"THE one duty we owe to history is to rewrite it," Oscar Wilde said. In line with that aphorism, the Advisory Commission to Study the Consumer Price Index, chaired , has rewritten the economic history of the past twenty-five years. The Boskin Commission was formed at the behest of the Senate Finance Committee. Last December it released its long-awaited report on the CPI. The commission reported its conclusion that the CPI overstates the rate of cost-of-living inflation by 0.8 to 1.6 percentage points a year; its best estimate was that inflation is overstated by 1.1 percentage points. If cost-of-living inflation has been overstated, then the growth of the economy and real wages has been much higher than previously reported. The commission has thus solved the problem of stagnating wages, which is now revealed to be a mere fiction. Far from experiencing a "silent depression," the commission implicitly claims, American families have never had it so good.
The political implications of this rewriting of history are obviously enormous. The commission's findings are being used as a cloak for an economic agenda that will injure lower- and middle-income households. By "cooking the books" the commission threatens to undermine the dawning consciousness that the U.S. economy is no longer delivering prosperity for huge segments of society. Clearly, its findings need to be substantively examined before being accepted.
Unfortunately, the majority of the American economics profession appears to have uncritically accepted the commission's finding that inflation is overstated; this implicitly makes a mockery of the profession's own intellectual accomplishments. If inflation, wages, and income have all been misstated, years of research have been conducted using incorrect data. Thus much of this research, which purportedly confirmed the profession's theoretical claims, is no longer valid.
The Boskin Commission cited four reasons for the CPI's mismeasurement of inflation: product-substitution bias, outlet-substitution bias, quality-change bias, and new-product bias. The CPI measures the cost of a given basket of goods in which the quantity of each good is based on the amount that the average consumer was buying on the date the index was calibrated. Product-substitution bias emerges because over time consumers alter the goods they buy, and consequently the bundle of goods that the CPI is tracking no longer represents consumer spending patterns. The Boskin Commission claims that consumers have been substituting low-inflation goods and that the CPI has been oversampling high-inflation goods.