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

1. The Boskin Report vs. NAS’ At What Price: “The Wild vs. the Mild” Robert J. Gordon, Northwestern University and NBER CRIW, Cambridge MA, July 31, 2002

2. Puzzled about the NAS Report • Invited to this panel, my first problem was obtaining a copy • First puzzle: Why was this report necessary? • Was the Boskin Commission so inadequate? • What about the Conference Board report? • How many times does the CPI need to be evaluated within a 5-year period?

3. Stated Motivation • We find out on p. 17, the BLS asked for it, commissioned it, paid for it • Their charge: exactly the same charge that the Senate gave the Boskin Commission: • Investigate conceptual, measurement, etc. • Appropriate use for indexing Federal programs • Can’t stop myself from WWII analogies • BLS = Britain • Boskin = Luftwaffe • NAS = Americans riding to the rescue • BLS: Help! We’ve been attacked, what should we actually do? • They had already achieved much post-Boskin on their own • What should remaining priorities be?

4. Similarities and Differences, Boskin vs. NAS • Similarity: same topic • NAS less interested in substitution since CPI had already adopted Boskin proposals; upper-level and lower-level substitution was at the core of the Boskin proposals. • “Formula” (lower-level) bias had only been recognized shortly before the Boskin deliberations • Similarity: A committee • Individual NAS chapters were primarily the work of particular people, just like individual sections of the Boskin report

5. Big Differences • We were charged with coming up with an exact numerical estimate of the bias, at least we thought so and never debated it • A terrific idea • In retrospect, it created a central magnetic field – everyone could disagree and tug the number down or up, but it was there • Today’s central bias number = exactly what Boskin report said minus what the BLS has fixed • Nobody had ever committed before • No numbers about bias in the 1961 Stigler report • That’s one reason the NAS report feels wimpy

6. The Biggest Boskin Innovation: The Quality Change Matrix • Quality Change and New Products • We took 27 industries, said we knew nothing relevant for about 9 of them, and the other 18 we came up with a precise number, what chutzpah! • Most important point: using “related research” to extrapolate bias from one industry to another • We scribbled on the back of a very big envelope

7. Big Difference: Boskin Lack of Review, Speed, Spontaneity • Boskin: commissioned June 95, final report with hearings first week Dec. 96 • We were a creation of the Senate Finance Committee and especially of the soon-to-be-disgraced Bob Packwood and then the elegant Daniel Moynihan • In between, a back-burner activity • Perhaps 5 meetings, of which 2 or 3 were with the top BLS people

8. How decentralized it was! • The Boskin Comm was built on trust • No arguments, no bickering • Dale said 1.1% implies $1 trillion in SS savings over 10 years • Somehow our separate efforts came up with the 1.1% bias number, but Zvi and I didn’t question the substitution part, and Mike/Dale/Ellen didn’t question the 0.6 quality change part

9. Boskin Stories • Kathy Abraham was a hero • We were the barbarians at the gate, the Luftwaffe over London • She handled us masterfully • Much praise also to John Greenlees and his staff • Those cozy meetings in the conf room of the Senate Finance Committee • Another WW example: Christmas eve on the Western front • Our reward was not financial, it was Moynihan! • The day of Packwood’s demise, viewed from Moynihan’s retreat (“Gentlemen, . . . “) • Lunch in the Senate, the famous navy bean soup

10. When was the Boskin Report actually written? • Four main parts: • What the BLS actually did • Implications of various “CPI-X” formulae for the Federal budget 10 years into the future • Substitution issues: lower level, formula bias, upper level • Quality change and new products

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

12. Quality Change Section • There could be no bigger difference from the NAS report, in lack of review • Once off the phone with ZG, the quality change section was in Fed Ex to Mike Boskin • Mike did a heroic job in merging these sections and getting a coherent report to Washington two days later. • Reviews? What reviews? We knew the reviews would come later and they came, in spades

13. Once Released, It Became Politics • How many TV cameras that day? • We were going to revolutionize Federal Finance • The big question became not the details of the report but rather • CPI minus X (where X was the 1.1 number) • CPI minus AX (where A was the fudge factor) • Eventually scuttled by AARP and other lobbies

