CPI Composition

[Copernicus]

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As I think you are stating ironically, health insurance is not extremely expensive. If you consider that 6% of CPI expenditures represents a much smaller percentage of total expenditures, and that for those who itemize expenses > 2% of gross income are deductible, health insurance is in reach of anyone who needs it and isnt getting it.

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I got to you too quick, but you bring up a good point. I'm having trouble understanding what you are saying because I don't think I'm understanding economics at the same level that you are. However you say that "health insurance is in reach of anyone who needs it and isn't getting it." Why then do people say they can't afford health insurance?

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If shes a med student I dont think she'll have trouble understanding that CPI represents changes in the cost of a market basket of expenditures most commonly consumed. Health care's weight is just the perecentage of the total expenditures.

As far as people saying they cant afford health insurance, I think the majority of that is political rhetoric, not what "people" are saying about their own situation. For those who do complain about it, I would attribute it to their priorities. Eg $3000 a year for comprehensive coverage to someone who believes they are healthy seems expensive compared to the latest 1080p HDTV, so they "can't afford" it.

[ItalianFX]

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If shes a med student I dont think she'll have trouble understanding that CPI represents changes in the cost of a market basket of expenditures most commonly consumed. Health care's weight is just the perecentage of the total expenditures.


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She has only been in Med School for a week and a half. She doesn't really understand this stuff at all. She's very smart, but not with economic knowledge. Could I say that Medical Care is 6% of the total CPI, which is a basket of goods that people spend their money on? Therefore, people spend 6% of their money on medical care out of all consumer goods.

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As far as people saying they cant afford health insurance, I think the majority of that is political rhetoric, not what "people" are saying about their own situation. For those who do complain about it, I would attribute it to their priorities. Eg $3000 a year for comprehensive coverage to someone who believes they are healthy seems expensive compared to the latest 1080p HDTV, so they "can't afford" it.

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You are right. People who say they don't have enough money usually just have their priorities wrong. I try telling people that they need to save for things rationally. I wonder if there are statistics on incomes of people who have health insurance/seek medical care. Would you think that there is a particular income group (low) who are saying they can't afford medical care? I think this really pulls on demographics.

[DcifrThs]

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i'd like to know the elasticities.

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Is there a way to determine this?

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not directly from the CPI RI data since i don't think it is sensitive enough and tons fo things can cause it to change.

there are ways to determine this yes, but you need other surveys.

Barron

[Moseley]

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questions, comments, thoughts?

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I think we spend too much on bacon and sausage. It's not healthy.

[PLOlover]

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first off, know that we're dealing in averages here. if you are an average american w/ an income tied exactly to average CPI then the CPI applies to you. but the average is a poor descriptor of the individual. for some, it will mean that they are living better off and for others it will mean that they are living worse off as you point out. in some cases the differences will be quite extreme.

what you say makes sense if the bold part above is true.

can you cite where the CPI assumes that a rise in food prices isn't passed entirely through to the index?

if average milk prices increase 10% (and nothing else changes) and households overall report that as such, then the relative importance of milk will rise by 10% and food will increase by 10%*milk's contribution to food if my understanding of the CPI construction is sound.

cna you provide some cite to the contrary?

thanks,
Barron

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did you google hedonics?

http://www.atimes.com/atimes/Global_.../HF27Dj01.html
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However, in the early 1990s that transparent method of CPI calculation came under assault from Michael Boskin, then chief economist to the administration of US president George H W Bush, and Alan Greenspan, then chairman of the board of governors of the Federal Reserve System.

Their assertion was that the CPI calculation was much too simplistic and resulted in much too high a measure of inflation. They argued that the calculation needed to take into account the real-world phenomenon of substitution, whereby consumers who cannot afford more expensive items switch to buying the less expensive ones, and that the inflation calculation should switch to tracking the costs of the less expensive items whenever substitution was presumed to occur.

That generally would have required moving from the fixed basket of goods to a variable one, but initially, instead of that move the concept of weighting was introduced into the fixed basket in an effort to approximate the phenomenon of substitution.

Straight arithmetic weighting was gradually replaced by geometric weighting by 1999. In the geometric weighting favored by Boskin and Greenspan, the basket items with recently increasing ("volatile") prices receive less weight while those that decrease in price receive more weight. So the result is a lower overall number for inflation.

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http://en.wikipedia.org/wiki/Hedonic_regression
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Some economists have criticized the US government's use of hedonic regression in computing its CPI, fearing it can be used to mask the "true" inflation rate and thus lower the interest it must pay on Treasury Inflation-Protected Securities (TIPS) and Social Security cost of living adjustments.

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http://moneycentral.msn.com/content/P92951.asp
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Lastly, Gross points out who is penalized by this cheating: "They disserve, of course, all of those who receive Social Security, as well as other private pensioners dependent on an accurate accounting of prices paid. They disserve buyers and holders of TIPS -- inflation protected securities -- which adjust inadequately to a faulty and near fraudulently calculated CPI that one day could total billions of dollars per year for TIPS holders. And they disserve all owners of U.S. Treasury obligations -- including foreign central banks and institutions. . . ."

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[DcifrThs]

thanks for the post. i didn't google hedonics until you posted.

seems like two prominent (and likely other) economists favored one system of calculation of CPI and there was a debate on which to use. finally, they adopted one that understates rather than overstates inflation.

i don't see the huge problem with this since it was done out in the open. especially since you can then argue that until it was done, the government was paying too much. now it is paying too little.

overall, i'm sure the reduction in payments past and future will far outweigh the overpayment made from inception to 1999.

but that will take a loonngngg time to occur in reality since i think CPI was used as the base until 8 years ago. i have to look into that.

there will always be people that cry conspiracy on either side. what do you think could have been said before they made the change? what about the poor taxpayers who are sponsoring those who invested in TIPS. inefficiencies will always arise, but it seems the decision was made fairly and in the open. if put up to the voters, obviously it would remain to be overstated.

you can never get something like this 100% correct so you have to choose your error. is it surprising that the government, whose interests are best served by understated inflation, to choose to understate rather than keep overstating?

ideally, it would be variable, but that would cost a ton more to administer.

anyways, i think you brought up a great issue and helped me understand where the change was made and why. now ig otta look into the cost to the government above "actual" inflation since inception of CPI to 1999.

Barron

[PLOlover]

you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.

[DcifrThs]

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you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.

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you're right. you know more than people that study it and biases they've found. look them up, here they are outlined in the shortest possible form:

Link

NOTE: this cite just summarizes the bias in the shortest manner i could find. innumerable papers written by authors for academic journals can be found and if i had access to JSTOR i'd cite them. you can look online for BLS and other ("biased") sites to find out the level of work put into finding those biases.

previously, i didn't htink it was understated based on reading those studies. reading greenspan's objection agreed with those studies (i.e. it was overstated). now that they seem to have changed the construction, it could be understated now, or, it could be close to even. i'd bet now though it is likely to be understated. but at least i'm gathering info and forming an intelligent opinion based on facts and studies.

glad you think i'm funny and can provide you with amusement.

Barron

[Josem]

you may find it helpful to compare the US CPI calculation and processes to the CPI of Australia.

Both have similar cultures and similar standards of living, and info on the Australian CPI calculation is available here

[PLOlover]

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you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.



you're right. you know more than people that study it and biases they've found. look them up, here they are outlined in the shortest possible form:

Link

NOTE: this cite just summarizes the bias in the shortest manner i could find. innumerable papers written by authors for academic journals can be found and if i had access to JSTOR i'd cite them. you can look online for BLS and other ("biased") sites to find out the level of work put into finding those biases.

previously, i didn't htink it was understated based on reading those studies. reading greenspan's objection agreed with those studies (i.e. it was overstated). now that they seem to have changed the construction, it could be understated now, or, it could be close to even. i'd bet now though it is likely to be understated. but at least i'm gathering info and forming an intelligent opinion based on facts and studies.

glad you think i'm funny and can provide you with amusement.

Barron

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btw, I'm not making fun of you personally or anything. I think we have to recognize this little paradigm of denying something exists, and then when it's proven to exist, to say that it is good.

for example, the torture debate, at first oh no no torture no way we're americans, then the whole waterboarding stuff came out, then it was like, well ok, we do torture (legislation was passed legalizing torture even though it was called someting else), BUT NOW IT"S GOOD.

I think the same thing will happen with the north american union, right now everyone is still denying it even though there is a summit in canada right now to further it, most americans the next they will hear will be, ok , yes the NAU exists, *but it is good*.

notice the main thing is that the chance to debate is kind of taken away, eg, do we really want to be part of a NAU? that question should be being asked right now, since they are implementing it, but they are going to deny deny deny it even exists until it is a done deal, at which point it will shift to , it does exist, it's here, it's good, it's a done deal, get used to it.

It's total propaganda and a mockery of our american democratic system.

so anyway that's where i was coming from.