[was: Greenspan's cooked book]
I wrote:
>at some point, economists decided on a conventional definition of
>inflation as referring only to increasing prices of newly-produced goods
>and services. Given that convention, inflation in housing prices only
>counts when it affects apartment rents (or "imputed" rent on
>owner-occupied housing) and other expenses of using housing, rather than
>the hike in the price of housing as an asset. (The economists "impute" >by trying to figure out how much it _would_ cost a home-owner to rent
>his or her home.) Equities are simply paper promises, rather than goods
>and services, so that equity inflation isn't counted. Health care is
>definitely counted, while only the part of education that isn't paid for
>via taxes is counted as part of the "cost of living."
Joanna writes: >OK, fine. Economists have decided that most of what people spend money on: houses, education doesn't count.<
I can understand if you're impatient with economists. I was giving the official "line" on inflation, which is reflected in how inflation is measured officially. (I may have made a mistake, Eric, but it isn't very relevant here.) I don't like the official definition of inflation, either. In fact, I recently published an article in the somewhat popularly-written economics magazine CHALLENGE on this: I present a measure of the "cost of living" that includes the cost of non-market necessities in living (and the like); the official measure misses stuff like the cost of dirty air. It turns out that inflation by this measure is significantly worse than the official measure.
> But the question remains: how does this affect their planning and calculation and the information that filters out to the uninitiated? My eight year old daughter had "economics" as a spelling word, and she asked me for a definition. So, I gave her a definition that an eight year old could understand: "Economics is the art of making a budget." So, if economists are dismissing the hugest costs that people have to deal with as not part of the equation, what does this portend for their ability to make a budget, a plan, or a prediction.<
well, in terms of planning, the official measure makes sense: almost no-one pays for the full price of a house upfront (at least not in the U.S.) so it makes some sense to figure out the "rental" price. More importantly, I think it's a mistake to put too much weight on inflation as a way of measuring what's wrong with the world. Even though I included a measure of inflation in my article that reflected increasing inequality in society, I think this is going a bit too far...
By the way, your definition of economics is close to the original one, that of Aristotle (household management), though it also fits the hegemonic definition (the study of making choices under conditions of scarcity).
>Oh, and it's not fair to say they're counting newly created goods in
their formula. Remember, some years ago, they came up with some "comparable price index" vodoo, which adds up to the idea that if I can substitute hot dogs for chicken, then the fact that the price of chicken has gone up doesn't matter cause I can buy hot dogs instead...which as we all know is just like chicken.<
unfortunately, the way they measure inflation these days more and more reflects this (wrong) kind of thinking...
>I am not asking for the party line here; I'm asking for what you think.<
As a professional economist, I find I have to do both. I did the first in my first missive on this suject.
Jim
