Least surprising news item from today.
For the data junkies, a ton of Excel sheets with historical market returns over on Global Financial Data.
“Look at the CPI for example. In its most popular use following World War II, when it became a cost of living adjustment for auto union contracts, the concept was to use it as a measure of a fixed basket of goods. Say you have a loaf of bread, a gallon of milk and a steak. You price them out one year, you price them out the next year and figure the percent change and figure out how much your income had to increase to maintain a constant standard of living. The key concept is a constant standard of living. That was the basic underlying premise of the CPI. At the end of the 1980s, Alan Greenspan and Michael Boskin , who was head of the Council of Economic Indicators, started a campaign to convince people that it was being overstated. The argument was, if steak goes up, people are going to just buy more hamburger ; if they buy more hamburger their cost of living will be less. It was completely contrary to the concept of the CPI because it took it away from being a measure of a constant standard of living to being a measure of a declining standard of living, which has no practical purpose other than its express purpose to reduce cost of living adjustments in Social Security. It was a way for Congress to contain Social Security payments without doing the unthinkable and vote against it. The concept didn’t fly at that time, but when you got into the Clinton administration, the Bureau of Labor statistics introduced geometric weighting of the CPI for the purposes of mimicking a substitution-based CPI such as Greenspan and Boskin had been advocating. So with the geometric weighting, if something goes up in price it gets a lower rating and if something goes down in price, it gets a higher weighting so it has the effect of giving you lower inflation than you would have had otherwise. The net effect of this over time was effectively 3% and it is accumulative in its effect. If the changes had never been made, Social Security payments would be roughly double what they are today so the intended purpose worked.”
His primers on government economic reports: