My Dutch colleague Dr. Stan Veuger takes on ShadowStats in his latest op-ed:
ShadowStats publishes “alternate” measures of inflation and pretends to do so by employing the methods the statistics bureau used to employ, that is, by ignoring the fact that we consume different goods and services now, and that an iPhone combines a broad variety of products that in 1980 were beyond the reach of kings and presidents. In particular, it claims to use the methods the bureau employed in 1980 and in 1990. It sounds like a challenge to reconstruct current-day inflation that way, but there is an easy fix for that. To construct the 1990-based alternate, it seems, one adds some 3.75 percentage points to the inflation rate. To construct the 1980-based alternate, it appears, one adds an increasing number to the inflation rate, where the number is more or less equal to the number of years that have passed since 1980, divided by 34. If that sounds arbitrary, it’s because it is.
But let’s think through the implications of these adjustments. If true inflation is higher than we think, it means that we can buy fewer things than we thought we could. If true inflation is higher than we think, a given increase in nominal gross domestic product translates into a smaller increase in real GDP than we thought. After all, nominal GDP just represents the sum of the prices of all of the goods we produce, while real GDP is the collection of goods and services that corresponds to this sum. How big are the changes implied by the ShadowStats adjustments to the inflation rate? I’ve helpfully calculated that and the results are shown in the graph below. The graph shows real GDP starting in 1980 as reported by the government and recalculated using the alternate inflation rates presented by ShadowStats. (Note that I’m using my best guess on the ShadowStats data, but their graphs are pretty clear as is the stark contrast illustrated.) The graph also shows that we are very poor. Using the 1980-based alternate inflation rate, for example, we are about half as rich now as we were around the time when then-Iraqi Leader Saddam Hussein invaded Kuwait – e.g., half the food, half the clothes, half the cards, half the cell phones, half the processing capacity, half the computer screen and half the floppy disks.
— Michael R. Strain is a resident scholar and economist at the American Enterprise Institute. You can write to him on Twitter at twitter.com/MichaelRStrain.