As the president and his apologists repeatedly tell us, the economy is in fine shape. One boast is the low unemployment rate. However, as Doug Henwood reports in The Left Business Observer, if the booming prison population were included, the rate would be 5.6% instead of 4.3%. For black males, the main beneficiaries of our solicitude for the victims of recreational drugs, the rate goes from 6.7% to 16.5%.
Last quarter’s numbers for the total economy were stellar: the Gross Domestic Product (adjusted for inflation) was up 4.3% from 1997's fourth quarter, productivity was up 2.7% for all businesses and up a smashing 3.9% in manufacturing firms, and the adjustment for year-to-year inflation was only 0.9%. But these figures are also open to question. The Gross Domestic Product is initially compiled in current dollars. Were prices to rise by ten per cent, the GDP in current dollars would grow by ten per cent even if the amount of goods and services produced didn’t grow at all. That is why the number is adjusted for inflation. Productivity is measured as the adjusted GDP divided by the number of worker hours in the period. Here is where a skeptic can raise a rude question. If inflation is understated, the reported growth in GDP will be overstated, and so will the growth in productivity.
These simple arithmetic considerations offer a convenient way for any administration to produce the illusion of a thriving economy— lie about inflation. By understating price increases, the government can show big growth in real GDP and productivity, not to mention ever-popular low inflation. And it can save on cost-of-living adjustments for its employees and Social Security recipients, helping to show a balanced budget. The cumulative effect of this can generate a serious understatement of the extent of poverty, another occasion for self praise.
Assorted rightists have been attacking the Bureau of Labor Statistics estimates of inflation as too high, for a couple of reasons. Businesses with union contracts hate cost-of-living increases, and monopolists and oligopolists like to raise prices without public scrutiny. Their think tanks oblige with press releases calling for lower estimates, and these are willingly repeated in the media.
A central feature of the conservatives’ argument is that measures of inflation are overstated because people switch to cheaper products when a price rises— examples are chicken for steak and paperbacks for hard-bound books. The survival of this nonsense is surprising, since it means that if prices of everything were to triple and we all switched to living in cardboard boxes and eating gravel, there would be no inflation at all. It is also suggested that productivity in the services sector is understated, implying that with cramped airline seats and most business phone calls on hold or shunted to voice mail, we're getting more for our money.
In the Hoover Institution report of a couple of years ago, Michael Boskin and his associates revealed their disdain for the intellect of a gullible audience with most of their examples. They noted that video recorder prices fell rapidly, but the fall occurred before ordinary people began buying them— if the consumer price index had included VCRs when they cost television stations $50,000, the consumer “market basket” weight given them would have been zero. They observed that television sets now get fifty channels, without admitting that to get all those channels one must pay a cable service $600 per year, hardly representing a hidden price cut for television viewers. Boskin called for more notice of improved quality. CDs are easier to handle than LPs, to be sure, but the record industry doubled the price in the switch (and the CPI probably treated them as distinct products and didn't show any increase at all). Much is made of the “low” prices of personal computers, but thanks to Bill Gates and his bigger slower programs that require bigger faster computers, the price has increased markedly. In 1985, one could buy a personal computer for $2000 and it would serve for a decade. Now the price is under $2,000, but for only a couple of years of useful life. From $200/year to almost $1000/yr is not a price cut. (And I'll bet the CPI still shows computer prices falling.)
There is a better case that inflation is understated by current methods. When tuition, textbook, and car prices rise, for example, the government does not consider the increased interest costs to the majority of consumers who finance such purchases with debt. Increases in college class sizes and substitution of teaching assistants for professors are not counted as price increases. When health care providers pile on unnecessary services, the real price of a person’s health care rises even if individual item charges are unchanged. When a drug company replaces a $2 a day drug with a heavily promoted $10 a day drug, no price increase is registered, because the “new” drug is a different product. The BLS has probably noticed the 14- and 12-ounce “pounds” of coffee and tobacco, but there are many other similar concealed price hikes. When the ratio of television advertising to entertainment and information increases, the Gross Domestic Product rises, but living standards decline and the effective price of cable services goes up. In an average family's budget, there are dozens of such unmeasured price increases.
The effects of funny numbers is particularly acute for Social Security recipients. Thanks to Greenspan, Boskin, and other enemies of accuracy, Congress decreed cost-of-living adjustments for beneficiaries at a rate lower than the overall change in the cost of living. This year, Social Security benefits were increased by 1.3%, rather than the 1.7% price gain estimated for the total population. But annual inflation of medical care was (a probably understated) 3.6%, and food and housing were each up 2.2%, suggesting that prices rose faster for the elderly than for most people. Screwing the geezers out of one per cent is trivial, of course, but the underpayments in real dollars will increase exponentially and create serious hardships in the future.
So far there has been no wholesale trashing of the official inflation measures but, Doug Henwood observes, "The BLS has publicly resisted pressure to redo the CPI while quietly conforming with a series of ‘technical’ changes. The only changes investigated either by the BLS or its critics are those that would lower the inflation rate." Thus the pressure from conservatives may have unwittingly contributed to Clinton’s economic miracle.
January 1998
Art Hilgart writes on economics and the society for several periodicals, including The Nation, Exquisite Corpse, In These Times, and The Humanist.