1. The Consumer Price
Index (CPI)
The CPI is probably the most consequential government
statistic. It is considered a good indicator of the rate of monetary inflation,
it is used in real GDP calculations, cost of living adjustments are tied to it,
and it is the most important statistical target for the determination of
central bank monetary policy. The Statistics Canada website explains what it
is:
“The Consumer Price
Index (CPI) is an indicator of changes in consumer prices experienced by
Canadians. It is obtained by comparing, over time, the cost of a fixed basket
of goods and services purchased by consumers. Since the basket contains goods
and services of unchanging or equivalent quantity and quality, the index
reflects only pure price change.”[1]
The first problem with the CPI as an
inflation measure is a conceptual one. The CPI is a measure of money’s
purchasing power over time. The economic factors determining the purchasing
power of money are numerous and varied. They include: the supply of money, the
demand to hold/hoard money, the supply of the particular goods in the fixed
basket, the real demand for those particular goods, and the way that new money
flowing through the economy affects the relative monetary demand for those
particular goods.
As a result, the CPI, or inflation rate,
should not be considered a fundamental economic variable at all. Rather,
changes in the CPI are symptomatic of changes happening in some of the more
fundamental economic variables mentioned above. Which of these is changing, the
CPI does not reveal.
When used exclusively as a measure of the
purchasing power of money for consumers, the CPI is conceptually okay. However,
when it is used as a target for monetary policy-making, or as a deflator to determine
real GDP (discussed in the GDP section), this conceptual problem can wreak
havoc.
Let us now consider the CPI purely as a
purchasing power measure. There are some problems with it here too. These are
mainly related to the procedure for selecting the fixed basket of consumer
goods and their weights. Statistics
Canada explains its process for this:
“Each good or
service is considered to be an element in a basket representative of consumer
spending, and price movements are assigned a basket share with the proportion
of total consumption expenditure they account for. For example, Canadians as a
whole spend a much larger share of their total expenditures on rent than on
milk. As a result, a 10% price increase in rental rates will have a greater
impact on the All-items CPI than a 10% increase in the price of milk. The CPI
basket shares are updated at two year intervals; the data to specify them are
obtained primarily from the Survey of Household Spending.”[2]
The first problem is obvious: the CPI is only an accurate
measure of changes in your purchasing
power of money if you are a perfectly ‘average’ Canadian consumer. The further
away from ‘average’ your tastes and consumer spending patterns are, the less
relevant the CPI is as a measure of changes in your purchasing power of money.
A second, related, problem has to do with location. The CPI
figure reported and relied upon is a Canada-wide one. But consumer price
movements can vary widely in different geographical locations: especially in a
country as large and as diverse as Canada. Again, the further away from
‘average’ your region’s consumer price movements are, the less relevant the CPI
is as a purchasing power measure for you.
A third problem has to do with basket reweighting. The CPI
basket shares are updated every two years based on a household spending survey.
While incorporating up-to-date information on consumer spending patterns is
useful, these frequent reweightings introduce a substitution bias into the CPI
calculations. If in one year, for example, the price of carrots goes up by 5%
but the price of spinach only goes up by 1%, then there will be a tendency for
some consumers to lean their spending patterns away from carrots and towards
spinach. If it is a basket reweighting year, than the product whose price is
going up slower will take on a bigger weight in the new CPI index, while the
product whose price is going up faster will take on a smaller weight. This will
tend to understate the CPI rate of increase from the point of view of people
who preferred the old basket of goods to the new basket of goods. As a measure
of the changes in money’s purchasing power in terms of a fixed basket of goods,
the reported CPI is likely to be an understated figure.
Several other issues with the CPI include: how to incorporate
new goods and services (ex. Internet service) into a measure that’s supposed to
be in relation to a ‘fixed’ basket of goods, how to deal with changes in
product quality, how to measure intangibles such as consumption atmosphere and
customer service quality, etc…
All these problems do not mean that the CPI is a useless
measure that should no longer be reported. Rather, they merely indicate that
the CPI numbers should not be treated with the reverence that they are treated
with today, nor relied upon to the same momentous extent.
