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EScroogeJr (< 20)

The BEA pretends stupider than it is

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February 17, 2008 – Comments (2)

One would harly believe that the government could overstate GDP by nearly 1 trillion dollars with nobody (except bloggers from www.nowandfutures.com) noticing it, but here it is, the official link proving that 980 bln of GDP exists only in the mind of bureacrats from the Bureau of Economic Analysis. A must-read for everybody who still trusts the official statistics.

http://www.bea.gov/papers/pdf/RIPfactsheet.pdf 

"That is, BEA imputes a value for the services of owner-occupied housing (space rent) based on the rents charged for similar tenant-occupied housing, and this value is included in GDP as part of personal consumption expenditures. This imputation is necessary in order for GDP to be invariant when housing units shift between tenant occupancy and owner occupancy" 

So let's see, in order to avoid the theoretical possibility of erroneous year-on-year comparison (which would presumably happen if all homeowners suddenly decide to rent their primary residences to each other), the BEA would overstate the GDP year after year after year? That's a very strange explanation, to say the least. Even the authors themselves seem less than enthusiastic about this statistical tool, and their clumsy attempt at its justification sounds almost aplogetic.

"The owner's equivalent rent index measures the change in the rental income foregone by a household that chooses to occupy a dwelling that it owns. This measure is used because the alternative of measuring acquisition costs of residences is conceptually inappropriate for the CPI. The CPI tracks the change in the cost of living, that is, in the cost of current consumption. Yet investment considerations play a large role in acquisitions of residences. Moreover, unlike money spent on items that do not hold their value, money that is spent to acquire a residence is not "gone" in the sense that it cannot be reclaimed. Money spent on a residence usually can be recovered - often with a profit - by selling". 

Now, this is hogwash, and every sentence of it needs a separate comment to show just how ludicrous it is.

Sentence #1. The owner's equivalent rent index measures the change in the rental income foregone by a household that chooses to occupy a dwelling that it owns. This sentence, restated in plain English, takes us to the never-never land of would-be incomes and would-be economic activities - things that a statistician worth his salt should never even consider.   The world of lost opportunities is always endless. The fact that I could sell or rent out my furniture, my car, and all my other worldly possessions does not mean that I have foregone some income that should somehow count toward the GDP or CPI. Say, I could sell my kidney for transplant for one gazillion dollars, does it mean that I have just earned 1 gazillion by selling my kindney to myself and spent it all to buy my kindney from myself? Besides, there is absolutely no way you can rent your watch, your snickers, your cup of coffee, or whatever, from yourself when you already own these things. In conventional English, the term "renting" applies only when you arrange for a temporary possession of a thing which you don't own. Clearly, a homeowner cannot rent a house from himself, unless he has such an acute case of split personality disorder that he should be renting a hospital room instead...which is not going to be cheap...because health care inflation is well above the official CPI.

Sentence #2. This measure is used because the alternative of measuring acquisition costs of residences is conceptually inappropriate for the CPI. This is also b...t because the acquisition cost of your residence has already been counted for the CPI (and GDP) purposes when it was built. The reason the original buyer payed something like 20x annual rent for it is precisely because he was paying for the opportunity to forget about renting for the next 200 years, or whatever time the house may last...little did he know that he would be renting it again, only in a more devious way. So in fact, what the BEA considers an "inappropriate" measure happens to be the one they actualy use. What they would have us believe is "appropriate" is to count that "inappropriate" GDP twise: first, when the house was built, then, when the house is occupied by its owner. Let's say, I buy a timeshare. How many times can we count the contribution of my purchase to the GDP? I'd say no more than one time.

Sentence #3. The CPI tracks the change in the cost of living, that is, in the cost of current consumption. True, but your house is not a current consumption. The consumption was over when you bought the house. Once you bought it, you're not consuming it, you're using it. GDP is about current production, not about enjoying your past GDP. 

Sentence #4. Yet investment considerations play a large role in acquisitions of residences. Really? For most people, the primary motive for buying a house is fear. Remember, we're talking about primary residences. People buy them in order to exchange the unpredictable future outflow of rental payments for a more predictable outflow of mortgage payments. Suppose I figured (or someone sold me on the idea) that tuna fish is likely to get more expensive, and I decided to buy 1000 cans now so that I could secure my food independence and sleep well, does this make me a tuna fish investor? This is the real model of the homebuying process. Anyway, that is beyond the point, because the issue is not what homeowners expect to get, but the outrageous misuse of statistics by the BEA.

Sentence #5.  Moreover, unlike money spent on items that do not hold their value, money that is spent to acquire a residence is not "gone" in the sense that it cannot be reclaimed.
Again, this is an affront to common sense. The fact that some consumer products are better than others because of their durability is not a sufficient reason to ignore inflation of the more desirable consumer products. And once again, the point is not how you treat existing-home-price inflation, but how you mistreat GDP and rental CPI statistics.

Sentence 6. Money spent on a residence usually can be recovered - often with a profit - by selling". Though true, this is a hypocritical observation given that your Bureau treats houses as depreciating assets, and anyway, you're trying to lead the discussion away from the issue of your outrageous misuse of statistics.

Wow! What an elaborate demagoguery! Lies, distortions, distraction of attention - every psychological trick has been used to defend the practice of reporting ficticious GDP.

However, when someone is making moronic statements, but somehow always seems to benefit from his errors, this could mean that he is not so stupid after all. Indeed, when food, energy, education, health care, etc. set one inflation record after another, wouldn't it be nice to pretend that these sectors are not representative of our consumption patterns as we really spend most of our consumption money renting houses from ourselves?  Sure as hell, it would. Of course, the moment will come when rents begin to rise faster than reported inflation. But the BEA has always been receptive to change. When computers took a large share of GDP, the BEA suddenly realized the importance of hedonics. So when rents begin to rise fast, they could suddenly listen to critics and realize that owner's equivalent rent imputations should be dropped from CPI. Of course, they'll have to stay in GDP becuase of their relevance for GDP calculations and to ensure continuity with past years' results. 

This post was typed with two fingers of my right hand, which I rented from myself.

   

2 Comments – Post Your Own

#1) On February 17, 2008 at 1:00 PM, dwot (66.58) wrote:

Now I wonder what else is causing this to be inflated.

 

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#2) On February 17, 2008 at 1:18 PM, EScroogeJr (< 20) wrote:

dwot, hedonics is the fist suspect, but I'll have to look at the issue first...I don't want to blindly copy and paste from nowandfutures.com.

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