Former fed chair Alan Greenspan is wrong on government’s inflation estimates – Fixie News
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Former fed chair Alan Greenspan is wrong on government’s inflation estimates

Alan Greenspan, who used to be an important person, says the government’s inflation figures are wrong.

Esther George, who is still important — as the head of the Kansas City Federal Reserve, — also says the inflation numbers are wrong.

But George thinks they are wrong for the opposite reason as Greenspan who, as boss of the Fed during the 1990s, made lots and lots of mistakes, including ones on inflation.

George says the government’s information underestimates inflation while Greenspan thinks it overestimates price increases. “I hear few complaints about inflation being too low,” George said in a speech the other day.

She posited that economists look at one kind of inflation while people in the real world see another kind.

Greenspan, in a speech last week, said: “If you had a 2 percent inflation rate as currently measured, it’s the equivalent of zero for actually what consumers are buying.”

I think it gives a person a lot of confidence when one view of the economy is saying that the numbers are taking us left while someone who formerly steered the economy says they are taking us right.

As an individual steering nothing but my car, I think someone ought to get this discussion under control before the US economy ends up in a ditch.

In case you don’t know about this stuff — or even care — the issue of the nation’s inflation rate is the most important economic detail today. How quickly prices are rising will determine whether the Fed continues to raise interest rates, holds them steady or lowers borrowing costs.

If I had to choose sides on inflation — and I will because that’s what columnists do — I’d be on George’s side. Greenspan is wrong again.

I’ve already written about this subject extensively over the past few decades. The last time was in a Feb. 28 column in which I explained that the government actually makes real-life inflation disappear through statistical tricks.

Here are three tricks I explained in that column:

Hedonics, which claims something can go up in price and not be inflationary if the quality of the product improves. The trouble is, the price is still higher. People still have to pay more.

Geometric weighting, which says that if something goes up too much in price, people will switch to a cheaper alternative.

Owner equivalent rent, which is a cute way that the government keeps the cost of homes lower than they actually are.

Instead of determining that a house’s price actually rose, which you do by looking at comparable listings of houses that sold, the government calculates what it would cost for you to rent your own home.

These three tricks are all nonsense intended to make inflation seem less troublesome than it actually is. And the government pulls these magic tricks because, when inflation is kept low, Washington has to pay less in cost-of-living adjustments on things like Social Security.

In other words, it’s cheating the public. So what’s new with that?

Those aren’t the only issues that make the measuring of inflation a brainbuster. Sometimes the numbers are simply wrong.

I remember a great instance of wrong numbers from years ago. One spring, the consumer price index, which measures inflation on goods people buy, seemed wrong to me. As I recall, I didn’t think it captured the true price of gasoline, which had been rising steadily that springtime.

I called the head government guy who was in charge of that number, and he told me that the number looked wrong because it was wrong. His department was having seasonal adjustment problems, so the low inflation was misleading.

So, he said, don’t worry: The figures would correct themselves in the other direction in the months ahead. And sure enough, the inflation data in the summer months went through the roof as the spring mistake was reversed.

There’s one other thing.

Greenspan’s reliance on the quality of products rising to cancel out inflation misses something people who live in the real world understand. A TV might be a much better value today because of technological improvements, but how often does the average American family buy a TV?

When the price of broccoli — or any other everyday item — goes up, where’s the hedonic improvement in that?

I hate broccoli, by the way. But some of you might like to eat that disgusting vegetable. And I’d hate to see you have to switch to a cheaper alternative, as geometric weighting says you would, just to help Greenspan prove his point.


Mario Draghi got it half right.

The European Central Bank boss said that “cryptocurrencies, bitcoins and such things are not real currencies.” He explained that the euro is backed by the EU countries.

Bitcoin and the other cryptos are backed by nothing. Their value, Draghi said, “is extremely unstable.”

What he got wrong is that he also called bitcoin “assets.” They aren’t assets. They are part of a scam and will be worthless once people lose confidence that prices will rise.

Bitcoin’s prices have been rising sharply lately on their way to another big crash. Stay away.

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