2. Gross Domestic
Product (GDP):
GDP growth is the most widely-used and influential ‘economic
growth’ statistic. Increases in the real GDP of a country or region are widely
considered to indicate increases in the economic well-being of residents of
that country or region. Statistics Canada uses both the ‘income’ and the
‘expenditure’ approach for calculating GDP, approaches that are supposed to
yield the same result, but we will focus on the expenditure approach because that
is the one they use to calculate real GDP. They explain:
“The second approach
sums all sales which firms have made to final users - to households, to
non-profit institutions serving households' , to governments, to business on
capital account, or in export markets. This approach also provides an
unduplicated value of total production. Imports, have to be deducted from this
summation since they are implicitly included in these final sales and should not
be counted as a part of Canadian production - they represent part of the
production of non-residents. Sales from one firm to another (intermediate
production) are not counted since to do so would involve double counting, all
intermediate production being embodied in final output sold to users.”[3]
The result of this calculation will be nominal GDP. Nominal
GDP by itself is quite a useless statistic: it basically just measures the
amount of money or currency units flowing around the economy in a given period.
The nominal GDP of a country experiencing hyperinflation would rise
tremendously; but this would not indicate tremendous economic growth, just the
opposite in fact.
To make GDP at all meaningful, it must be converted to real
terms. The CPI rate of change discussed above is used to do this; it is used to
‘deflate’ the nominal GDP measure by the relevant inflation rate in order to
provide a somewhat meaningful real, comparable figure year over year. This
procedure presents a host of problems, which we will discuss below.
The most significant problem with GDP as an economic growth
statistic is that it just measures ‘production’. It does not really measure
what is produced, or who benefits from that production. But these things are
vitally important for determining the economic well-being of people living in
the country or region in question.
One strange manifestation of this is that destruction does
not affect GDP at all. A hurricane could cause billions of dollars worth of
damage to the city; this would not affect GDP. Only the repairs to the city
would affect GDP, and in a positive direction. Thus, a country who just
repaired one million units worth of economic damage every year would have the
same GDP as a country who added one million new units of economic value every
year.
Another is that government expenditures are included in the
GDP calculation. The problem with this is that, unlike for voluntary private
sector transactions where at least the private buyer deems the price of a good
to be worth paying, there is no such assurance for government expenditures.
They could be spent on useless, counterproductive, or simply relatively
inefficient ‘services’, but they would count as the same GDP all the same.
Arguably, these and other oddities of the nominal GDP
calculation could be resolved by using the CPI as a deflator to reach the real
GDP figure. Destruction would probably result in less supply of consumer goods
and hence higher prices for them, which would mean a lower real GDP. If
government spending messed up the economy, a similar thing could occur. Thus,
let us examine this CPI deflator panacea and see if it really does the trick.
Let us examine a possible
scenario. If the government spends a whole lot of taxpayer money on ‘free’
goods and services (education, healthcare, roads, military equipment, etc…),
things that aren’t included in any inflation index, then this money is no
longer available to bid up the price of the ‘private’ goods and services that
are included in the CPI. GDP stays high, while the CPI is kept low, simply by
the government taking and spending more taxpayer money. The result is an
increase in real GDP.
It might be argued that this
trick could only work in the short-term; that eventually producers, as a
result, will shift their production away from private consumer goods and
towards government goods, which will result in a reduction of the supply of private
consumer goods and thus an increase in their price and of the CPI. This kind of
adjustment can take several years though; more if producers are uncertain
whether this state of affairs will last or not. And, if the effect on GDP wears
off, the government can just tax and spend even more and revive the effect for
the next several years!
Government-sponsored inflation
also has the potential to increase real GDP. All they need to do is print
money, spend it, but prevent the CPI from going up enough to offset the
spending. Since the new money from modern inflation generally benefits the
government and its rich, connected financial-market cronies first before
flowing through the rest of the economy, there will be a lag between the
inflation-fuelled, GDP-increasing spending and CPI increases. This is because
the main inflationary beneficiaries (especially the government and the
mega-rich financial players) generally have very different tastes than the
‘average’ consumer does. As a result, the GDP-increasing spending will not
result in an immediate corresponding, offsetting rise in the CPI; there will be
a lag. In this lag period, real GDP will increase.
Another problem has to do with
the societal consumption/investment ratio. If in a year, this ratio shifts
towards savings and investment and away from consumption, then more money will
be spent in the ‘intermediate production’ pipeline in a given period (that is
not counted in GDP), and less on final consumption goods. GDP will go down as a
result. Theoretically, the reduced demand for final consumer’s goods could
cause a corresponding drop in the CPI rate of increase, which would offset this
effect when the real GDP calculation is done. But it is highly unlikely that
this exact relationship would hold; more likely real GDP will be either
understated or overstated depending on what exactly happens to consumer prices
as a result, which is impossible to predict.
