Monday, June 27, 2016

Seven Reflections on Brexit

A long-planned family vacation had me visiting in Great Britain last week during the Brexit vote. Here are some reflections on the event, in no particular order.

1) The Brexit vote seemed to me a strangely American moment. Some of the lasting slogans handed down from the American revolution against England are "no taxation without representation" and "don't tread on me." Thus, for an American there was some historical irony in hearing many of the British argue, in effect, that there should be "no regulation without representation," or perhaps "no legislation without representation." There was similar irony in hearing some of the British turn loose their "don't tread on me" spirit while railing against annoying but in some sense small-scale regulatory impositions from the central power, like rules that sought to standardize shapes and sizes for fruit and vegetable produce, or the rules with force of law that sales of loose and packaged good use only metric measurements.  I found myself half-expecting some "Leave" advocates to start quoting the US Declaration of Independence: "When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them ..."

2) There was a widespread feeling, even among the Remain supporters with whom I spoke, that the nature of the European project had mutated over time. My sense was that many of the Leave voters were (mostly) fine with the progress of the greater European project from the founding of the European Economic Community back in 1957 up through the 1980s. But after the effort had transmogrified into the European Union in 1993, the project was no longer focused on facilitating trade between nations. Instead, it had become focused on an agenda of gradually erasing national boundaries, or in the phrase often-used, a push for "ever-closer union," which pushed beyond the comfort level of many of the British. For example, when the European Union describes its own history, it refers to early participants in the European project back in the 1950s as "Founding Fathers," a phrase with a strong resonance for Americans of those who seek to create a single nation.  The EU website also describes how the 1957 treaty aimed at a "common market" between countries, while the 1986 update treaty aimed at a "single market."

I ran across a 1982 European court decision that involved imposing value-added taxes across countries, which included an explicit statement that the European project viewed itself as involving a smooth movement from a common market, to a single market, then to "bringing about conditions as close as possible to those of a genuine internal market." The Court decision said:
The concept of a common market as defined by the Court in a consistent line of decisions involves the elimination of all obstacles to intra-Community trade in order to merge the national markets into a single market bringing about conditions as close as possible to those of a genuine internal market. It is important that not only commerce as such but also private persons who happen to be conducting an economic transaction across national frontiers should be able to enjoy the benefits of that market.
3) A shuttle driver at Heathrow airport surprised me by explaining the Brexit vote by saying: "Well,
you know, we're a nation of shopkeepers." I don't get a casual conversational reference to Adam Smith's The Wealth of Nations every day! Smith uses the phrase in Book IV, Chapter VII, in a discussion "Of Colonies," and in particular, in part of the discussion subtitled "Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope." In a frequently quoted passage, Smith wrote:
"To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers."
There are several odd twists and turns in relation to this passage. A first twist is that Smith using "shopkeepers" as a pejorative term. He is arguing that is after England and the colonists had gone to the effort and expense of developing the colonies, then "shopkeepers" in England wanted the British government to guarantee that the colonists would be required to buy what they needed only from English producers, and also to sell only to English producers. Here's some of what Smith writes in the same paragraph as the above quotation:
"England purchased for some of her subjects, who found themselves uneasy at home, a great estate in a distant country. The price, indeed, was very small, and instead of thirty years purchase, the ordinary price of land in the present times, it amounted to little more than the expence of the different equipments which made the first discovery, reconnoitred the coast, and took a fictitious possession of the country. The land was good and of great extent, and the cultivators having plenty of good ground to work upon, and being for some time at liberty to sell their produce where they pleased, became in the course of little more than thirty or forty years (between 1620 and 1660) so numerous and thriving a people that the shopkeepers and other traders of England wished to secure to themselves the monopoly of their custom. Without pretending, therefore, that they had paid any part, either ofthe original purchase-money, or of the subsequent expence of improvement, they petitioned the parliament that the cultivators of America might for the future be confined to their shop; first, for buying all the goods which they wanted from Europe; and, secondly, for selling all such parts of their own produce as those traders might find it convenient to buy. For they did not find it convenient to buy every part of it. Some parts of it imported into England might have interfered with some of the trades which they themselves carried on at home. Those particular parts of it, therefore, they were willing that the colonists should sell where they could; the farther off the better; and upon that account purposed that their market should be confined to the countries south of Cape Finisterre. A clause in the famous act of navigation established this truly shopkeeper proposal into a law.
"The maintenance of this monopoly has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies." 
A second twist is that that Napoleon (who was familiar with Smith's writings) is reputed to have snarked that England was not a worthy opponent in war, because it was merely "a nation of shopkeepers. There doesn't seem to be much evidence that Napoleon ever actually made this comment, but as the legend metamorphosed into what people thought they remembers, some in England began to treat Napoleon's intended insult about "nation of shopkeepers" as mark of pride. Indeed, news stories in recent years point out British government ministers who now argue that the country should become "a nation of shopkeepers,"  by which they mean entrepreneurs, along with poll results suggesting that "shopkeeper" is viewed as a quite desirable job.

Clearly, applying Smith's argument to the Brexit phenomenon in any direct way is a stretch! But it is true that in Smith's usage, Britain was a nation of "shopkeepers" who expected their government to cut them a profitable deal in world markets--and the seeming inability of the British government to cut such deals was part of the fuel for the "Leave" forces.

