In the discussion thread: Payroll employment continues to edge up in June (+80,000); jobless rate unchanged (8.2%) [View all]
Response to pinqy (Reply #20)
Fri Jul 6, 2012, 01:17 PM
stockholmer (3,751 posts)
30. BLS and other models, the changes, and some issues
Last edited Fri Jul 6, 2012, 01:19 PM USA/ET - Edit history (1)
These models have changed over the last several decades so much - that to compare them over time is like comparing oranges to apples. This is not Republicans or Democrats - but BOTH parties. The biggest changes have come under both Clinton and Bush. Here is a brief reason why we can't use BLS and other government data to compare year-over-year data - because of these radical changes.
Employment/Unemployment: The U3 is the most highly watched number for unemployment, the problems with the U3 are numerous.
1. It is a poll. They call people and see if they have a job, looking for a job, unemployed, etc. Polling data traditionally has wide margins of error as well as you can create questions to generate the answers you WANT.
2. "Discourage Workers" - Clinton stop counting those people who are unemployed, but no longer looking for work. By labeling them, we no longer count them as unemployed.
3. Temp/Part time - Bush increase the use and definitions of temp and part time workers into the employment numbers, making it look better than it is.
All these changes (by both Republicans and Democrats) have made the current unemployment and employment numbers better than what they actually are. The U6, which is another BLS number - does not include many of these "label" changes. U6 is just as valid and is conducted by the same government organization that conducts the U3 number. However, politicans NEVER like to talk about U6 - as it is ALWAYS higher than U3. The fact is - U3 is beyond bogus if we are talking about the actual number of unemployed people in this country.
The CPI (Consumer Price Index) has traditionally been used to measure inflation. However, the model - again - has changed so many times over the last several decades that it no longer measures inflation, but rather the adjusted cost of living. A COLI (Cost of Living Index) measures the impact of inflation and reflects how consumer change their spending habit as they are affected by inflation. The government has changed our CPI model to a COLI model, however they didn't change the name nor have they told the public that they are no longer measuring inflation, but rather the impact of inflation to the consumer.The recent changes under Bush and Clinton are as follows:
Hedonics - this alters the price of a good, based on the technology benefit it has to the consumer. Example, you can use the iPhone to surf the internet, so it serves two purpose, so instead of reflecting the actual cost of product, they adjust it lower to reflect the technology benefit. However, the man on the street is STILL out of pocket for the full amount. Hedonics is one of the most highly critical change to the model.
Substitution - initaily this was argued that if the price of steak increase, the consumer can purchase hamburger. As the consumer is still meeting their utility effeiencys - steak and hambger are both protein. What subsitution reflects is changes in consumer spending habits as the cost of one good increases, they will select a lower cost good to meet a similar need. However, this is actually lowering the CPI number because of the impact of inflation. The BLS can use subsitutions to change the size of product, brand names, generic names, and even time when they measure the price. It reeks of manipulation. I am happy to provide the BLS text sample of what they can do with Subsitution - it is pretty shocking.
Geometric Weighting - goods have always been weighted in the index, but now geometrical weightings have pushed some goods higher that drop in value, while certain goods with higher volatility are weighted lower.
CORE - the Fed and other's like to discuss the CORE. This is the CPI minus FOOD and ENERGY. They argue that Food and Energy fluctuations are temporary and can distort inflation. The reality is that Food and Energy are the largest consumption factors that impact consumers and as they have shorter commodity cycles (1-6 months) they certainly do have higher volatility. However, to remove them to measure inflation - is ignoring the biggest expenditure for consumers. So far the Fed's pat answer is that Food and Energy prices are temporary - however we have seen a steady rise of a couple of years. What IS temporary - we don't know because the Fed will NOT define Temporary.
Commodities - Soft Commodities (Food and Energy) have shorter life cycles to market (1-6 months) that certainly impact the "head line" inflation number, even with all the model changes. However, Hard Commoditeis (Iron, Copper, and other raw materials) have a longer time to market (mining -> refining -> manufaturing -> finished goods -> inventory). It can take 6 -18 months (and longer depending on inventories) before higher commodity prices trickle down to the consumer (in the CPI measure). However we ARE starting to see it. The model will allow the BLS to keep rachetting it down lower, even Bush's new CPPI-U will even push it lower. So we may never see high inflation - if reported by the BLS and their model.
So why all these model changes? Several Reasons:
1. In order to attack Treasury Buyers, the rate of inflation must not be too far above the shorter-term yield curve on notes.
2. It keep the value of the dollar from falling too quickly.
3. Most importantly - the CPI is used to determine the rise in Social Security Payments.
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