Similar uncertainty applies to
trade policy. If the government cracks down on imports but exports remain
unchanged, then GDP will go up. Of course, this crack down on imports is bound
to lead to an increase in consumer prices, but whether this increase results in
a CPI increase large enough to offset the increased GDP is highly uncertain,
dependent as it is on complex market phenomena and on the composition of that
year’s CPI basket, particularly whether imported goods are a prominent part of
it or not.
Basically, if the government can
cause an increase in GDP (by taxing and spending, by inflating and spending, by
discouraging savings/investment, by discouraging imports), without causing a
corresponding rise in the CPI (whose definition is controlled by government
statisticians), than they can magically increase the real GDP figure without
actually making their citizens better off at all.
This somewhat bizarre, easily manipulable
statistic is actually a terrible proxy for the economic growth of a region, yet
it is the most widely used and influential one. Though still highly imperfect,
after-tax median regional income, deflated by the CPI rate of increase to get a
real figure, would be a much better indicator of regional economic well-being. This
statistic would, of course, be far less favourable to interventionist
governments than GDP, which might explain why it is not as popular.
3. Low Income
Statistics
Statistics Canada publishes “three complementary low income
lines”[4].
To their credit, the website does explicitly state that: “These measures are not measures of poverty, but
strictly measures of low income.”[5] Nevertheless, this does
not seem to deter ‘anti-poverty organizations’ such as Canada Without Poverty
from conflating the two: “Statistics Canada released
annual numbers on low-income last week illustrating that poverty remains a
persistent problem across the country.”[6]
When these three ‘low income’
statistics are passed-off as ‘poverty’ statistics, as is repeatedly done by
many Canadian political commentators and activists, these statistics become
vicious and misleading. It is from this perspective that we will criticize
them.
A. Low Income Cut-Offs (LICOs)
“The low income
cut-offs (LICOs) are income thresholds below which a family will likely devote
a larger share of its income on the necessities of food, shelter and clothing
than the average family. The approach is essentially to estimate an
income threshold at which families are expected to spend 20 percentage points
more than the average family on food, shelter and clothing.”[7]
This bizarre but surprisingly influential
statistic is a relative measure. The better-off the ‘average family’ gets, the
less percentage of their income they will have to spend on necessities. This
will push the ‘allowable’ percentage of income spent on necessities for LICO
purposes up, resulting in a rising of the income threshold.
Used as a ‘poverty’ statistic, this does not
make any sense. If the real incomes of lower income people remain unchanged,
but the real income of the ‘average family’ goes up, then according to the LICO
as poverty measure, more people will fall into poverty. But why should people
who are concerned about poverty be distressed if the real income of the average
family goes up? Supposedly, their goal is to raise poor people up, not to drag
everybody else down.
B. Low
Income Measure (LIM)
“In simple terms, the LIM is
a fixed percentage (50%) of median adjusted household income, where “adjusted” indicates
that household needs are taken into account. Adjustment for household sizes
reflects the fact that a household’s needs increase as the number of members
increases.”[8]
This blatantly relative ‘poverty statistic’
is apparently the most commonly used low income measure for the purposes of
making international comparisons[9]. This fact was
demagogically seized upon by Ed Broadbent, former NDP leader turned
‘anti-poverty’ activist, in an editorial in the Globe and Mail, supposedly
about ‘child poverty’. He writes:
“By this global
measure, we have utterly failed to create equality of opportunity. This child
poverty rate is a national disgrace. It jumped from 15.8 per cent in 1989 to
19.2 per cent in 2012, according to a Statistics Canada custom tabulation for Campaign 2000.”[10]
Notice the verbal trickery that is going on
here: he says that Canada has failed to create ‘equality of opportunity’, which
is true, but then he immediately goes on to say that because of this, the child
poverty rate is a ‘disgrace’. But relative income measures have nothing to do
with whether children are living in poverty or not. Again, as with the LICOs,
if middle income people become better off, thus raising the median household
income, but lower income people remain at the same standard of living, how can
we possibly say that ‘child poverty’ has increased? No single child, or anyone
else, has become more materially destitute as a result of this change. To
despair about such a turn of events would simply represent egalitarian
mean-spiritedness, not any concern for the well-being of poor people.
