The Boskin Report vs. The Boskin Report vs. NAS’ NAS’ At What Price: At What Price: “The Wild vs. the Mild”“The Wild vs. the Mild”

Robert J. Gordon,Robert J. Gordon,Northwestern University and NBERNorthwestern University and NBER

CRIW, Cambridge MA, July 31, 2002CRIW, Cambridge MA, July 31, 2002

Puzzled about the NAS ReportPuzzled about the NAS Report

Invited to this panel, my first problem was Invited to this panel, my first problem was obtaining a copy obtaining a copy

First puzzle: Why was this report First puzzle: Why was this report necessary?necessary?– Was the Boskin Commission so inadequate?Was the Boskin Commission so inadequate?– What about the Conference Board report?What about the Conference Board report?– How many times does the CPI need to be How many times does the CPI need to be

evaluated within a 5-year period?evaluated within a 5-year period?

Stated MotivationStated Motivation

We find out on p. 17, the BLS asked for it, commissioned We find out on p. 17, the BLS asked for it, commissioned it, paid for itit, paid for it– Their charge: exactly the same charge that the Senate gave the Their charge: exactly the same charge that the Senate gave the

Boskin Commission:Boskin Commission:Investigate conceptual, measurement, etc.Investigate conceptual, measurement, etc.Appropriate use for indexing Federal programsAppropriate use for indexing Federal programs

Can’t stop myself from WWII analogiesCan’t stop myself from WWII analogies– BLS = BritainBLS = Britain– Boskin = LuftwaffeBoskin = Luftwaffe– NAS = Americans riding to the rescueNAS = Americans riding to the rescue

BLS: Help! We’ve been attacked, what should we BLS: Help! We’ve been attacked, what should we actually do?actually do?– They had already achieved much post-Boskin on their ownThey had already achieved much post-Boskin on their own– What should remaining priorities be?What should remaining priorities be?

Similarities and Differences,Similarities and Differences, Boskin vs. NAS Boskin vs. NAS

Similarity: same topicSimilarity: same topic– NAS less interested in substitution since CPI had NAS less interested in substitution since CPI had

already adopted Boskin proposals; upper-level and already adopted Boskin proposals; upper-level and lower-level substitution was at the core of the Boskin lower-level substitution was at the core of the Boskin proposals.proposals.

– ““Formula” (lower-level) bias had only been recognized Formula” (lower-level) bias had only been recognized shortly before the Boskin deliberationsshortly before the Boskin deliberations

Similarity: A committeeSimilarity: A committee– Individual NAS chapters were primarily the work of Individual NAS chapters were primarily the work of

particular people, just like individual sections of the particular people, just like individual sections of the Boskin reportBoskin report

Big DifferencesBig Differences

We were charged with coming up with an exact We were charged with coming up with an exact numerical estimate of the bias, at least we numerical estimate of the bias, at least we thought so and never debated itthought so and never debated it– A terrific ideaA terrific idea

In retrospect, it created a central magnetic field – everyone In retrospect, it created a central magnetic field – everyone could disagree and tug the number down or up, but it was could disagree and tug the number down or up, but it was therethereToday’s central bias number = exactly what Boskin report Today’s central bias number = exactly what Boskin report said minus what the BLS has fixedsaid minus what the BLS has fixed

– Nobody had ever committed beforeNobody had ever committed beforeNo numbers about bias in the 1961 Stigler reportNo numbers about bias in the 1961 Stigler reportThat’s one reason the NAS report feels wimpyThat’s one reason the NAS report feels wimpy

The Biggest Boskin Innovation: The Biggest Boskin Innovation: The Quality Change MatrixThe Quality Change Matrix

Quality Change and New ProductsQuality Change and New Products– We took 27 industries, said we knew nothing We took 27 industries, said we knew nothing

relevant for about 9 of them, and the other 18 relevant for about 9 of them, and the other 18 we came up with a precise number, what we came up with a precise number, what chutzpah!chutzpah!

– Most important point: using “related research” Most important point: using “related research” to extrapolate bias from one industry to to extrapolate bias from one industry to anotheranother

– We scribbled on the back of a very big We scribbled on the back of a very big envelopeenvelope

Big Difference: Boskin Lack of Big Difference: Boskin Lack of Review, Speed, SpontaneityReview, Speed, Spontaneity

Boskin: commissioned June 95, final Boskin: commissioned June 95, final report with hearings first week Dec. 96report with hearings first week Dec. 96– We were a creation of the Senate Finance We were a creation of the Senate Finance

Committee and especially of the soon-to-be-Committee and especially of the soon-to-be-disgraced Bob Packwood and then the disgraced Bob Packwood and then the elegant Daniel Moynihanelegant Daniel Moynihan

In between, a back-burner activityIn between, a back-burner activity

Perhaps 5 meetings, of which 2 or 3 were Perhaps 5 meetings, of which 2 or 3 were with the top BLS peoplewith the top BLS people

How decentralized it was!How decentralized it was!

