What used cars tell us about the risk of too much inflation hitting the economy
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One does not simply fix the pension system.
Ok, maybe the government has certain incentives, but how exactly do you propose the CPI is manipulated? The guys doing the actual calculation receive a government salary that is fixed, they don't get any bonus linked to the outcome of the measurement. Their bosses don't get a bonus based on how low the CPI comes out either. In fact nobody in the government gives a flying fudge if the deficit goes up or down because the CPI reads this or that. They will receive their salary regardless. Conversely, if one day it turns out they did manipulate the CPI, they may lose their jobs, and even may be dragged in courts for years. All for what? For a government salary? Or are you saying someone is actually bribing them? For someone to bribe them, that someone needs to make a profit. How exactly does that happen?
One way is OER, aka Owners Equivalent Rent. Great article https://wolfstreet.com/2021/03/11/house-price-inflation-in-c... (look at that graph half way down).
Another way is "hedonic adjustments". https://www.economicshelp.org/blog/603/inflation/hedonics-an...
Assuming everyone always stayed in the same job position, this might be true, but advancement within the system is frequently based on whether your work is producing the desired results so when you treat this as a multi round game, their salary level can be tied to the degree which the data they produce conforms to the desired narrative.
One is that a number of governments, including the US, UK, Canada, and Australia, issue bonds linked to inflation. That is, as I understand it, they return a fixed amount over the measured inflation from some index. In other words, understating inflation would reduce the borrower's (the government's) payments.
Another is that Social Security in the US (and maybe similar things elsewhere) is periodically adjusted for inflation, so that the recipients don't lose purchasing power. Again, if inflation were understated, then the government would save money.
There might be other incentives to overstate inflation; the above is just what came to mind, so I am not implying that there is an overall pressure to understate inflation like people tend to claim without evidence. I wouldn't think there are that many inflation linked bonds compared to regular ones.
Ideally the people at or near the top who may have incentives to distort things cannot do it because the low-level bureaucrats keep on doing their jobs. But it hardly seems guaranteed at all times in all places.
But who are those people? The Chairman of the Fed? The Secretary of the Treasury? The President? Let's say the US Government ends up paying $10 BN more on the inflation-linked bonds because of the CPI, how exactly will any of the 3 top-level people listed above going to suffer? Maybe the President does not get re-elected if the deficit is too high? Ha-ha, good joke, after years of trillion dollars deficits, does it look like the voters give a damn?
Ok, maybe I went to high up. Maybe it's people in the second echelon. Or third. Why would any of these guys care how much Uncle Sam pays on the inflation linked bonds, or what the balance sheet of the Social Security Administration looks like? People on the private side often have their compensation linked to the performance of their company (for example by being partially paid in equity), but there is noting similar on the Government side.
So, again, why would any Government employee indulge in any number cooking? What would be their upside?
When organizational failures happen, they don't happen with full transparency or with the participation of everyone in a large organization as if it were one big pyramid. Some people compromise with their conscience, but many others are just trying to balance doing their job as they see it with keeping their manager happy. The dynamics of sub-organizations depend on their directors and how much autonomy they have.
It can certainly happen. But absent some obvious incentives, I prefer to give the benefit of the doubt. (The Libor manipulation was done by people employed by the private sector, who had their career advances and their compensation linked to the way the Libor was marked.) You are right that some non-obvious group dynamics can happen in Government organizations, but based on this generic statement alone, we should refrain to accepting any conspiracy theory without at least a modest amount of intellectual due diligence.
The value of my house is likely up 15% from last year. My investments grew 20%, my income went up, getting food from any restaurant seems to cost at least $40 for two people, hard to find a bar of chocolate under $4, cup of coffee likewise. There is very little telling me my dollar today is only 1.5%-2% less valuable than last year.
Similarly "Starbucks" has been called "Fourbucks" since at least the 90s. If you don't want to pay that much, it's basically a dollar at any convenience store -- literally for pretty much any volume.
