I'm more of a fan of GDP criticisms. In the short term, broken windows get added into GDP, which seems to me to be a big issue. But then, I'm not an economist, so I take my own views with a grain of salt.

I'm more of a fan of GDP criticisms. In the short term, broken windows get added into GDP, which seems to me to be a big issue. But then, I'm not an economist, so I take my own views with a grain of salt.

I simply cannot fathom how intelligent people pay any attention to the CPI or GDP numbers. Both are entirely subjective numbers that are created by a political process. You might as well have the Pontificus Maximus read the flight of birds and then tell everyone the most politically correct conclusion. It would at least be more honest.

Take hedonics and chain weighting the prices – both attempts to measure changes in quality over time. But these changes in quality are impossible to measure numerically. For instance, how many times better is a 2002 desktop computer than a 2008 computer? One person may say that the 2008 model is 5 times better, because the processing power is 5 times greater. Another person might say that they are equal, because they only use Microsoft Word, and that works equally well on both computers. A third person might say that the 2008 version is worse, because Vista sucks and crashes constantly. The judgment is entirely subjective. Plausible arguments result in an order of magnitude difference in the result. And yet, numbers like these are actually used to determine the CPI and GDP. Every component of CPI is this bad. Which is better an average 1950’s house – ( 1,300 ft, 15 minute commute, in a neighborhood with a very high walkability index) or the average 2008 house ( 2,200 square ft, 25 minute commute, have to drive everywhere)? Which is better, Grey’s Anatanomy or a Vaudeville Show? Thanks to Napster/BitTorrent/NetFlix, the average person has an infinite supply of music, tv, and movies. Is that an infinite gain in wealth? Of course, Napster and the Internet seemed to have killed the music industry, and no great bands have arrived on the scene since the late 1990’s. Since I love guitar rock, this is a terrible loss for me.

For most items comprising the CPI basket of goods, plausible arguments could be made that result in not only order of magnitude difference in growth, but an actual change in direction of growth. Yet magically, the number comes out to consistently be 2-3% a year. It’s not a conspiracy, but it’s obvious the number is purely the creation of a messy political process.

What happens is that every so often people subjectively feel that the number is wrong. For instance, in 1995, measured inflation was causing social security payouts to go out higher than people thought were necessary. So the Boskin Commission found plausible arguments for reducing the inflation number. I am sure that when they figured out all these hedonic and chain-weighting measures, the committee members simply kept adjusting the model until the numbers looked right.

The number is so divorced from reality that our cities can turn into desolated war zones ( the 1970’s) or the internet can give us an infinite amount of entertainment for free, and neither makes much of a blip in the GDP number.

What’s more, the actual method used to determine increase in quality – chain weighted prices – does not measure increase in quality at all, but measures the fact that people will consistently pay more for the newest item regardless of whether it is any better. The newest fashion accessories always sell for 20% more than last seasons, but no one argues that fashion increases in quality by 20% a year. The GDP number is essentially based on this constant, “status factor”, and mixed and adjusted with other fudge factors, and ends up consistently growing 2-3% a year no matter the economic conditions.

It’s simply astounding that economists run so many regressions against the inflation and GDP number, when it was so obviously designed by a subjective, political process.

If you really want to track changes in the standard living over time, statistics can certainly play a roll. But you have to use your brain. If I was studying the changes in the standard living, I would look at each part of a person’s budget individually. I would make an objective comparison of price of good versus median income. For instance, I’d look at the price of eggs or flour or fish versus median income over time to see how much richer in terms of food we were. I’d then subjectively compare the offerings in a typical super market today versus 1950. I’d look at the price of the median home compared to median income in 1950, versus today. But then I’d also have to subjectively compare the size of the home, location, commute, etc.

Statistics, such as median income or the price of eggs, can be very useful in combination with subjective comparisons. But many of the models of modern economists use junk statistics and get junk results.