Published by EH.NET (February 2010)

Thomas A. Stapleford, The Cost of Living in America: A Political History of Economic Statistics, 1880-2000. New York: Cambridge University Press, 2009. xviii + 421 pp. $30 (paperback), ISBN: 978-0-521-71924-7.

Reviewed for EH.NET by Trevon Logan, Department of Economics, Ohio State University.

Thomas Stapleford of the University of Notre Dame has managed to make fascinating what is likely one of the most boring parts of economic theory ? the calculation of price changes. Indeed, standard textbooks at the undergraduate and graduate level pay little attention to such issues. He does so by bringing a keen insight into the analysis ? price indices are not simply economic measures, they are inherently political measures that reflect the growing interest of the state in human welfare and economic policy. While economists know well the theoretical differences between different ways of measuring price increases (Laspeyres, Paasche, Marshall, and so on), the development and use of these measures had a more intimate relationship with political and historical realities than we may realize. Stapleford?s book describes this relationship over the twentieth century in the United States.

It was quite wise for Stapleford to begin his book?s introduction by considering the controversy around the Boskin Commission?s work on whether or not the CPI was overstating inflation, which briefly caused the economics profession to reconsider what we knew about price indices (this is not to say that work had stopped before or after, but price indices are no longer a ?hot? topic in economic research). As he makes clear, very small changes in the CPI have big effects (he notes by the early 1950s a 0.5 percent change in the CPI would cause transfer payment changes of $1 billion). This strategy highlights the importance and the continuing debate about the proper measurement of the CPI. Stapleford also uses the introduction as an opportunity to lay out his main thesis: the idea that rationalization is the driving force behind the development of economic statistics (mainly the Consumer Price Index, CPI). To him, rationalization is the way that the state takes controversial issues and places them in the hands of bureaucrats behind a wall of objective ?science.? As an example, we do not decide to increase or decrease Social Security payments when we ?rationalize? the process by indexing the benefits to inflation. The Bureau of Labor Statistics (BLS) becomes a collection of experts who use a given technique (supposedly a ?scientific? one) to arrive at a number that has large effects on the economy. The key, to Stapleford, is to realize that such a decision is a decidedly political one with seen and unseen causes and consequences.

Overall, this is intellectual and political history of the first rate. Well researched, carefully argued, it does a good job of describing the technical difficulties in price indices without losing focus on the historical narrative. As a scholar of early consumer expenditure surveys myself, I was particularly impressed with Stapleford?s descriptions in the early chapters of the failed efforts to combine the state statistical bureaus into a national force with systematic evidence. While the data collected by the state bureaus has given economic and social historians a detailed picture of many aspects of working class life from 1870 to 1910 or so, Stapleford impressed upon me how much we lost by the inability to regularly and systematically survey workers, firms, and prices. But Stapleford ties this failure to politics ? there was simply very little need for the state bureaus to cooperate because there was no national consensus for what anyone would even do with the price series that could be created. Rather, since each state bureau had its own charge, resource constraints, and politics, the jumbled mass of surveys reflects the jumbled thinking about the usefulness of economic statistics at the time.

After these first chapters Stapleford is left to explain how we constructed and codified the CPI. In the remaining chapters (especially chapters 3 through 6) he builds his case ? in his narrative the impetus for the construction and maintenance of federal economic statistics, and the later canonization of them, took place from roughly 1910 to 1945. There was no one key event; the needs of World War I, the increasing concerns about labor disputes and wages in the 1920s and the Depression each exerted independent forces that not only caused a much larger federal presence in the economy, but a much larger federal measurement of the economy. World War I impressed upon the government (and its citizens) the need for efficient control of resources that needed to be harnessed for national defense. In the 1920s, both organized labor and big business saw the need for standard measures, which were many times used to settle labor disputes. This is key for Stapleford?s hypothesis of rationalization since both labor and business could appeal to ?objective? measures of the cost of production and consumption. The final movement was solidified by the Depression, which left the federal government with the duty to regulate the economy, and also gave it the power to define how that economy would be measured. Given the uses of the price measures in the decade before, it was natural to appeal to these economic statistics when setting goals and in dispersing transfers.

