Ipm 12 editors overview.fm

Editor’s Overview
THIS TWELFTH ISSUE OF THE International Productivity Monitor, published by the Centre for theStudy of Living Standards, differs from past issues. Five of the six articles address one topic, namelythe impact of the Boskin Commission after one decade on price measurement. A final article dis-cusses the role of information technology in the US growth resurgence.
summarizes the report’s methods, findings, and released its final report, Toward a More Accurate recommendations, and then reviews the com- Measure of the Cost of Living, prepared for the US ments and criticisms that appeared soon after Senate Finance Committee. The Commission the report was issued. Changes in CPI method- investigated possible sources of bias in the US ology are also summarized and assessed, as is Consumer Price Index (CPI) and concluded that recent research on related issues. Gordon the CPI in 1995-96 was upward biased by 1.1 sharply distinguishes two questions. First, with percentage points per year. This startling find- what we know now, what should the Commis- ing had important ramifications for price mea- sion have concluded about CPI bias in 1995-96? sur ement in bo t h th e Uni ted St ate s and Second, what is the bias now after the many throughout the world. The articles in this sym- improvements introduced into the CPI since the posium, by leading researchers in the price mea- s u r e m e n t f i e l d , e x a m i n e f r o m d i f f e r e n t On the first question, Gordon notes that his perspectives the impact of the Boskin Commis- own recent research on apparel and rental hous- ing indicates a substantial downward bias in the In his brief introduction to the symposium, CPI over much of the twentieth century, dimin- Jack E. Triplett of Brookings Institution, and
ishing in size after 1985. Incorporating these organizer of the session at the January 2006 findings into the Boskin matrix would reduce its 0.6 percentage point annual upward bias due to Association where these papers were originally quality change and new products to a smaller 0.4 presented, highlights the importance of price point bias. However, this is more than offset by measurement for reliable productivity esti- the stunning discrepancy over 2000-06 in the mates. For Triplett, accurate price indexes are chain-weighted C-CPI-U compared to the tra- essential for reliable productivity measurement.
ditional CPI-U, indicating that the Commission Indeed, he points out that a one percentage greatly understated the magnitude of upper level point upward bias in price changes results in a substitution bias, that is the substitution one percentage point downward bias in real out- between broad consumer expenditure catego- put growth and by consequent productivity ries. This retrospective evaluation suggests that growth. An upward bias in price indexes implies the bias estimate for 1995-96 should have been that productivity growth is being underesti- 1.2 to 1.3 percentage points, not 1.1 points.
Gordon estimates that the upward bias in the In the first article in the symposium, Robert
CPI has declined from the revised 1.2-1.3 per- J. Gordon from Northwestern University, one
centage points in the Boskin era to about 0.8 of the five members of the Boskin Commission, points today. Yet he notes that the Boskin report, I N T E R N A T I O N A L P R O D U C T I V I T Y M O N I T O R like most contemporary studies of quality In the third article in the symposium, Jack E.
change, failed to accord sufficient importance to Triplett of the Brookings Institution begins by
the value of new products and increased longev- highlighting the extremely salutatory effect the ity. Allowing for these, he concludes that the Boskin Commission has had on international current upward bias in the US CPI is at least 1.0 price statistics, promoting open discussion of price measurement issues, engendering dia- In the second article in the symposium John
logue between statistical agencies and users, S. Greenlees, Associate Commissioner of
and encouraging research. Less positive in Prices and Living Conditions at the US Bureau Triplett’s view has been the Boskin Commis- of Labor Statistics (BLS), provides a BLS sion’s popularization of “guestimates,” through response to the Boskin Commission from the its widely cited 1.1 percentage point CPI bias perspective of ten years following the release of figure. Triplett characterizes a guestimate as a the report. Greenlees documents the research on price indexes done at the BLS in the first half research results, but he does acknowledge that of the 1990s that pointed to upward CPI bias, without its guestimate the report would have and discusses how these results attracted the attention of the US Senate, leading to the Triplett argues that the Commission ignored appointment of the Boskin Commission in 1995.
