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To: flatsville who wrote (59237)	1/18/2001 1:26:00 PM
From: Mike M2	Read Replies (2) \| Respond to of 436258

Flats, I suggest that the Commerce Dept's abuse of hedonics is a far greater scandal due to the nature of its far greater economic implications. The fact that stock market valuations have reached unprecedented levels cannot be disputed but the reasons why are. The bulls - Wall St, mutual fund industry, the finacial press The Fed, Commerce dept et. al. would like us to believe that there was not irrational exuberence because the US has undergone a growth and productivity miracle thus higher valuations are justified. The bears assert that the economic miracle is more of a mirage and the true driver has been unprecedented credit excesses. If we were to cut stock market valuations in half we would still be near historically high valuation for the peak of an economic expansion. The loss of paper wealth would be $6 trillion ? far greater than the ? who knows how many billions in reduced COLAs resulting from the BLS understatement of product price inflation. The resolution of this bull/bear debate will have a profound impact on the state of the economy for the rest of the decade and beyond. I would prefer to leave politics out of this because it clouds the issues which impact all Americans but I get irritated when Clinton supporters twist the facts. I am not an expert on gov't and who calls the shots but it does seems to me that the executive branch has far greater control over the BLS, Commerce Dept etc than the legislative branch.I despise Bill Clinton but I would agree there is blame enough for all politicians. The one individual who is most responsible for the current situation is without a doubt Alan Greenspan so we can blame republicans for selecting him and Clinton for keeping him. I will address the issue of hedonics more substantially in a later note. mike

To: flatsville who wrote (59237)	1/18/2001 3:41:07 PM
From: Mike M2	Respond to of 436258

Flats, I will quote Dr. Richebacher in another attempt to expose the hedonic hoax. Let me start by saying nobody denies that there have been stunning advances in technology- or that the quality of life has improved what is under debate is the economic relevance of hedonics. Dr. Richebacher notes " It's really a marvelous statistical technique that delivers everything markets like to see- higher real GDP growth, higher productivity growth- except one thing: falling product prices don't generate income growth. it's an entirely new phenomenon: productivity growth without correlated income growth.... Taking our usual careful look at US GDP numbers in " chain" dollars we conclude instead that about two-thirds of the apparently superior economic growth performance over the last four to five years has been pure statistical fiction and one third cyclical. This ,by the way, is roughly the result of new econometric investigations by Professor robert Gordon of Northwestern University, a noted authority on productivity. from The July Richebacher Letter 1217 St. Paul St. Baltimore, MD 21202 let me add my own comment- it is easy to check this the Commerce dept. gives numbers for real GDP and " Chained GDP" - the difference is the magic of hedonics . let me further emphatically stress that technology companies report their financial results in nominal dollars not chained dollars. more in another note Mike

To: flatsville who wrote (59237)	1/18/2001 4:08:47 PM
From: Mike M2	Read Replies (1) \| Respond to of 436258

Flats, more on hedonics from the Sept. issue of the Richebacher Letter " Besides we keep wondering and wondering in vain about the economic merits of productivity growth that arises from the statistical fiction of hedonic price indexing. Productivity growth has its economic essence in reducing costs per unit of output, inherently implying a corresponding rise in income , individually and nationally. According to market forces, the resulting gains in income may translate into higher wages or higher profits, but either way, somebody enjoys an increase in income. Who in America enjoys any income gain from the big rise that the statistics show in computer output and investment, as measured by the hedonic deflator? Please stand up so we can see you." ....Principally, it is the function of gross domestic product ( GDP) to measure and register the spending and income flows in the economy. Their growth is the essence of the growth of GDP product. But while the hedonic deflator creates massive increases to GDP, these flows are completely missing. these hundreds of billions of dollars that the hedonic deflator calls into statistical existence have been nobody's expense and also nobody's revenue. The basic error in this statistical concept is to equate a fictitious collapse in prices with a boom in spending.... the academic who invented the hedonic deflator may be brilliant statisticians as far as measuring computer power is concerned, but once you think it through, it reveals itself as lousy economics. it's so lousy that we keep asking ourselves, what is really behind this nonsense, just lowsy economics or deliberate attempts to delude the public.... The markets are focusing on three aggregates as the emblems of America's superior economic performance. they are fixed investment, real GDP and productivity. it happens that all three are heavily bolstered by the hedonic deflator the same way. " from The Richebacher Letter 1217 St. Paul St Baltimore, MD 21202 Let me add a comment the issue is not about quality of life which technology has improved but about economic performance measured in nominal dollars. For those who wish to see the numbers I refer you to the Commerce Dept.'s Survey of Current Business or the links that I previously mentioned. Mike