May 27, 2010
With the deficit hawks in high gear, people are prepared to say anything in pursuit of the goal of deficit reduction. Remarkably, the NYT is apparently willing to print almost anything. Today the deficit cutting crusade is led by hedge fund manager David Einhorn. In a lengthy column Einhorn bemoans the fact that at least some people in the Obama administration are more concerned about getting people back to work than reducing the deficit.
Einhorn is a bit more knowledgeable about basic economics than many of those who worry that the United States will be unable to find investors to buy its debt. Since he has heard of the Federal Reserve Board, he recognizes that the actual concern should be inflation, not insolvency, since the Fed can always buy up government debt.
However, since one would have to struggle to find any evidence of inflationary pressures in recent economic data, Einhorn chooses to invent his own evidence:
“Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.”
The main source of the difference between the government statistics dismissed by Einhorn and the “Shadow Government Statistics” he cites is due to the inclusion of asset prices, like house prices, in the shadow statistics. There are good reasons for excluding asset prices from measures of inflation, but Einhorn’s subsequent comments simply don’t make sense.
He tells readers that. “lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.” Actually, this is not true insofar as asset prices are the cause of understated inflation. Asset prices do not affect GDP or productivity measures. It is remarkable that Einhorn apparently does not know this.
Einhorn also complains that his assessment of the understatement of inflation:
“doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)”
Actually, the government has a wide variety of inflation measures, many of which do include the full weight of health care expenditures. They all show the same thing as the consumer price index: inflation is very low and falling. In short, Mr. Einhorn either has no clue about government data, or he is deliberately trying to mislead readers.
The NYT has been far more responsible in discussing the deficit than most other news outlets. It is understandable that it would want to open up its oped columns to those with differing views. However, it should not allow them to simply make things up as Mr. Einhorn has done here.
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