America: Actually Quite Poor!

by Will Wilkinson on April 21, 2008

I read Kevin Phillips cover article [$$$] in this month’s Harper’s, and thought he was completely crazy. First of all, I was amazed that they printed an article largely about one of my pet interests, the methodology of the Consumer Price Index, which I thought was a bit too esoteric for a general readership. But I was really baffled by Phillips’ claim that the CPI massively underestimates inflation. Phillips thinks the Boskin revisions were a big mistake, despite the fact that they were very conservative, and most economists who know about this that I have talked to think the problem goes in the opposite direction. Tyler is his usual ambassadorial self in his blog review of Phillips’ book Bad Money when he says:

Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man.  I find the former scenario more plausible.

But thankfully he really lays it out there in his comments:

A lot of the Phillips book is simply economically illiterate. For sure America has its economic problems, but they are not the ones identified in *Bad Money*

Perhaps it is time to convene an Overcoming Bias colloquy about how it is that estimates of the trend in real wealth can be so massively divergent.

Viewing 3 Comments

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    Tyler Cowen's post doesn't make a whole lot of sense. For example, how does it follow that you will be a very rich man if you know that the inflation estimate is wrong? And then there's this sentence:

    "If there's anything wrong with gdp statistics, it's either environmental problems or that we don't have good measures of the productivity of government itself."

    Anyone who could seriously talk about "the productivity of the government" obviously doesn't know what he's talking about.

    Also, the inflation rate has nothing to do with how rich America is now, as he implies, but with how much of that current wealth the government is stealing by inflating the currency.
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    Ken -- If you can estimate inflation better than the market, you can short stocks to buy bonds or vice versa. Bonds pay off constant, inflation-pummeled dollars, while stocks price in the inflated revenues of the underlying company.

    As for the "productivity of government", you can if you prefer substitute "the deadweight loss of government"; the problem of its being hard to measure remains the same. Governments do provide goods and services (albeit generally the wrong ones, and badly); if those goods and services get better or worse there is a real effect on peoples' lives that isn't going to be adequately measured in GDP figures.
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    "If you can estimate inflation better than the market, you can short stocks to buy bonds or vice versa. Bonds pay off constant, inflation-pummeled dollars, while stocks price in the inflated revenues of the underlying company."

    That imposes additional requirements not specified by Tyler Cowen, though. Specifically: that the market's estimate of inflation be exactly the same as the government figures, that you already be rich enough to be messing around with stocks and bonds, and that your personality includes a willingness to gamble a lot of money.

    I don't dispute that if you know the government's inflation claim is wrong _and a whole bunch of other things are also true_ that you could be a very rich man. However, the number of people for whom all those other factors _are_ true doesn't seem to be very big.

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