Happy Easter! Now suck it up

I have been writing, and here, about the under-reported inflation from the Bush administration. This twisting of government statistics has been going on for years with significant changes in the CPI, for example, being made in 1983 (replacing "rental equivalence measure" inflation for homeowner costs) and 1999 (instituting "hedonic regression-based quality adjustments." - say that three times fast) Now the Washington Post looks at inflation and finds that yes, inflation is increasing and that it is twice as high for the middle-class than the standard measures reported. I would also ask you to note that they did not even look at inflation for retirees and the working poor, who are hurt even harder than the middle-income families.

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. For a broad range of goods on which it is easier to scrimp -- such as restaurant meals, alcoholic beverages, new cars, furniture, and clothing -- prices have risen 2.4 percent.

Wages for typical workers, meanwhile, have been rising slowly. In that same time span, average* earnings for a non-managerial worker rose about 5 percent [this overstates the increase by using average instead of median - el.] This contradiction -- high inflation for staples, low inflation for luxuries and in wages -- helps explain why American workers felt squeezed even before the recent economic distress began.

The other under-reported story, besides inflation hitting workers harder than the wealthy and the shady, twisted, hedonic government statistics, is the decline in incomes. During the Bush administration the income for the typical worker has gone down after inflation. This is the first time that has happened since Herbert Hoover.

People are noticing and they are finally starting to blame Bush and the Iraq Occupation. More than 7 out of 10 Americans think government spending on Iraq is partly responsible for our economic troubles. And from The Middle-Class Squeeze:

Real incomes for middle-class families have declined. For the median family, real annual incomes have declined from $47,599 in 2000 to $46,326 in 2005, a drop of 2.7%. For working-age families - those headed by adults younger than 65 - the decline has been even steeper. For these families, median annual incomes have declined from $55,284 in 2000 to $52,287 in 2006, a drop of 5.4%

Prices for health insurance, energy, and education have risen rapidly. Three key expenses for middle-class families are the costs of health insurance, energy, and college education. In all three areas, price increases have outstripped inflation. In real terms, the cost of health insurance has increased 48%, the cost of gasoline has increased 57%, and the cost of college education has increased 39% since 2000.

The middle class is being squeezed. The combination of declining real incomes and increasing expenses reduces the standard of living for the middle class. In real terms, health insurance costs have increased by nearly $900, gasoline and other energy costs have increased by over $2,300, and college education costs have increased by over $1,500 since 2000. The median U.S. family facing these three expenses would have seen its real income drop by almost $1,300 since 2000, while its real expenses would have increased by almost $5,000.

Many people don't know about hedonics so here is a little explanation from a columnist at MSN Money:

For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. To wit, you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)

The idea behind the first case at least makes some sense, though the government carries it too far by acting as though improvements can be precisely measured. The problem with the second case is that those quality improvements are not voluntary. Since you have to pay the new price, it's sheer silliness to say that the price really didn't go up.

There are other ramifications as well. It turns out that the computer-spending component has materially warped GDP calculations in many of the last eight quarters. To put the numbers into perspective, from the second quarter of 2000 through the fourth quarter of 2003, the government estimated that real tech spending rose from $446 billion to $557 billion, when nominal spending only increased to $488 billion. That extra $72 billion represents the value the government imagines the improvement in computer quality is worth.

I am not just some wide-eyed liberal ranting that the government is lying to you about inflation, it seems more than half the economists don't believe in the hedonic theories, at least as it is applied in legal cases [from a casebook for lawyers offline], and the United States is the only country in the world that gooses its statistics through hedonic indexing.

Workers are also being ripped off by banks, mortgage companies, and credit card companies through excessive fees, too short of grace and notification periods and too high rates of interest. Again, not just my bleeding liberal heart sensibilities but some other radical at MSN - Money who is calling for Congress to lead a credit card revolution.

Adam Hamilton writing what he may have thought was hyperbolically:

Real inflation, by any measure, is much higher than official Labor Department statistics indicate. Sooner or later, general price levels will rise high enough so everyone will be able to see through the statistical smoke and mirrors the BLS has deployed. When that day comes, international faith in the US dollar will plummet like a meteor, and hundreds of billions of dollars will be dumped in the international currency markets in nanoseconds.

We are at that day where dollars are the hot potatoes that no one wants to hold for long and the Fed is dumping billions every chance it gets to keep the system afloat.

BTW, I was very busy this week but work was on Spring Break so I could keep using their connections and had little to do.

Gary Permalink on 3/22/2008