As for your investments... yeah, I do think there's inflation there. We're Quantitatively Easing money directly into the stock market, and it doesn't seem to be making its way out. That's a problem, but not a CPI problem.
Similarly, the housing market is up in some places and way down in others -- most visibly in New York and San Francisco, where a ton of people had been paying a lot of money. The money appears to have moved without changing the total amount being paid all that much.
Can you please elaborate on what you mean by this?
Even if the purpose of their measurement is not necessarily the lived daily experience of consumers, those numbers are used to drive policy that is, so I think it might be time to define a new metric that more closely reflects the actual cost of living.
We had different inflation stats back in the day. The US government has been slowly changing them. This guy uses the old official methodology to calculate inflation today. He gets way higher inflation using the old methodology and plugging in todays numbers. https://en.wikipedia.org/wiki/Shadowstats.com
There is a lot of controversy here, but I think inflation is definitely higher than reported.
If your theory about what's wrong with CPI is "BLS is subtracting 3% from the true value" that is a useful fix. If you're concerned about the basket of goods they use, or deflators for quality improvements, or substitution effects, or any other technical concern it isn't clear that Shadowstats provides any value.
I don't, and it's pretty straightforward why. You can argue about how high inflation was over the past year and about technical details. But if you think it's significantly and systematically off and has been for a long time, then it would compound and make a big difference.
Back when my sense of "normal" prices was established, a pound of spaghetti was a dollar. The official total amount of inflation in the last twenty years was a little over 50% or a little over 2% a year. I'm confident the official figures are in the ballpark, because if inflation had really been say 5%, then spaghetti would be twice the price it is.
Car prices are also a useful benchmark. A Honda Civic EX is a pretty standard unit of transportation. In 2001, it was $17350, and in 2021, $25495. That's an increase of about 47% vs. official CPI went up about 50%. And notice that we're not accounting for any sort of improvement in the product, such as all the safety equipment, more horsepower, etc. So you can't complain about "hedonic" adjustments.
A funny thing on the Wikipedia page on Shadowstats is:
"Shadowstats has not changed its $175 per year subscription fee since at least 2006"
If there's so much inflation, how come the price of reading about it hasn't gone up?
I guess you're implying that these things could diverge and the inflation rate matching could just be a coincidence.
But I don't think it's possible, because they're all part of a feedback loop. The people who build cars have to pay for rent and health insurance. The people who manage apartments and work for insurance companies eat and drive cars.
Edit: The selling price of my home in 2019 was 53% more than the selling price in 1995. The CPI was up more, roughly 70%.
>> If there's so much inflation, how come the price of reading about it hasn't gone up?
This is unserious analysis.
You were making a decent point up until you resorted to this type of rhetoric.
I hope my new car will reach 500,000 miles. Maybe not. It's my first non-Honda, who appears to have passed its quality crown to Subuaru. Regardless, anecdotally, price-per-mile seems to be going down.
(I will note, though, that gas mileage doesn't appear to be improving. I should perhaps have gotten a hybrid, but I really want an electric.)
Low inflation is a catastrophe. I'm surprised you don't know that much. No, things aren't well.
I am surprised that you did not bother to explain what you mean by this.
Most economists consider negative inflation a catastrophe, because of a "deflation spiral" -- prices go down, vendors and manufactures make less money, lay people off, they have less money to spend, so prices go down, etc.
(All other things being equal, of course, which they never really are.)
Most, but slightly fewer, consider low (0-2%) inflation to be sub-optimal, but not catastrophic. A little inflation nudges people to buy stuff (including investments) rather than stuffing their money in a mattress, which it slows the economy down.
About 2% is considered optimal. There are those who would like it lower.
Above 2% is considered a problem, and getting into catastrophic range somewhere on the order of 4-5%, depending on a whole lotta factors.
That's conventional wisdom among economists, but definitely not "I'm surprised you don't know that much" territory. Especially without that crucial distinction between negative and low inflation. 1% inflation simply is not a catastrophe.