14. So What Happened After Publication? • Unlike NAS, which was heavily reviewed before publication, we were reviewed after publication • Much of Boskin report is a first draft • Brent Moulton and Karen Moses gave us a masterful beating up (BPEA 1997, no. 1) • But they approved of the matrix framework as a way of organizing ideas, no one had ever done that before • Their nit-picking peeled away maybe 0.15 of our 0.6 quality change bias, but we still had new products in reserve, for which we had not developed any estimate except the presumption of the direction of bias

15. Recommended Scope of CPI • Limit it to Private Goods and Services • BLS should not be “drawn in” to measure impact of environmental changes, benefits of anti-pollution legislation, public goods, increases in life expectancy • Agree: The Boskin Comm speculated at end about our report about how these issues might affect our bias estimates without recommending that the BLS do anything about them

16. Some Topics Should be left for Academic Research • Over time, effects of environmental decay and pro-environment legislation • Across countries, issues in comparing standards of living • Europe vs. US. Air conditioning, heating, energy use, auto use vs. public transport, low density of U. S. metro areas, vs. undeniable U. S. advantage of larger home and lots sizes

17. Downplay disaggregation among consumers • Agree, same as Boskin • No need for CPI to create special-purpose price indexes for the elderly • Not to mention males, females, ethnics, teenagers, or economics professors

18. Differences in Emphasis • In Boskin, much more beating up on CPI about upper-level and lower-level substitution issues • But CPI accepted that right away and acted with amazing speed to change at both the upper and lower levels • Some of this had been planned before Boskin • Not much left for NAS to criticize

19. Whatever Happened to the Second Research-Based CPI? • The CPI can never be revised, we all agree • We need an alternative CPI that continuously incorporates results from historical studies, goingn back, at least in principle, to 1914 • Current BLS CPI-RS is a good start, but needs to have differences between CPI-RS and CPI-U and CPI-U-X1 split apart in a regular table available to anyone • Remarkably little attention to alternative CPI in NAS report • Mentioned in passing on p. 8, but not as a numbered recommendation, no emphasis on its potential for historical research

20. COGI vs. COLI • “Need minimal use of COLI theory to perform practical comparisons” – Agree • Discussion muddled • COGI vs. COLI differ in assumptions about substitutions and in weighting schemes • No difference in the difficulties posed by quality change and new goods • Good suggestion not in Boskin: Adopt “advance estimate of the superlative index”

21. Quality Change • Both reports share the BLS emphasis on incremental improvements going forward • Lack of attention to potential for improving our measures of quality change going backward into history • Implicitly, let the academics do it

22. NAS on Hedonics • To be skeptical is not novel • Triplett: “automobiles may be too complicated for the hedonic technique.” • Hedonics best for simple products, PCs are a great application • PC memory and speed have standard measures, new features (CD drives etc.) can be dummied out • Picture quality of TVs and Sound quality of stereo audio more problematic • Caution exaggerated, Rec 4-3 (p. 7) wimpy

23. Defects of Matched Model Indexes • Not enough emphasis either in Boskin or NAS • Price declines missed when they occur with new model introductions (PCs) • Price increases missed when they occur with new model introductions (womens’ apparel)

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

25. New Goods? • NAS says: do nothing • That’s where a retrospective research-based index could make a major improvement • Example: VCR introduced into the market at $1200 in 1978, by 1987 price had fallen to $200 • Introduced into the CPI in 1987 • Low-hanging fruit • Many similar examples, e.g., air conditioners 1951 vs. 1964

26. Outlet Substitution? • NAS: Do nothing other than “conduct research” (rec 5-2, p. 9) • Data are available now on the market share of discount stores going back at least two decades • Another issue that a research-based historical index can address

27. End on a High Note • Medical care, Chapter 6 • Barely treated by Boskin • Except to cite a few studies: Cutler, Shapiro, etc. • I agree with the major recommendations • Develop a new medical care total expenditure index (“expanded scope” medical CPI) • Base it on a substantial number of “treatment episodes”

28. Data Collection • Excellent discussion of scanner data, NAS largely comes out pro-scanner • But did not pick up on Boskin distinction between “local” data (rents, vegetables) and “national” data (consumer durables) • No need to collect so much data on a local basis for nationally sold durable goods

29. Finally, CPI vs. PCE Deflator • Good discussion of possibility of merging upper-level weights • But lack of discussion of ongoing divergence between inflation rates of CPI and PCE deflator • As CPI methods have improved and weights updated faster, should be convergence • But instead, more divergent than ever • Should be a permanent ongoing table to provide a decomposition of reasons