So much for tomorrow. This has been a crazy week and I expect it to be an equally demanding weekend. Perhaps next week will bring relief?Today I want to write a little bit about local economic indexes (do I know how to party or what?). A few days ago my partner initiated a discussion about just how easily the data in the Consumer Price Index (CPI) can be manipulated, and how there are some who believe the CPI is manipulated, wildly, already.
For those of you who wouldn't know a CPI from a GPS device (and I count myself among you), in its most simplistic terms, the CPI attempts to measure the average rate of inflation in the U.S. The term inflation represents a loss of purchasing power due to increased prices on goods and services. The increased prices are not reflected by increases in quality. So, in theory, the goods being measured are equal to the goods measured last time, and its the prices alone that have changed. Are you still with me? I hope so.
There are critics (of the current administration, of government regulation, or of economic forecasting more generally) who argue that the CPI is routinely manipulated by government to achieve specific political and economic purposes. Why would the government want to tinker with measures of consumer prices? Well, the theory goes that by suppressing inflation figures (current figures are below 3%) the U.S. saves a lot of money. How? Cost of Living Allowance increases (COLA), salary and pension adjustments and the interest on the national debt are all impacted by the rate of inflation. If the rate is low, the government spends less on all of the aforementioned things. There are allegedly many ways that the statisticians manipulate these figures, but I don't know enough about them to explain them satisfactorily. Apparently, "geometric weighting"(a process by which the prices of "volatile" categories, such as housing, energy and health care, are simply eliminated from the tabulation), rolling back price increases for products with quality improvements, and not accounting for subsidies on goods are the mainstays of this manipulation. In truth, I don't pretend to be an expert on this topic. I just think that it's interesting.
So, the critics (understandably) take issue with official numbers that are so low when it's obvious to anyone with a pulse that the cost for most things, especially essentials like housing, health care and energy, are increasing by double-digit increments nearly every year. I do find it interesting that there doesn't appear to be a whole lot of documented discussion of this dissonance.
The manipulation of these figures, the critics contend, leads to a false sense of consumer confidence and encourages overspending, due to artificially low interest rates. Ultimately, instabilities and vulnerabilities result. What would happen, I wonder, if we relied on local measures and indexes of cost and economic activity, instead of the Bureau of Labor and Statistics' CPI? Would the numbers be so easily manipulated? Certainly statistics can be massaged into saying just about anything, but wouldn't it be much easier to take the authors of a local measure to task if the lived reality and the report didn't match?
It seems to me that persons of a given locale would be better served by the transparency and accountability that is likely to come with designing and using local measures of purchasing power. Responsible spending might be one benefit. Employer COLAs that have some basis in the local reality might be another. And I have to imagine that when the persons of a community witness the rapid climb in price of an area necessity, some of them might be inspired to respond with creative and regionally appropriate solutions. Less manipulation. More problem solving. A clearer, more honest picture. I'll admit that I like the sound of that.
I'm interested to hear what others have to say, about the CPI or local measures. A good weekend to all!
5 comments:
I have a couple thoughts on this, but will try to be brief for once.
Assuming the CPI is being manipulated (and there is is significant reason to suspect that it is), it goes beyond a local problem. However, from a local perspective (which is the focus of this blog) there are issues with the index itself aside from the suspected manipulation.
For one, the CPI is a measure of countless (tens of millions?) goods ranging from tractors to caviar to tanning lotion. While one could argue that a giant blanket index is of some use for macro-economists, it's also reasonable to note that it really functions only on a macro level, and thus is not of much use to an individual living in his/her own actual budget.
As one simple example, suntan lotion may be a year-round commodity in South Beach (and thus an important local index), but it's a non-issue in International Falls for at least 10 months of the year (where the cost of heating oil or firewood are far more crucial).
If prices in firewood or heating oil spike 10-15%, the average consumer in a cold clime will feel a very big pinch, even if the measured "CPI" may still be hovering at 3% because of all the non-relevant items being measured. If, conversely, the price of suntan lotion doubled while everything other prices held, well, the wise Int'l Fallser will just take more care to wear a hat during the month of July.
As much as corporations and government (cynically speaking, is there a difference?) have pushed the notion that we are just one big happy unified country who could all benefit from a McDonalds and a Wal-Mart, we still don't all live the same. The price of tractors is, at least directly, not likely to come up in Manhattan, NY; the price of caviar is unlikely to draw widespread attention in Manhattan, KS.