C. Market
Basket Measure (MBM)
The MBM is
a measure of low income based on the cost of a specific basket of goods and
services representing a modest, basic standard of living. It includes the
costs of food, clothing, footwear, transportation, shelter and other expenses
for a reference family of two adults aged 25-49 and two children (aged 9
and 13).(…)
The MBM thresholds
are calculated as the cost of purchasing the following items:
·
A nutritious diet as specified in the 2008 National
Nutritious Food Basket (Health Canada 2009).
·
A basket of clothing and footwear required by a
family of two adults and two children.
·
Shelter cost as the median cost of two- or
three-bedroom rental units including electricity, heat, water and appliances.
Shelter cost of mortgage-free owners is no longer reflected in the thresholds,
but rather in the disposable income of individual reference families for whom
it applies.
·
Transportation costs, using public transit where
available or costs associated with owning and operating a modest vehicle where
public transit is not available.
·
Other necessary goods and services.[11]
Superficially, this measure seems like it
could be a genuine measure of absolute poverty, but if we look more closely, it
turns out to be a relative measure of ‘low income’ like the other two.
For food, this ‘National Nutritious Food
Basket’ is formulated by making a composite measure of the most popular foods
in all the different food groups required in a really healthy diet, and then
determining sufficient quantities of these quantities to get all the vital
nutrients. The diet represented by this basket is probably richer and more
nutritious than the diet of the vast majority of Canadians, including well-off
ones. Also, for food choice, it’s not at all based on the cheapest way of
getting all these nutrients, but on the most popular, or average, ways of
getting these nutrients for Canadians.[12] To pass off this kind of
diet as part of a ‘modest, basic standard of living’ is a little questionable.
For clothing and footwear, we are not told
how the calculations are done. Based on the other items in the basket, it is
probably based on some kind of average. I would be surprised if it was based on
prices at second-hand clothing shops and thrift stores, which is where low
income people would actually shop if necessary.
For shelter, we are told that it is based on
the median cost of an appropriately-sized rental unit. But why on earth would low income people be paying the median cost for shelter? Real low income
people would probably opt for accommodations that were cheaper than the median,
as would make sense.
For transportation, the measure seems okay,
except that we are not told what a ‘modest’ vehicle is. I would be surprised if
they used the prices and insurance rates for used vehicles though, which is
what low income people would probably opt for if necessary.
For ‘other necessary goods or services’,
what is included is left to our imaginations. I suspect that more averages and
things that low income people wouldn’t actually buy are included.
Thus, because of what is included, the MBM
is not actually an absolute measure of what income people need to sustain
themselves and their families, but a kind of relative measure of what income
people need to live a low-average lifestyle, with this income threshold going
up as the average lifestyle in a country becomes better. This explains why the number
of people falling below the MBM lines is similar to the number of people
falling below the LICO and LIM lines, both relative measures of low income, as
opposed to the number of people falling below lines set by absolute measures of
poverty.
D.
Conclusions
So why are these relative, low income
measures so prominent in the ‘poverty’ discourse in Canada? Well, using these
measures as ‘poverty’ statistics is political gold for leftist egalitarians.
The more income inequality there is, the more, according to these misleading
statistics, ‘poverty’ there seems to be. By this sleight of hand, the leftists
can publicly say that they are interested in fighting poverty, which is a
generally sympathetic leftist position, while actually pushing for more
equality of incomes, which is a much less sympathetic leftist position. By
using these relative statistics as ‘poverty’ measures, fighting poverty and pushing
for egalitarianism seem to fuse into the same thing, which is simply not true.
4.
Unemployment Rate
People are considered to be ‘unemployed’ for
statistical purposes if they are: 1. Without work. 2. Currently available for
work. 3. Seeking work. According to the resolution of the 13th
International Conference of Labour Statisticians in 1982, ‘seeking work’ means:
“Had taken specific
steps in a specified recent period to seek paid employment or self-employment.
The specific steps may include registration at a public or private employment
exchange; application to employers; checking at worksites, farms, factory
gates, market or other assembly places; placing or answering newspaper advertisements;
seeking assistance of friends or relatives; looking for land, building,
machinery or equipment to establish own enterprise; arranging for financial
resources; applying for permits and licences, etc.”[13]
The ‘seeking work’ criterion does make sense
from a certain perspective: if you don’t have work but don’t really want to
have work, then you being unemployed is not a personal or political problem at
all. Actively seeking work is the best indicator that you do actually want to
work; you just currently can’t find a job.