The Boskin Comm was built on trustThe Boskin Comm was built on trust– No arguments, no bickeringNo arguments, no bickering

Dale said 1.1% implies $1 trillion in SS Dale said 1.1% implies $1 trillion in SS savings over 10 yearssavings over 10 yearsSomehow our separate efforts came up Somehow our separate efforts came up with the 1.1% bias number, but Zvi and I with the 1.1% bias number, but Zvi and I didn’t question the substitution part, and didn’t question the substitution part, and Mike/Dale/Ellen didn’t question the 0.6 Mike/Dale/Ellen didn’t question the 0.6 quality change partquality change part

Boskin StoriesBoskin Stories

Kathy Abraham was a heroKathy Abraham was a hero– We were the barbarians at the gate, the Luftwaffe over LondonWe were the barbarians at the gate, the Luftwaffe over London– She handled us masterfullyShe handled us masterfully– Much praise also to John Greenlees and his staffMuch praise also to John Greenlees and his staff– Those cozy meetings in the conf room of the Senate Finance Those cozy meetings in the conf room of the Senate Finance

CommitteeCommittee– Another WW example: Christmas eve on the Western frontAnother WW example: Christmas eve on the Western front

Our reward was not financial, it was Moynihan!Our reward was not financial, it was Moynihan!– The day of Packwood’s demise, viewed from Moynihan’s retreat The day of Packwood’s demise, viewed from Moynihan’s retreat

(“Gentlemen, . . . “)(“Gentlemen, . . . “)– Lunch in the Senate, the famous navy bean soupLunch in the Senate, the famous navy bean soup

When was the Boskin Report When was the Boskin Report actually written?actually written?

Four main parts:Four main parts:– What the BLS actually didWhat the BLS actually did– Implications of various “CPI-X” formulae for Implications of various “CPI-X” formulae for

the Federal budget 10 years into the futurethe Federal budget 10 years into the future– Substitution issues: lower level, formula bias, Substitution issues: lower level, formula bias,

upper levelupper level– Quality change and new productsQuality change and new products

The Most Controversial Part: The Most Controversial Part: Quality Change and New ProductsQuality Change and New ProductsPress Conference was sked for Dec 4Press Conference was sked for Dec 4Quality Change/ New Products written in Quality Change/ New Products written in the two weeks before November 26, Fed-the two weeks before November 26, Fed-exed to ZG the day before Thanksgiving, exed to ZG the day before Thanksgiving, in a world pre-email attachments ( Nov 28)in a world pre-email attachments ( Nov 28)$ Billions slipping off the keyboard$ Billions slipping off the keyboardTwo hour phone call on Sat Nov 30, Two hour phone call on Sat Nov 30, Cambridge to JAX (who paid?)Cambridge to JAX (who paid?)– When in doubt, “cut the number by half”When in doubt, “cut the number by half”

Quality Change SectionQuality Change Section

There could be no bigger difference from the There could be no bigger difference from the NAS report, in lack of reviewNAS report, in lack of review

Once off the phone with ZG, the quality change Once off the phone with ZG, the quality change section was in Fed Ex to Mike Boskinsection was in Fed Ex to Mike Boskin

Mike did a heroic job in merging these sections Mike did a heroic job in merging these sections and getting a coherent report to Washington two and getting a coherent report to Washington two days later.days later.

Reviews? What reviews? We knew the reviews Reviews? What reviews? We knew the reviews would come later and they came, in spadeswould come later and they came, in spades

Once Released, It Became PoliticsOnce Released, It Became Politics

How many TV cameras that day?How many TV cameras that day?We were going to revolutionize Federal We were going to revolutionize Federal FinanceFinanceThe big question became not the details of The big question became not the details of the report but rather the report but rather – CPI minus X (where X was the 1.1 number)CPI minus X (where X was the 1.1 number)– CPI minus AX (where A was the fudge factor)CPI minus AX (where A was the fudge factor)

Eventually scuttled by AARP and other Eventually scuttled by AARP and other lobbieslobbies

So What Happened After So What Happened After Publication?Publication?

