The Inflation Rate Is “Overstated”? Baloney!

By | May 9, 2013 | 0 Comments

 http://www.nytimes.com/images/blogs/freakonomics/posts/Eatsntreats.jpg

It is my belief that the true inflation rate is somewhere between 4% and 5%, while the government declares that it is less than 3%. But the government has an ulterior motive for understating the inflation rate. Social Security payments and the pensions of government workers are indexed for inflation, as are income-tax brackets. They go up with the inflation rate, so as to preserve purchasing power, especially for people on fixed incomes.

That is, the government tends to understate the inflation rate in order to pay out less in pensions and take in more from income taxes.

To make matters worse, the government now claims that the current inflation rate is overstated. President Obama proposes to redefine it using “chain-weighted” methods, which will reduce the stated inflation rate still further.

The rationale is as follows. If the price of A goes up, people buy less A and more B. “Chain-weighting” allows for this by weighting the price of B more heavily. For example, when beef prices rise, people buy fewer steaks and more hamburger, but they still eat beef. So far, so good. But if the price of beef rises still higher, people buy less hamburger and more macaroni and cheese. And if the price of food rises even more, they will eat dog food. The “chained” inflation rate takes no account of the real value of what people buy, but merely notes how much they buy and what it costs.

You see the problem. Using such dubious calculations, people could wind up using their entire incomes to live in shacks and eat beans, but the claimed “inflation rate” could still be low. The government has a financial interest in understating the inflation rate. So when the government implements a “correction” that reduces the announced rate still further, we have a right to ask: Is this a genuine correction intended to remedy a known error? Or is it a “fudge factor” designed to move the number in the direction the government wanted in the first place?

What is my basis for claiming that the true inflation rate is actually higher than the government says it is? Consider the following examples, which are not taken into account in calculating the Consumer Price Index.

The dented fender.

My old car had heavy-gauge steel fenders. But on my newer car, the fender sometimes comes loose from its bracket when I hit a pot hole – of which there are many. Usually I simply push the fender back in. But this time I pushed a bit harder and made a large dent. And yes, it is steel, not aluminum – it’s just very thin steel. Denting a fender with the palm of one hand does not fill me with confidence that the car will protect me in a crash. I’d rather have thicker steel and fewer air bags – but hey, that’s just me.

The juiceless juicer.

We bought a high-end juicer with an artistic shape and a fancy foreign name. After about a year, the artistic shape and the fancy foreign name remained, but the motor gave out. Like many appliances with French or German names, it was made in China. Now we will buy another juicer, which will probably last even less time. But the “chained” inflation rate will falsely record that the price we paid for juicers was stable, when in fact it went up because of declining quality.

The “big roll” of towels.

For years we bought one brand of paper towel. Then the size of the roll decreased by about half. I might have accepted this manipulation, were it not for the fact that the company insulted our intelligence by renaming it “Big Roll.” We now use another brand of paper towels, but the prices are similar. Again, falling quality is not accounted for.

The “original” dental floss.

I used a well-known dental floss. But I switched brands when the floss began to disintegrate in use, requiring me to use several lengths for one flossing. Now my new brand has decreased the width of the floss by about one-half. That is, half the floss now sells for the same price. The floss is still called “original,” but it’s the price that’s original, not the floss.

The “concentrated” detergent.

The clothes-washing detergent we use was so thick that emptying the cup took several seconds. Then it got thinner and thinner. Soon the company advertised “concentrated” detergent, which came in half-sized containers for the same price. But the “concentrated” detergent seemed identical to the original detergent before it was watered down. The price effectively doubled, but the government pretended not to notice.

The odorless glass cleaner.

I clean the inside of my car windshield with a popular glass cleaner. I roll down the windows to keep the ammonia fumes from irritating my eyes. Recently I noticed that there was hardly any odor, but also that the glass remained streaked. I added about one-quarter household ammonia to the bottle, and again the glass is clean, and again my eyes are irritated. The price remained the same, but the “glass cleaner” became mainly blue water – and that’s a lot of money for blue water. But the government numbers don’t take this into account.

The Swiss-cheese pipe.

We had some plumbing work done, and the city inspector came to check it out. He related that he had re-piped his mother’s garden sprinklers. After about a year, the pipe sprang a leak. This was much too soon for galvanized pipe to rust out, so he cut a section with a saw. The metal was full of bubbles, so that some of the pipe was as thin as egg shells. The pipe was made in South Korea, as is much of our steel. Yes, it seems cheaper, but when even a plumbing inspector can’t see that it is defective, in fact it is much more expensive.

The 50-million-mark postage stamp.

Economist Herbert Stein remarked that if something can’t go on forever, it will stop. This process of steadily falling quality and steadily rising prices will surely reach a point when even the most arrogant bureaucrat can no longer deny it, and even the most pro-government media can no longer ignore it.

But will this point come before or after the decline in our quality of life has reached the level that we have become, in effect, a third-world country? And if this happens, will it be accepted by our people, who increasingly come from third-world countries and will feel right at home? Or will our people get extremely angry?

My parents had a 50-million-mark postage stamp. It was a memento of the German hyperinflation of the early 1920s, which wrecked the middle class and paved the way for Hitler. It wasn’t an accident. It was a deliberate act by the government to get rid of Germany’s huge war debt. Do I think that our government will do something similar to get rid of our colossal debt? I hope not. But I do think that those who ignore history – from pro-inflation economists to the spendthrifts in Congress – are colossal fools.

When we discuss inflation, it’s not just about economics. It’s also about trust. It’s about our ability to trust our government to maintain a stable currency, in which our salary is paid, and everything we own is evaluated. It’s about our ability to trust our government to issue honest reports. And it’s about our standard of living. Ultimately, it’s about our freedom. Impoverished, debt-ridden people can’t be free in any meaningful sense.

It is one thing to deny American exceptionalism. It is quite another to work to destroy it.

http://www.nytimes.com/images/blogs/freakonomics/posts/Eatsntreats.jpg

Signpost on the Road to Totalitarianism

Contact: dstol@prodigy.net. You are welcome to publish or post these articles, provided that you cite the author and website.

www.stolinsky.com

Social Widgets powered by AB-WebLog.com.