However, from another perspective the
criterion doesn’t make sense at all. If you are someone who wanted a job,
looked around for a good while, but then determined that nothing was out there
and gave up, then you would not be considered to be unemployed statistically as
you would not be actively ‘seeking work’. However, this state of affairs is
probably even worse, from a personal and political perspective, than one where
the job seeker hasn’t yet given up the search.
Another difficulty is that anyone could be
‘out of work’ but ‘seeking work’; they just have to set their job and wage
expectations high enough. A high-school drop-out could insist on entering the
workforce in a managerial role and at a six figure salary; at that rate they would
never find a job and would be ‘unemployed’ forever. Less dramatic instances of
this phenomenon probably result in many people being listed as ‘unemployed’
when really they are only unemployed because of their own unrealistic
expectations; hardly a political problem.
I don’t know of a way to create an
unemployment statistic that avoids these difficulties. However, their existence
would seem to suggest that policy makers shouldn’t treat these figures with the
kind of reverence and reliance that they currently treat them with.
5.
Human Development Index (HDI)
The United Nations’ HDI is their attempt to
create a statistic that will measure different countries’ ‘achievements’ on a
more holistic basis than GDP levels alone. It is a composite index made up of
three dimensions: health, education, and standard of living. A UN website
explains:
“The health dimension is assessed by life expectancy at
birth”.
“The education component of the HDI is measured by mean of
years of schooling for adults aged 25 years and expected years of schooling for
children of school entering age”.
“The standard of living dimension is measured by gross
national income per capita.”[14]
Health: Life expectancy is not a very good
measure of the health of the population. People could be plagued by annoying,
chronic ailments that don’t threaten their life and still have a high life
expectancy. If the country has a socialized healthcare system, the government
could keep its HDI score up by focusing its health resources on
life-threatening ailments and neglecting people with non-life-threatening
ailments that reduced their standard of living. Probably not coincidentally, this is how most
existing socialized healthcare systems work anyway.
Education: More years of schooling = better
education? Really? Force kids to attend 12 years of public school, in which
most learn very little. Then, encourage young adults to complete multiple
university degrees in relatively useless subjects by heavily subsidizing their
education and by wrecking the job market for young people. Voila, the
government has increased the ‘human development’ levels of its population! This
nonsensical calculation is obviously heavily biased in favour of state
intervention in the education system, no matter how useless or
counterproductive.
Standard of Living: GNI per capita is just
GDP plus income earned by the country’s residents from foreign sources, divided
by the total number of people living in the country. All of the problems with
GDP as a ‘standard of living’ or ‘economic growth’ statistic discussed above
apply here.
Thus, the HDI is a pretty lousy statistic;
heavily biased in favour of state interventionism. It should not be taken very
seriously as an indicator of the well-being of the residents of a country. This
should be kept in mind the next time you hear someone clamoring for the
emulation in our country of the socio-economic policies of #1 HDI-ranked
Norway.
[1] http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=2301
[2] http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=2301
[3] http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=1901
[4] http://www.statcan.gc.ca/pub/75f0002m/75f0002m2013002-eng.htm
[5] http://www.statcan.gc.ca/pub/75f0002m/75f0002m2013002-eng.htm
[6] http://www.cwp-csp.ca/2013/07/updated-poverty-numbers-released/
[7] http://www.statcan.gc.ca/pub/75f0002m/2013002/lico-sfr-eng.htm
[8] http://www.statcan.gc.ca/pub/75f0002m/2013002/lim-mfr-eng.htm
[9] http://www.statcan.gc.ca/pub/75f0002m/2013002/lim-mfr-eng.htm
[10] http://www.theglobeandmail.com/globe-debate/canada-has-failed-to-create-equality-of-opportunity/article21704778/
[11] http://www.statcan.gc.ca/pub/75f0002m/2013002/mbm-mpc-eng.htm
[12] http://www.hc-sc.gc.ca/fn-an/surveill/basket-panier/method-eng.php
[13] http://www.ilo.org/public/english/bureau/stat/download/res/ecacpop.pdf
[14] http://hdr.undp.org/en/content/human-development-index-hdi
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