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Can We Believe Anything the Government Tells Us?

January 19, 2010
Last week the Wall Street Journal published an opinion piece called, “Don't Like The Numbers? Change 'Em” by economist Michael Boskin with the tag line: “if a CEO issued the kind of distorted figures put out by politicians and scientists, he'd wind up in prison.” The irony, however, is that Boskin's own economic creative distortions have his critics wondering why he is not in prison.

Boskin writes rather convincingly about politicians willfully distorting GDP, jobs numbers, the effect of the current government economic stimulus and scientific findings related to global warming. We expect politicians to bend the truth but economists and scientists are supposed to hold to a different standard of truth and accuracy but Boskin shows that they are not immune from political influence. He conveniently leaves out his own role in such dealings.

The Boskin Commission was formed in the mid 1990's to analyze the Consumer Price Index because it had been suggested by Alan Greenspan that inflation was being overstated. The Commission agreed with Sir Alan and suggested, among others, two very dubious adjustments to the index. Barry Ritholtz reports:

My two favorite pieces of Boskin intellectual fraud are substitution and hedonic adjustments. Hedonic adjustments are addressing the improvement in quality as a form of deflation. For example, 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. These adjustments wildly distort not only CPI data but GDP as well. Bill Fleckenstein calculated that the hedonic adjustments of faster computer chips and dropping costs massively jacked up the productivity data and GDP data from 1995-2002.

Substitution is a nonsensical approach that adjusts inflation for consumer behavior. When steak prices rise, consumers “substitute” cheaper proteins such as hamburger or chicken. Thus, Boskin states, the consumer is spending no more than they previously were, and is not suffering inflation. The reality is that consumers have been priced out of steak due to price increases. Oh, and somehow, the decrease in quality does not get hedonically adjusted when it raises inflation.

By using methods such as “hedonic adjustments” and “substitution” the Boskin Commission found that inflation was overstated by 1.1%. CPI since 1997 has been adjusted lower by at least this amount. This has been a great boon to government spending and a great curse to retirees. Frederick Sheehan reports, “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.” Isn't that convenient for a government facing a growing deficit/debt problem?

Ultimately, when it comes to the truth about the economy or the environment or any other politicized topic, for that matter, we can trust the government, including politicians and those economists and scientists working for them, about as far as we can throw it. For it is obvious that they see the truth merely as something that gets in the way of business as usual in Washington.
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