Unlike NAS, which was heavily reviewed before Unlike NAS, which was heavily reviewed before publication, we were reviewed after publicationpublication, we were reviewed after publication– Much of Boskin report is a first draftMuch of Boskin report is a first draft

Brent Moulton and Karen Moses gave us a Brent Moulton and Karen Moses gave us a masterful beating up (masterful beating up (BPEABPEA 1997, no. 1) 1997, no. 1)– But they approved of the matrix framework as a way But they approved of the matrix framework as a way

of organizing ideas, no one had ever done that beforeof organizing ideas, no one had ever done that before– Their nit-picking peeled away maybe 0.15 of our 0.6 Their nit-picking peeled away maybe 0.15 of our 0.6

quality change bias, but we still had new products in quality change bias, but we still had new products in reserve, for which we had not developed any estimate reserve, for which we had not developed any estimate except the presumption of the direction of biasexcept the presumption of the direction of bias

Recommended Scope of CPIRecommended Scope of CPI

Limit it to Private Goods and ServicesLimit it to Private Goods and Services– BLS should not be “drawn in” to measure BLS should not be “drawn in” to measure

impact of environmental changes, benefits of impact of environmental changes, benefits of anti-pollution legislation, public goods, anti-pollution legislation, public goods, increases in life expectancyincreases in life expectancy

– Agree: The Boskin Comm speculated at end Agree: The Boskin Comm speculated at end about our report about how these issues about our report about how these issues might affect our bias estimates without might affect our bias estimates without recommending that the BLS do anything recommending that the BLS do anything about themabout them

Some Topics Should be left for Some Topics Should be left for Academic ResearchAcademic Research

Over time, effects of environmental decay Over time, effects of environmental decay and pro-environment legislationand pro-environment legislation

Across countries, issues in comparing Across countries, issues in comparing standards of livingstandards of living– Europe vs. US. Air conditioning, heating, Europe vs. US. Air conditioning, heating,

energy use, auto use vs. public transport, low energy use, auto use vs. public transport, low density of U. S. metro areas, vs. undeniable density of U. S. metro areas, vs. undeniable U. S. advantage of larger home and lots sizesU. S. advantage of larger home and lots sizes

Downplay disaggregation among Downplay disaggregation among consumersconsumers

Agree, same as BoskinAgree, same as Boskin– No need for CPI to create special-purpose No need for CPI to create special-purpose

price indexes for the elderlyprice indexes for the elderly– Not to mention males, females, ethnics, Not to mention males, females, ethnics,

teenagers, or economics professorsteenagers, or economics professors

Differences in EmphasisDifferences in Emphasis

In Boskin, much more beating up on CPI In Boskin, much more beating up on CPI about upper-level and lower-level about upper-level and lower-level substitution issuessubstitution issues

But CPI accepted that right away and But CPI accepted that right away and acted with amazing speed to change at acted with amazing speed to change at both the upper and lower levelsboth the upper and lower levels– Some of this had been planned before BoskinSome of this had been planned before Boskin

Not much left for NAS to criticizeNot much left for NAS to criticize

Whatever Happened to the Second Whatever Happened to the Second Research-Based CPI?Research-Based CPI?

The CPI can never be revised, we all agreeThe CPI can never be revised, we all agreeWe need an alternative CPI that continuously We need an alternative CPI that continuously incorporates results from historical studies, goingn back, incorporates results from historical studies, goingn back, at least in principle, to 1914 at least in principle, to 1914 Current BLS CPI-RS is a good start, but needs to have Current BLS CPI-RS is a good start, but needs to have differences between CPI-RS and CPI-U and CPI-U-X1 differences between CPI-RS and CPI-U and CPI-U-X1 split apart in a regular table available to anyonesplit apart in a regular table available to anyoneRemarkably little attention to alternative CPI in NAS Remarkably little attention to alternative CPI in NAS reportreportMentioned in passing on p. 8, but not as a numbered Mentioned in passing on p. 8, but not as a numbered recommendation, no emphasis on its potential for recommendation, no emphasis on its potential for historical researchhistorical research

COGI vs. COLICOGI vs. COLI

““Need minimal use of COLI theory to perform Need minimal use of COLI theory to perform practical comparisons” – Agreepractical comparisons” – Agree

Discussion muddledDiscussion muddled– COGI vs. COLI differ in assumptions about COGI vs. COLI differ in assumptions about

substitutions and in weighting schemessubstitutions and in weighting schemes– No difference in the difficulties posed by quality No difference in the difficulties posed by quality

change and new goodschange and new goods

Good suggestion not in Boskin: Adopt “advance Good suggestion not in Boskin: Adopt “advance estimate of the superlative index”estimate of the superlative index”

Quality ChangeQuality Change

Both reports share the BLS emphasis on Both reports share the BLS emphasis on incremental improvements going forwardincremental improvements going forward

Lack of attention to potential for improving Lack of attention to potential for improving our measures of quality change going our measures of quality change going backward into historybackward into history

Implicitly, let the academics do itImplicitly, let the academics do it

NAS on HedonicsNAS on Hedonics

To be skeptical is not novelTo be skeptical is not novel– Triplett: “automobiles may be too complicated for the Triplett: “automobiles may be too complicated for the

hedonic technique.”hedonic technique.”

