments had been employed before the Boskin Commission, but sparingly.

Afterwards, even the prices of textbooks - if they had color graphics - were adjusted for quality.)

Steve Leuthold, founder and chief investment officer of the Leuthold Group, calculated the price of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using hedonic adjustments, the government calculated the price of a new car had risen from $6,847 in 1979 to $11,708 in 2004.

The Boskin Commission was one scandal that economists actually denounced. Greg Mankiw, chairman of George W. Bush's Council of Economic Advisers from 2001-2003, said at the time "the debate about the CPI was really a political debate about how, and by how much, to cut real entitlements."

Barry Bosworth of the Brookings Institute called the revised CPI an " 'immaculate conception' version of deficit reduction in which spending is cut without Congress taking the blame."

Jack Triplett of the Brookings Institute extended the argument: "What I liked least about the Commission Report was exactly what made it so influential - its guesstimate of 1.1 percentage points of bias....The Commission (and others that have followed) used ad hoc reasoning to come up with a number...."

Jacob Ryten, from the Canadian statistical office, wrote in the same vein: "Without the guesstimates, the Commission Report was just another dry, academic study to be perused by professionals... Conversations with Committee members suggest that some, at least, were ill at ease themselves with guesstimates.... My personal preference is to resist the seductive blandishments of politics and politicians...."

Jack Triplett chided the Report as succumbing "to the lure of political statements in its choice of language to describe the effect of CPI measurement errors on Social Security expenditures.... Professionals at any rate, should understand that improving the accuracy of the CPI is not the same thing as improving the basis for allocation to the dependent population...."

Professionals, at any rate, have seen fit to keep Michael Boskin at the summit after he succumbed to "seductive blandishments of politics and politicians." It cannot be said that Boskin dishonored his profession, since he is still a superstar. Other professions institute bodies such as the American Bar Association and the American Medical Association that take action against negligence.

Federal Reserve Chairman Ben S. Bernanke, another pliant alumnus of the CEA, sits before the Senate claiming there is no inflation in the economy. He uses the CPI as his measure, taking the additional step of removing food and energy costs.

Near the end of his Wall Street Journal effort, Boskin wrote of the Obama job numbers: "One piece of good news: The public isn't believing much of this out-of-control spin." He's probably correct, but spinning the number of jobs "created or saved" has no consequence, other than to increase the public's distrust of government. The distortion of the CPI should have been censured by his profession, if it is that.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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