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« Investing for 2007: Using Long-term Sentiment to Gain Perspective | Main | Rethinking the Presidential Election Cycle »

January 18, 2007

Comments

oldprof

David -
Thanks for the additional discussion. I am not at all bothered by disagreement from the best and brightest. I wanted readers to see your views, so I highlighted how to reach your article.

I knew when I started this topic that no one from Wall Street would agree. That is fine. It is consistent with my objective for the blog.

My work has always involved surrounding myself with very intelligent people (and more than a few geniuses) who had important and differing perspectives. Since I am not an expert in all of the relevant fields, I try to use what I know well to determine who has the best read on a specific issue.

I hope that you keep reading and join in frequently with your thoughts.

David Merkel

Corporate profits are a large and growing part of the factors of production in the US. But wages and benefits are larger, and have not been growing rapidly relative to inflation. Thus the growing income gap. Corporate profits are a small slice of the pie, and not a valid argument here.

Unemployment rates aren't relevant either. We can have everyone employed, and not paid great wages. It also isn't a consistent argument with what you have written previously. Academic economists would say that low unemployment portends higher wage rises, leading to inflation. I don't think they are right here, but you seem to defend the academics.

Tax collections are strong in nominal terms. It doesn't tell us a thing about the level of inflation. States receive the same amount of money whether inflation is 7% and real growth 0%, or if inflation is 0% and real growth 7%.

I would refer you to the comments by Charlie Munger on academic economists. The nice thing about neoclassical economic theory, is that it fools enough people, that those of us who ignore it do better. What's bad is that the government economists take these mistaken models, and then apply them for policy purposes, further messing up the economy.

Most of what you write, I enjoy. This is a rare one where we disagree. Take care, and keep up the generally good work.

oldprof

David Merkel writes an excellent column for thestreet.com, providing many useful observations. I read everything he writes. He and Jim Grant and Bill Gross and Barry Ritholtz (and the others sharing this view of inflation) are all very intelligent.

Readers should click on David's name in his comment to see his article on the subject.

Having said this, I disagree strongly about the motives of economists. The vast majority of those in the academic world are not seeking and government jobs or favor. They are working on a specialty and trying to get it right. Take a look at those testifying before the Boskin Commission, as well as the Commission membership.

One of the things that I try to do to add value is to bring the perspective of someone who has worked in government, in academia, as well as in the investment world. My personal experience with these people is that they are trying to do this right. Do they make mistakes in measurement? Sure.

My point -- and I stand by it - is that the various problems in inflation measurement are real. It is not whether to make some adjustment, but how to make it.

The names they choose (hedonic adjustments? imputed rent?) are not chosen to sway public opinion. The fact that modern economics emphasizes quantitative work does not mean that the concepts are wrong.

I think that David should revisit his article and look at things like tax collections, corporate profits, and unemployment rates. If the GDP has been overstated as much as he suggests, how can these objective measures be so strong?

SetT

What you find are Wall Street-types who find a conspiracy in all the #'s , then say that--- of course--- THEY don't believe in conspiracies ... but the band of sychophantic Tin-Foil Hat comments on sites such as Big Picture, defend these nutcase ideas and , boom , we have a race to the bottom ... no one believes anything anymore .... they're just a bunch of naysayers and hypocrites

David Merkel

I wrote an article on this as well, listed above. So has James Grant and a number of others. There's no conspiracy, but economists attempting to burnish their reputations and careers generally do what the government wants. Who hires the most economists? The government.

There are errors of stupidity, and errors of intelligence. The economists who gave the procedures for these indexes would give us correct answers in a very simple world, devoid of the complexity that makes our lives so rich. Their simplifying assumptions induce biases: the substitution effect, hedonics, and owners equivalent rent. They choose the low inflation answer to each of these problems, because they serve the government, and it minimizes, as you point out, what the government has to spend on entitlements, etc.

Economics lost a lot when it became a highly quantitative field, substituting false precision in the place of generally correct qualitative reasoning. Eventually neoclassical economics will be replaced by an ecological model of economics, similar to what some at the Santa Fe Institute are doing. It will take a long time for false ideas to die, because they are reinforced by an academic guild that excludes anyone who is not a neoclassicist.