Repeat: Issues with manipulation aside, there should be wider comprehension that aggregate national measures may miss what's happening on the ground in the diversity of locales around the country.
Imagine if, to close with a metaphor as I tend to, we were speaking of the weather and not 'economics.' Imagine a weather service that only listed the average national temperatures and average precipitation.
The difference is that most people could readily tell when a national weather average was...a bit off where they were. All you'd have to do is compare your thermometer to said average. Someone would then invent a way to better measure and report weather at the local level.
Trouble is, when it comes to economics, most of us don't have our own thermometer. So this concept that it is useful to measure a national average economic "temperature" lives on...
Whether or not that's what the economy looks like outside your window.
Well put p@g! I absolutely agree. Do you think, then, that the CPI exerts much of an influence on most peoples' day-to-day lives (as the critics contend)?
Thank you for your thoughtful comments.
In response, yes and no.
In terms of prices paid at the pump, no. But in all the ways the CPI is used -- COLA, SocSec and certain types of pensions -- for 'contractual' purposes (for lack of a better term), yes, it certainly affects the majority of Americans financially at some point in their lives.
After my previous post, I decided to see what the CPI folks had to say for themselves. Here's one part of their FAQ:
http://www.bls.gov/cpi/cpiadd.htm#2_2
While much of it is pretty straightforward and insightful, there are some notable items in there (methadology in assigning item "categories" for geometric mean measures, etc.).
If nothing else, it's interesting that only specific items they discuss are dairy and meat. I raise that not as a dietary comment, but more that, in theory, meat and milk are relatively constant items (ignoring hormones, additives, etc.) in and of themselves. By using those they get the dual benefit of using something "everybody uses" (pardoning vegans/vegetarians, etc.) but also something that is fairly constant in being what it is. On the whole (ha!), milk today is like milk yesterday. It gives something that's not necessarily neat and tidy a neat, tidy, and even homey appeal.
Anyway, this isn't my blog, (and we've gotten somewhat off the issue of 'local') so I'm going to go away now. ;)
I think the CPI is manipulated. What statistic cited from DC isn’t? “There are lies, damned lies, and statistics,” my dad liked to say. But the reasoning behind the supposed CPI tampering is interesting.
As to your central question about using local measures and indices, I think that we do already. We could certainly do it better, though. For example, I know that Portland government uses (or at least argues over) lots of local stats to set its policies and so forth. There is great issue over whether these are over-manipulated, so we don’t see that problem vanish at the local level. It may decrease in severity, however, due to increased transparency as you suggest.
As a long-time employer I can attest that COLAs are negotiated with employees based on local factors (exclusively, in my experience). For example, my former company pays more to employees in DC than those in the NW (all else being equal), because of the cost of living difference. Again, I’ve always been a small company, while large employers function with great administrative inefficiencies that cast a shadow over everything, including payroll issues.
Even though some local measures and indices are used, I think that there is value to the idea of better publishing them. Increasing the residents’ awareness of the economic health should be a good thing, perhaps encouraging the benefits you mentioned (e.g., responsible spending). A good array of these measures might help a community understand how well it is doing to promote its own self-sufficiency, encouraging actions to enhance those factors.
According to the FAQ that p@g references, the CPI impacts 80 million persons' incomes in the U.S. The FAQ states that another 2 million individuals are directly impacted by the CPI due to the use of CPI statistics in collective bargaining agreements. That means that about 27% of persons in the U.S. are directly impacted by the CPI. Then there are the indirect effects that p@g referred to. It's interesting stuff. Particularly given that, on the same page, the document states that the CPI "...seldom mirrors a particular consumer's experience."
Given the likelihood that the CPI is greatly manipulated and the fact that it directly (financially) impacts more than a quarter of the people living in this country, it seems problematic that it's such a poor measure of individual experience.
The CPI is an imperfect tool of limited usefulness, that may exert more influence than is warranted.
I assume that many local governments have invented some instruments for measuring data on local economic activity. I don't happen to know what is being used in my part of the world, but I feel sure it needs some tweaking. Steven raises an interesting point about there still being a problem of a perception of manipulation when local governments collect and attempt to frame these sorts of statistics. I imagine a primary reason for this kind of popular sentiment is that, transparency cannot really be achieved unless a locale actually understands what constitutes "economic health." I find myself asking "who designs these measures?" I certainly don't remember being asked to help define just what the indicators of "economic health" should be. And I don't think I'm alone here. I assume that when such things are left to the "experts," there will still be a problem of transparency.
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