Hedonics best for simple products, PCs are a Hedonics best for simple products, PCs are a great applicationgreat application– PC memory and speed have standard measures, new PC memory and speed have standard measures, new

features (CD drives etc.) can be dummied outfeatures (CD drives etc.) can be dummied out– Picture quality of TVs and Sound quality of stereo Picture quality of TVs and Sound quality of stereo

audio more problematicaudio more problematic

Caution exaggerated, Rec 4-3 (p. 7) wimpyCaution exaggerated, Rec 4-3 (p. 7) wimpy

Defects of Matched Model IndexesDefects of Matched Model Indexes

Not enough emphasis either in Boskin or Not enough emphasis either in Boskin or NASNAS

Price declines missed when they occur Price declines missed when they occur with new model introductions (PCs)with new model introductions (PCs)

Price increases missed when they occur Price increases missed when they occur with new model introductions (womens’ with new model introductions (womens’ apparel) apparel)

Independent Advisory Board?Independent Advisory Board?

Recommendation 4-8 (p. 7)Recommendation 4-8 (p. 7)““econometricians, statisticians, index econometricians, statisticians, index experts, marketing specialists, product experts, marketing specialists, product engineers”engineers”Would have to hire a ballroom to get them Would have to hire a ballroom to get them all together into one roomall together into one roomUnwieldy and unnecessary. The BLS is Unwieldy and unnecessary. The BLS is doing just fine, implementing hedonics doing just fine, implementing hedonics incrementally on its ownincrementally on its own

New Goods?New Goods?

NAS says: do nothingNAS says: do nothing

That’s where a retrospective research-based That’s where a retrospective research-based index could make a major improvementindex could make a major improvement

Example: VCR introduced into the market at Example: VCR introduced into the market at $1200 in 1978, by 1987 price had fallen to $200$1200 in 1978, by 1987 price had fallen to $200

Introduced into the CPI in 1987Introduced into the CPI in 1987

Low-hanging fruitLow-hanging fruit

Many similar examples, e.g., air conditioners Many similar examples, e.g., air conditioners 1951 vs. 19641951 vs. 1964

Outlet Substitution?Outlet Substitution?

NAS: Do nothing other than “conduct NAS: Do nothing other than “conduct research” (rec 5-2, p. 9)research” (rec 5-2, p. 9)

Data are available now on the market Data are available now on the market share of discount stores going back at share of discount stores going back at least two decadesleast two decades

Another issue that a research-based Another issue that a research-based historical index can addresshistorical index can address

End on a High NoteEnd on a High Note

Medical care, Chapter 6Medical care, Chapter 6Barely treated by BoskinBarely treated by Boskin– Except to cite a few studies: Cutler, Shapiro, Except to cite a few studies: Cutler, Shapiro,

etc.etc.

I agree with the major recommendationsI agree with the major recommendations– Develop a new medical care total expenditure Develop a new medical care total expenditure

index (“expanded scope” medical CPI)index (“expanded scope” medical CPI)– Base it on a substantial number of “treatment Base it on a substantial number of “treatment

episodes”episodes”

Data CollectionData Collection

Excellent discussion of scanner data, NAS Excellent discussion of scanner data, NAS largely comes out pro-scannerlargely comes out pro-scanner

But did not pick up on Boskin distinction But did not pick up on Boskin distinction between “local” data (rents, vegetables) between “local” data (rents, vegetables) and “national” data (consumer durables)and “national” data (consumer durables)

No need to collect so much data on a local No need to collect so much data on a local basis for nationally sold durable goodsbasis for nationally sold durable goods

Finally, CPI vs. PCE DeflatorFinally, CPI vs. PCE Deflator

Good discussion of possibility of merging upper-Good discussion of possibility of merging upper-level weightslevel weights

But lack of discussion of ongoing divergence But lack of discussion of ongoing divergence between inflation rates of CPI and PCE deflatorbetween inflation rates of CPI and PCE deflator

As CPI methods have improved and weights As CPI methods have improved and weights updated faster, should be convergenceupdated faster, should be convergence

But instead, more divergent than everBut instead, more divergent than ever

Should be a permanent ongoing table to provide Should be a permanent ongoing table to provide a decomposition of reasonsa decomposition of reasons