If the world is teetering on the brink of a dramatic financial collapse, you couldn’t tell it from the behavior of the 7,000 or so economists who gathered here for three days last week to communicate new results, schmooze, and attempt, in general, to settle the hash of the world.
Then again, neither could you tell it from the official government indexes of prices and production. As much as anything, that turned out to be the meetings’ theme.
Federal Reserve Board Chairman Alan Greenspan made headlines when he spoke frankly to a luncheon session about the mechanism of deflation, meaning falling prices and the general flight from goods to money that at times has occurred with disastrous effect, notably in 1929.
Naturally he was aware that his remarks would be taken as a veiled warning to governments and markets about the darker possibilities inherent in the situation in East Asia.
But if you look more closely at his long and carefully crafted address you will discover that his thinking was dominated by a set of practical, concrete concerns that didn’t make the papers, but whose relevance will.
Greenspan’s talk was about measurement error. The source of his deeper worries is to be found in Washington rather than New York or Jakarta, Indonesia.
The battle against inflation has largely been won, said the Fed chairman. A new set of issues now has emerged. “Of mounting importance is a deeper understanding of the economic characteristics of sustained price stability,” he asserted.
“We central bankers need also to better judge how to assess our performance in achieving and maintaining that objective in light of the uncertainties surrounding the accuracy of our measured price indices.”
Price indexes may be the hardest and often the dullest topic in all of economics, but in the last 30 years, they also have become among the most important. It is price indexes that permit us to compare purchasing power over time, and to gauge the quantities of goods produced. You can’t talk about inflation, or gross domestic product, or productivity without price indexes.
The problem is that in times of rapid technical change, products themselves are forever changing–and it becomes difficult to get a handle on what is happening to the price of a standard unit of output. With characteristics of most products and services rapidly changing, it’s becoming ever more difficult to measure. Automobile tires, refrigerators, winter jackets, and tennis rackets are all examples of goods that have changed in ways “that make them surprisingly hard to compare to their counterparts of 20 or 30 years ago,” said Greenspan.
But wasn’t all this taken up recently by the Boskin Commission, which concluded that the consumer price index has overstated the increase in the cost of living by about 1 percentage point per year in recent years?
What you have to understand, however, is that government statistical agencies, notably the Bureau of Labor Statistics, played a key role in sabotaging any practical payoff from the work of the commission. The agency raised its collective eyebrows at the possibility that revisions in the consumer price index might be used to lower cost-of-living adjustments in various government programs, especially Social Security.
More to the point: Though Greenspan was too polite (or too important) to say so, the Bureau (and the Commerce Department, which shares responsibility for the government’s main statistical programs), have done little in recent years about improving the underlying intellectual basis for economic measurement.
Yet the compilation of such fundamental accounting frameworks is one of the jobs to which government is best suited. The last considerable advance in measurement was a result of studies undertaken for a commission led in the mid-1950s by the late George Stigler, a University of Chicago economist.
The Stigler Commission owed its existence to the widespread public conviction that the price of automobiles consistently was being mismeasured, thanks to the custom of annual model changes. From its work emerged so-called hedonic price indexes, which unbundle the characteristics of changing products, in order to price them separately.
Without such hedonic indexes, it would be all but impossible to make sense of the economics of such complex modern products as the personal computer. “But hedonics are by no means a panacea,” said Greenspan.
And though he held out the hope that financial markets may eventually devise instruments and associated analytical techniques for measuring changes in the general price level, he said that the currently available instruments–the market for inflation-indexed bonds, mainly–are in no way a substitute for government price collecting.
Greenspan ended his remarks on a cheerful note. A nation’s statistical system, he noted, once had been compared by a Commerce Department official to the measurements a tailor makes for a suit for a customer–with the key difference that, in the case of the economy, the customer is running and the tailor is running alongside.
The only way to succeed as a measurement economist in changing times, therefore, was to be just as fast and twice as agile as the forces affecting the economy. The opportunities for increased agility are great in the information age, said Greenspan; how economic and statistical science will make use of the new possibilities remains to be seen.
“If the challenge for our statistical agencies is not to lose their race against technology, the challenge for policymakers is to make our best judgments about the limitations of existing statistics,” he concluded. With this gnomic warning, he returned to Washington.
