The Illusions of Hedonics
The term “hedonics� is derived from ancient Greek and basically means “pleasure doctrine�. It is also the doctrine which the Bureau of Labor Statistics (BLS) applies when calculating the price indices and for the computation of the real gross domestic product and of productivity. Because of it and the inherent impossibility of generating a truly scientific number, what is published as the number for inflation is highly crude at best and a very deceiving one at worst. When taken naively at its face value, the inflation rate as it gets published not only distorts policy decisions, but also those of the private investor. FULL ARTICLE
Comments (9)
This article immediately hit home with me when I read it, because of the dishonesty, fraud, and theft by the federal government when the BLS compiles "hedonic adjustments" and the resulting fraudulently-lower price inflation they tout.
Even if hedonic adjustments could somehow be objectively and accurately determined (putting aside the impossibility of it for arguments sake), it also "steals" the value imputed by the entrepreneur's labor and production efficiencies, and "gives" it to the government so that it may cover over and hide the true price inflation that occured.
Not only is this an insult to the entrepreneur, but it's theft via the fraud which hides the monetary, and hence price inflation which fools the holders of dollars as to the value of goods they can purchase.
Published: July 29, 2005 9:22 AM
he idea of using quality increases to adjust prices and track the exchange value of money is utterly absurd. Quality changes CAN cause relative price changes between goods, but not general prices overall.
If all goods were to simultaneously experience an increment in 'quality' just sufficient so as not affect relative prices, then no prices would change without a change in the supply of money or a change in the supply of goods.
Every purchase would result in a slightly better product, but this would flow to an improvement in the subjective standard of living, not a change in prices. Any transfer payment that is indexed to such a plan will continue to fall behind in its actual purchasing power as the money supply is inflated.
Regards, Don
Published: July 29, 2005 9:42 AM
There clearly is a private sector demand for various price indexes, as is shown with not only the price component of the purchasing manager's survey but also commodity price indexes like CRB,stock price indexes etc. However Anthony is of course right that much of this demand is related to people trying to protect themselves from inflation created by fiat money and by financial speculators trying to predict monetary policy.
Anthony makes a good point about how it is in the interest of the state to produce such a low inflation number as possible both as a self-end in order to convince everyone that it is OK for the state to inflate even more and both as a mean to produce higher real GDP growth. Say you have a country with 5% nominal growth. It is clearly far more beneficial if you can say that inflation is 1% rather than 4%. With 1% inflation you would have 4% real growth and regime apologists could say that we're experiencing "solid non-inflationary growth", but with 4% inflation real growth would be only 1% and the economic situation would then be described as "stagflation".
Because the state for this reason has a self-interest in underestimating inflation it is clear that one should be sceptical towards the official numbers. I myself have pointed to how the official numbers underestimate inflation by using "home owners equivalent rent" instead of actual housing prices.
Regarding hedonics, it is not in principle wrong to take that into account as a better product could be seen as equivalent to more products. However, I certainly don't think you should trust the governments attempt to measure it. The only objective way in which quality changes can be measured is by looking at how much consumers would be willing to pay for the new quality, and that is not the way the BLS measures it (of course it would be very difficult to measure it). Note that quality changes is not always positive. I for example thinks that old TV:s in some aspects were better since you could adjust them directly and not just through a remote control. While using a remote control is more comfortable, it is good to be able to adjust them directly also if you (like I do from a time to time )can't find the remote.
Published: July 29, 2005 10:18 AM
It seems to me that measuring changes in the value of money by using a market basket of goods would be very easy if there no technological/quality change occurred in those goods. However, that is not the real world. We can't expect manufacturers to keep their products constant for the benefit of statisticians.
So why not construct a market basket of basic goods for which technological/quality changes rare or impossible.
For example,
an ounce of gold
a ton of steel
a gallon of gasoline
a pound of flour
a gallon of milk
a pound of beef
It seems to me that specified goods like these (for example, 1 gallon of whole milk) could be used to make a market basket that would be subject to very little quality change and could be held constant for a very long time.
Published: July 29, 2005 10:41 AM
It would be one thing if these numbers were printed with a central bankers warning on it that said something like "Warning, these figures have been highly tampered with and tweaked almost to the point of being useless." If that were the case I would have no problem with the concept of calculating and printing such nonsense. It is the shroud of "science" and "objectivity" that surrounds these numbers in the minds of so many people that is disturbing. This is just another example of the point Mises made that one government intervention begets another and another and so on and so forth. In the absence of government tampering with money, none of these statistics would be necessary. It is also interesting to note (as Mises also pointed out,) that the definition of inflation has been distorted. People now think of inflation as a rise in prices rather than as an increase of the money supply. This is very convenient for the state, which can then try to cover the price rises caused by inflation so that they can say, "hey, look, no inflation." My own thoughts on this topic can be found here.
Published: July 29, 2005 10:43 AM
Frank I like to use the Oh Henry bar for the very reasons you mention. Plus it gives me an excuse to eat them (for research puposes).
Published: July 29, 2005 12:03 PM
The hedonics measures are silly, but they don't have nearly the impact on inflation that, say, owner equivalent rent does. Turns out that technological components like computers are a pretty small part of the basket. Housing is a big one.
Many of you have seen this article by John Berry and some of his statements on inflation won't fly here, but the key points about hedonics are important.
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=a7yZyxZ7nrPU
(Try "berry hedonics" on google if the link doesn't work).
-- The gadget-related part of the basket is very small.
-- The bulk of the hedonic adjustments are applied to housing and apparel. The housing adjustment, ironically, raises the CPI because it is an adjustment down in quality due to aging of the existing housing stock.
The CPI may wildly misrepresent inflation, but hedonics isn't the most important part of the problem.
Published: July 29, 2005 12:07 PM
Let Us Not Eat Cake: An Especially Tasty Example of Hidden Inflation
by Andrew S. Fischer
http://www.lewrockwell.com/orig6/fischer1.html
This is an interesting article on hedonic pricing; it poses a different problem -- how should the statistician adjust the index when there is a reduction in quality.
Published: July 29, 2005 1:58 PM
Interestingly though Today's GDP report, actually upwardly revised inflation while holding nominal growth unchanged, thus lowering real growth. Previously, real GDP growth was estimated at an average 3.1% in 2002-2004 but now it has been revised down to 2.8% while inflation as measured by the gross domestic purchases price index was upwardly revised from 1.97% to 2.23%. This means that nominal GDP was unchanged, but that this nominal GDP growth was a bit more stagflationary than previously thought.
This also means that the favourite inflation measure of Alan Greenspan and other Bush apologists, the PCE deflator excluding food and energy have been upwardly revised from 1.6% to 2%. This of course still underestimates inflation, but it will be interesting to see how this will be commented by those who have used this measure to deny that inflation is a problem.
Tomorrow, I'll leave a more detailed analysis of the GDP report on My blog
Published: July 29, 2005 4:56 PM