Did the Baskin Commission lie about inflation?

I watched a significant portion of the Stanford Academic Freedom Conference on Friday and a bit on Saturday. (I didn’t go because after a total of 20 hours in a car, a plane, and a bus to visit a friend in New Hampshire, my left leg was hurting and I couldn’t imagine driving 2 hours to Stanford and then sitting for a few more hours.)

Overall, the parts I saw were excellent. I thought some of the best talks were by Jay Bhattacharya, Tyler Cowen, John Yonidis, John Hasnas, Peter Arcidiacono, and Solveig Gould. Archidiacono’s speech reminded me of a wonderful poem called “The Paradoxical Commandments.” I posted about it here a few years ago.

A speech by Peter Thiel, however, had a conflicting note.

Thiel was pointing out what he saw as Stem’s failure. He thinks we haven’t made as much technological progress as we should have in the last few decades, and he blames this, in part, on the failure of universities in the hard sciences. I have no opinion on this; He knows more about technological advances than I do and so he may be right.

After making this point, he said that with 4% annual economic growth, many of our economic problems will disappear. I agree with him on that.

Then he said that the Boskin Commission, which was appointed by the US Senate Finance Committee in the mid-1990s to assess how well the Consumer Price Index was doing, had lied (his words). Instead of getting 4% growth, Thiel said, they claim that 2% growth is really 4% growth because CPI overstates inflation by understating quality improvements.

they are did not False This was a freak attack by Thiel.

First, the commission said the CPI increased inflation by 1.1 percentage points, not 2 percentage points. Second, it had good grounds. Later, Mike Boskin actually developed the premise that the CPI systematically raises inflation by 0.8 to 0.9 percentage points each year. This is David R. In “Consumer Price Index” in Henderson, ed Concise Encyclopedia of Economics. Here is what the commission said in its report:

Our interim report of September 15, 1995, presented preliminary estimates of the bias in the CPI. We estimated that the overall bias was 1.5 percentage points annually in recent years, but changes to the CPI methodology would remove a potential 0.5 percentage points per year from the BLS, reducing the bias to 1.0 percent going forward. points per year. We have now revised our estimates to reflect changes in the CPI announced by the BLS on March 29, 1996, and new estimates of bias effects due to new product introductions and changes in the quality of existing products. The BLS removed some of this bias by a total of 0.24 percentage points per year, increasing our bias estimate by one-quarter of a percentage point. In addition, we revised our estimate of the new product/quality change bias upward by 0.10 percentage points per year.

I’m getting a little lost in the weeds here but whatever the exact bias, regarding Thiel’s claim, the commission had a good basis for its decision. Moreover, quality improvement was only part of the story. Another part was substitution bias. Yet another outlet was biased. Boskin explains it all here. If there was a liar, and I’m not saying there was because I don’t know if Thiel was just ignorant, it wasn’t Mike Boskin or the Boskin Commission.

Thiel ends this part of his discussion by saying that economists say (and I’m quoting exactly as I remember) that we should tell grandma because her cell phone is a little thin, that makes up for the fact that she’s eating cat food. I’ll leave it to you to judge whether this is close to a correct conclusion based on what economists say about value changes, new products, substitution bias, and outlet bias.

The photo above is by Mike Boskin.

disclosure: During the extreme Santa Clara County lockdown, Mike Boskin had some very pleasant interactions via email, where he became somewhat of a friend.

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