That they are Ph. D. economists makes it more likely that they got it wrong. They making a sophisticated error, because their paradigm for understanding human behavior is flawed.

David Merkel
RealMoney.com

oldprof

Hi Barry -

Thanks for your comments.

Calculation of indexing versus Soc Sec adjustments? The point is to realize that government does not work by making such calculations.

As to bias in current BLS calculations, our opinions are not that important. It is a technical matter. You frequently make the mistake of thinking that your own experience or that of your readers should determine the best measure. I stated that the Fed believed in an upward bias. Go check P. 42 of Laurence Meyer's book to see that he, Yellen, and Greenspan shared this view. And this is AFTER the Boskin revisions.

Health care? Once again you are confusing the measurement in price changes of what one buys with the result of the purchase. That is exactly my point.

Barry Ritholtz

I agree with you as to the absurdity of the conspiracy theorists -- You can agree with me when I suggest that ALL models have some bias to them. I can asssure the BLS models' bias are not upwards!

As to the Boskin Commission -- many people looked at it as little more than a politically motivated showboat to wrestle Social Security into submission. And Boskin's PCE deflator showed very little inflation over the past 5 years. (and is therefore rubbish in my book).

Win/Loss: Have you compared how much the government "loses" by understating inflation due to indexing, versus how much it would owe via various COLA adjustments? (I haven't either) But given the size of SS, versus the marginal gians of indexing, understating CPI is a huge gov't win via COLAs.

You omitted to mention the "Substitution" mechanism -- when Steak goes up in price, people can substitute chicken, sez the BLS' model -- thereby totally ignoring the fact that steak went up in price. Being forced to buy a cheaper product doesn't mean that there's no inflation, it only means that some people can no longer afford the original product!

As to the quality adjustments, that is another steaming pile of academic enzyme free donkey fazoo. The natural order of human progress is to make everything faster, better, more featured. ABS brakes were origianlyl an expensive option -- then through manufacturing economies of scale, the price came down dramatically. That is the nature of progress, not proof of no inflation. (Same with Plasma TVs and CPUs -- economies of scale).

You picked the wrong example when you chose Health Care as a topic: As a nation, we pay more in total, and the most per capita than any other country -- and yet by most measures, we are not anywhere near the top of health care in terms of longevity, infant mortality, chronic illness, obestiy, etc. We in fact get very little for our health care dollars.

Barry Ritholtz

I agree with you as to the absurdity of the conspiracy theorists -- You can agree with me when I suggest that ALL models have some bias to them. I can asssure the BLS models' bias are not upwards!

As to the Boskin Commission -- many people looked at it as little more than a politically motivated showboat to wrestle Social Security into submission. And Boskin's PCE deflator showed very little inflation over the past 5 years. (and is therefore rubbish in my book).

Win/Loss: Have you compared how much the government "loses" by understating inflation due to indexing, versus how much it would owe via various COLA adjustments? (I haven't either) But given the size of SS, versus the marginal gians of indexing, understating CPI is a huge gov't win via COLAs.

You omitted to mention the "Substitution" mechanism -- when Steak goes up in price, people can substitute chicken, sez the BLS' model -- thereby totally ignoring the fact that steak went up in price. Being forced to buy a cheaper product doesn't mean that there's no inflation, it only means that some people can no longer afford the original product!

As to the quality adjustments, that is another steaming pile of academic enzyme free donkey fazoo. The natural order of human progress is to make everything faster, better, more featured. ABS brakes were origianlyl an expensive option -- then through manufacturing economies of scale, the price came down dramatically. That is the nature of progress, not proof of no inflation. (Same with Plasma TVs and CPUs -- economies of scale).

You picked the wrong example when you chose Health Care as a topic: As a nation, we pay more in total, and the most per capita than any other country -- and yet by most measures, we are not anywhere near the top of health care in terms of longevity, infant mortality, chronic illness, obestiy, etc. We in fact get very little for our health care dollars.

Bill aka NO DooDahs!

Inflation is a monetary phenomenon and is not to be confused with a general increase in prices - the inevitable *result* of inflation.

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