One of my favorite things about reading a good book is rummaging through its citations to look for more good books. It’s like paleo-wikipedia. Today’s find, from Jerry Davis’s last chapter in Managed by the Markets, is this interesting article from Harper’s on manipulations of macroeconomic statistics by Kevin Phillips. Much of the piece recounts interesting and politically salient examples of how technical changes in the calculation of key macroeconomic indicators – GDP, CPI (which tries to measure inflation), and the unemployment rate – led to “polyanna creep”. That is, successive administrations pushed the statistics to always make the economy look better, such that compared to 25 years earlier, the statistics of the 2000s reported inflation and unemployment as being far lower than they otherwise would have been.
I have a lengthier take on the whole problem – which hopefully may someday be part of an article or dissertation chapter – involving the idea of technopolitics, and the problem with forgetting that statistics are always everywhere political tools and never technical measures of an objective underlying reality, but for this quick post I just want to highlight an interesting connection between measurements of inflation the mortgage crisis. So, story part I goes back to the Reagan administration and changes made in the CPI that helped lower interest rates:
In 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different “Owner Equivalent Rent” measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs.
But, as we know from (good citation needed), rental prices and home prices diverged fairly dramatically in the past few years. That’s one of the signs we missed in the whole housing price bubble. Because the house price wasn’t in the CPI any more, the measure was lower than it would have been and thus interest rates were lower, which in turn fueled the bubble, as Phillips notes (citing a law professor):
As Robert Hardaway, a professor at the University of Denver, pointed out last September , the subprime lending crisis “can be directly traced back to the  BLS decision to exclude the price of housing from the CPI. . . . With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates.”