Americans Don't Hear about the Real Costs in our Economy

ARTICLE SYNOPSIS:

Last week reporters asked President Bush if he would finally agree that we're in a recession. President Bush avoided answering the question, saying: "The average person doesn`t really care what we call it. These are tough times. Economists can argue over the terminology."
Follow this link to the original source: "Problems with the U.S. economy"

COMMENTARY:

One measure of the state of the economy is the Consumer Price Index (CPI). According to the CPI, the official inflation rate based on last year was an increase of 4 percent. This compares with double digit inflation in the 1970s and 1980s. Is this right?
No. The fact is government changed the way the CPI is calculated. Writing in Harper's magazine, Kevin Phillips notes: "In 1983, under the Reagan administration, inflation was ... finagled when the Bureau of Labor Statistics decided that housing ... was overstating the Consumer Price Index; the BLS substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner might get for renting his or her house." According to Phillips, this methodology "simply sidestepped what was happening in the real world of homeowner costs." In other words, it was a quick way to cook the books and understate the real level of inflation. Based on the way CPI was figured in 1982, our inflation rate would be 11 percent.
One of the reasons for the change to the way CPI is calculated is that the government has tied major expenses, including Social Security benefits, to the official inflation rate. By showing that the official inflation rate is down, government expenses that are indexed for inflation are also kept down.
According to Barry Ritholtz, director of equity research at Fusion IQ, who was interviewed by CNN’s Glenn Beck, if we were to figure inflation the way we did in 1982 "we would probably be seeing Social Security payments 70 percent higher than what they are today."
In 1983, when government changed the way to measure housing costs, "that basically said, let`s not take into account things like maintenance or utilities or property taxes that we all know have been going through the roof." If we were using only the 1983 changes to figure inflation, it would be at 7.5 percent today.
In 1996, however, additional changes were made to the way CPI is calculated. One of those changes is called substitution. "If the price of steak goes up really high," said Ritholtz, "well, you go out and buy chopped meat and, therefore, look, magic, no inflation. The reality is, you`ve been priced out of the cost of steak."
Inflation in communist China and the United Kingdom is about 11 percent, said Ritholtz. "It`s a little sad that we get more accurate inflation data from the Chinese than we do here domestically."
These are tough times, Mr. President, and they’re made more difficult because government plays games with terminology and in calculating the real costs in our economy.