the possibility that quality improvements could Greenlees provides a detailed discussion of actually produce a net downward bias to CPI the methodological changes to the CPI made by the BLS between 1996 and 2002 in three areas adjustments inherent in the BLS procedures corresponding to the categories of bias identi- may over-adjust. Triplett points out that the fied by the Commission: upper and lower level motivation for the appointment of the Boskin substitution bias, quality change and new prod- ucts, and outlet bias. A key change in the first desire to reduce Social Security expenditures area was the introduction of a chained CPI (C- by indexing benefits to a lower rate of increase CPI-U) that captured consumer substitution as than the CPI. He feels that a mix of politics and much as possible. This was the first official statistics seldom produces an output that is superlative CPI produced by a statistical agency favourable to economic statistics. For Triplett, in the world. In the second area, the BLS has it would have been preferable to separately introduced more hedonic models to capture address the distinct issues of CPI measurement quality change, but the overall quantitative and principles for allocation of resources to the impact has been small. The BLS has also recog- nized the need to use a product and outlet sam- In the fourth article in the symposium, Ernst
ple that was as representative as possible of R. Berndt from MIT provides a political econ-
current consumer spending patterns. Viagra was omy interpretation of the rise and fall of public interest in price measurement, placing these developments in the context of the attempt by mission, by forcing the BLS to scrutinize the Congress and the White House to deal with grow- strengths and limitations of its CPI procedures ing deficits in the early to mid-1990s. He provides and by highlighting and publicizing the budget- a detailed discussion of initiatives since the Boskin ary impacts of the CPI, paved the way for vari- Commission, such as the National Academy of Sciences panel, to improve CPI measurement.
Berndt examines the thorny issue of the CPI Triplett, Baily concludes that the Commission for health care, with particular reference to the should have advised Congress that it did not Boskin Commission recommendation that BLS have an adequate scientific basis to recommend move from pricing health care inputs to pricing a specific quantitative adjustment to the CPI health care outcomes. Because of the formidable index used to adjust federal programs.
measurement challenges in adjusting medical care expenditures for changes in outcome qual- rebound in productivity and output growth in ity, little progress has been made in this area.
the last decade. In the sixth and final article in Berndt concludes that the BLS has responded the issue, Daniel E. Sichel of the Federal
constructively to the recommendations from the Reserve Board reviews the book Information various price measurement initiatives. By imple- Technology and the American Growth Resurgence by menting many of the methodological changes Dale Jorgenson, Mun Ho, and Kevin Stiroh, suggested, the BLS has reduced net CPI inaccu- which provides a detailed analysis of this racy and increased professional confidence in rebound. Sichel begins by noting that the book can be considered a “Users’ Guide” to growth In the fifth and final article in the symposium, accounting and is highly recommended in this Martin Neil Baily of the Institute for Interna-
regard. The basic story as told by Jorgenson et tional Economics, and a former Chair of the US al. and to which Sichel is sympathetic is as fol- Council of Economic Advisors, discusses the lows. In the mid-1990s the constant-quality policy implications of the Boskin Commission.
prices of semiconductors fell substantially, lead- He begins by offering support for the type of the ing to rapid declines in the price of Information back-of-the-envelope calculations of CPI bias Technology (IT) capital goods. Firms responded that the Commission used so effectively to by substituting capital purchases toward IT cap- attract public attention to its report. In the area ital, resulting in a surge in IT capital deepening of quality adjustment, however, Baily criticizes the Boskin Commission for what he calls “pre- Sichel reviews in an even-handed manner the mature extrapolation,” that is moving too critiques that have been put forward of the quickly from a limited number of examples to a Jorgenson et al. derive their results. His bottom Baily stresses the importance of high-quality line is that while many of the critiques make data for policy decisions. He observes that a bet- valuable points, there is currently no alternative ter allocation of existing resources can improve methodology to growth accounting that offers economic statistics, suggesting that the creation such a comprehensive framework for assessing of a unified statistical agency in the United the sources of economic growth. Sichel notes States, like Statistics Canada, would streamline that one limitation of the book is that it provides data collection and analysis. In terms of the issue no analysis of the post-2000 US productivity of Social Security solvency, Baily argues that use growth acceleration, which has taken place in a of the CPI to adjust social security benefits period when rapid IT capital deepening was not downward is not a preferred option. Echoing I N T E R N A T I O N A L P R O D U C T I V I T Y M O N I T O R

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