In Stapleford?s narrative the concept of ?purchasing power? was a politically loaded expression of progressives? desires for large changes in industrial relations, while the economic theorists and institutionalists argued about whether a ?true? cost of living could be accurately measured. These developments did not take place independently, as Stapleford shows time and again that the choice of method and, indeed, the decision to measure at all, were carefully navigated political processes. Stapleford shows that during FDR?s administration BLS officials used the economic circumstances to place themselves in a key position for national economic policies. For example, the Economy Act of 1933 allowed the federal government to reduce wages by up to 15 percent based on the BLS cost-of-living index. Stapleford shows that this technique of indexation gave the BLS a larger role in the macroeconomy as indexation proliferated, which he argues is consistent with his rationalization hypothesis. Even after the war the units of measurement they developed ? the series on prices and wages ? continued to exert influence after the New Deal policies were abandoned.

While the heart of the book ends at the beginning of the 1950s, Stapleford spends the last two chapters describing the way that the CPI came to be used as a macroeconomic measure, and even delineates the debates about what the index should be. By this Stapleford does not mean inflation as pi used in macroeconomic models, but for the way that through the 1970s the federal government more and more began to index transfers to inflation. This began with poverty lines in the Great Society, extended to Social Security, and by the early 1980s income tax brackets were indexed. By the end of this indexation movement roughly 50 percent of federal expenditures became tied to the CPI either directly or indirectly. While the CPI has long aimed to be a ?constant utility? measure, Stapleford concludes by noting that while theoretically advantageous, the problems with the ?constant utility? measure of the CPI continue to raise a number of troubling issues. (Chief among them is whose utility we are measuring.) Indeed, the BLS has recently begun developing alternative CPIs for different groups whose utilities may be more dependent on certain expenditure categories (as in the case of older Americans who spend more on health care).

There are naturally some drawbacks. One drawback of the book is that Stapleford paints with a relatively broad brush at times. He regularly implies that the CPI is intimately related to a host of other economic statistics, but this is truly a book about the intellectual history and political history of the CPI. This is not a critique of the book, but the focus could have been sharper if Stapleford had tempered his desire to use the CPI history and then cast a wider, more tenuous net to other measures, especially later in the book. As economic historians know well, unemployment, industrial production, and GDP itself are their own stories (and their histories certainly deserve to be revised or in some cases written as well). Another drawback is that the intellectual development of the indices, while covered well for the novice reader, takes a decided back seat to the politics, but to be fair that is exactly Stapleford?s point.

And perhaps putting the economics in the background was a good idea. About a year ago I was attending a seminar on the misuses of the Penn World Tables ? the large and well used panel dataset of country GDP and other macro indicators. The seminar speaker discussed the fact that revisions of the data changed the results of many well-cited and influential papers. These included studies of the effects of assassinations on growth, the relationship between volatility and growth, and civil conflict and growth. An elder statesman remarked that economists today do not pay much attention to issues such as the measurement of prices and inflation, and that we (as a profession) are worse for it. I agree. For some reason the thorny issues involved in something as ?simple? as a price index have fallen out of vogue in favor of what we like to think of as ?causal? policy analysis. The bite is that we know, without the use of instrumental variables and the sometimes fantastic stories that accompany their use, price index calculations are causally related to a host of economic issues. Even more, all of our time series or panel estimates depend, critically, on getting the prices right ? applied microeconomists are not exempted. One can only hope that Stapleford?s book will cause renewed interest into one of the most important (and non-mundane) economic statistics in use.

Trevon D. Logan is an Assistant Professor of Economics at Ohio State University and a Faculty Research Fellow at the National Bureau of Economic Research. Recent publications include “Economies of Scale in the Household: Puzzles and Patterns from the American Past” in Economic Inquiry, “The Transformation of Hunger: Demand for Calories Past and Present” in Journal of Economic History, and ?Health, Human Capital, and African-American Migration before 1910? in Explorations in Economic History.