4) A comment I heard several times from "Leave" proponents is that the United Kingdom has fifth-largest economy in the world, and even outside the EU, it will remain an important player in the global economy. This argument strikes me as whistling in the dark. Yes, if GDP across countries is compared at market exchange rates, the United Kingdom ranks fifth (after the US, China, Japan, and Germany). But world GDP isn't a race, where finishing 5th of the 195 economies where the World Bank estimates a GDP level gives you a prize. Absolute size matters, and the UK is only about 3.8% of the global economy by size. In other words, if countries don't want to deal with the UK for whatever reason, there are lots of other options out there. If one compares GDP across countries using "purchasing power parity" exchange rates, then the UK ranks only 10th in the world, and is 2.4% of the total world economy. One of the main economic justifications for the EU is that with an internal market of more than 500 million people, and with a total GDP exceeding either the US or China (at market exchange rates), members will be better-positioned both to trade within the group and to be part of better deals negotiated outside the group.

5) Along with issues of democratic representation and the possibility of negotiating alternative international agreements, the other big issue in the Brexit vote concerned immigration. Here are a couple of graphs from the "Migration Statistics Quarterly Report: May 2016" published by the UK government. From 1970 up to the early 1990s, immigration and emigration were roughly equal in the UK. But then immigration rises rapidly, and in many year there is overall net in-migration of 200,000 per year or more.

Are Britain's migrants coming from inside the EU or outside? This figure shows "net" migration--that is, immigration minus emigration--for various groups. You can see that in starting around 1997, the main surge in net migration was at first from outside the EU, a change often said to be triggered by pro-immigration policies adopted by the government of then-Prime Minister Tony Blair. However, in since about 2010, net migration from within the EU has stepped up as well. After 2004, a substantial share of this migration from inside the EU was from eastern European countries. In the last few years since 2010, there has been increased immigration to the UK from countries in the so-called EU-15, which are the countries that were members of the EU up to early 2004, as well as from Romania and Bulgaria.

Thus, greater immigration had a fairly modest affect on the UK through the earlier decades of the European project, up through the 1990s. The big change in UK immigration around 1997 was mostly a result of decisions by Britain's government, not imposed by the EU. It was also a decision of Tony Blair's government, not imposed by the EU, to allow workers from the eastern European countries joining the EU after 2004 to work in the United Kingdom.  Although the more recent issues about refugees from Syria and north Africa who are seeking asylum in Europe and the United Kingdom have clearly added heat to the immigration issue, the underlying message here is that immigration--a rising share of it from within poorer countries of the European Union--has been shaking up the UK economy for the last 20 years.

Martin Ruhs offers an interesting overview of these issues in "Is unrestricted immigration compatible with inclusive welfare states? The (un)sustainability of EU exceptionalism," published in 2015 as Working Paper #125 for the Centre on Migration, Policy and Society at the University of Oxford. As Ruhs points out, a standard argument why high income countries cannot allow mass immigration from lower-income countries was given in a speech by Milton Friedman back in 1978. Friedman said:
"... it is one thing to have free immigration to jobs, it is another thing to have free immigration to welfare, and you cannot have both. If you have a welfare state, if you have a state in which every resident is promised a certain minimum level of income or a minimum level of subsistence regardless of whether he works or not, produces it or not, well then it really is an impossible thing.”
As Ruhs points out, this conventional wisdom doesn't quite summarize the issue accurately. Most intra-EU migrants are workers, not welfare recipients. He writes (citations omitted for readability:
The paper is not concerned with the intra-EU migration and social rights of EU citizens who are not workers, a group that has recently been much discussed in debates about alleged “benefit tourism”. This usually refers to claims that EU citizens move to other EU countries for the primary purpose of accessing benefits rather than working and contributing. Although popular in media and public debates across the EU, there is little evidence to support this claim. In the UK, for example, there is no evidence to support the idea that access to the welfare state is a major driver of EU immigration and EU migrants are significantly less likely than UK workers to access out-of-work benefits. In any case, the great majority of EU migrants across EU member states are labour migrants who qualify as “workers”.
But that said, the United Kingdom has a lightly regulated labor market compared to other high-income countries within the EU, and thus is more likely to attract unskilled workers. In addition, many of the benefits received by British workers are "non-contributory," meaning that they are paid out of general government revenues rather than out of payments from workers (and their employers). Ruhs sums it up this way:
In a free movement area with unrestricted labour migration across countries, the nature of the labour market plays an important role in shaping the scale of immigration in particular countries. More flexible labour markets tend to attract more migrant workers, especially for employment in lower-waged jobs, than more regulated labour markets. At the same time, the nature of the welfare state, especially the extent to which it provides non-contributory benefits, impacts on the net-fiscal contribution that new migrants make. In countries with welfare systems characterized by a high share of non-contributory benefits, low-skilled immigration will, ceteris paribus, create a smaller net-benefit (or greater net-loss) than in countries with welfare states that include a greater share of
contributory benefits.
Most economic studies (although not all) suggest that the native population of a country as a whole benefits from immigration. However, those who find themselves in most direct competition for jobs with the new migrants are more likely to incur costs. And the UK labor market and welfare policies, relative to the other high-income economies in the EU, are set up in a way that will raise the economic tensions from a more-open immigration policy. .

6) After the vote, a number of "Remain" proponent often emphasized that the margin seemed very narrow. I disagree. In big elections with millions of voters, a 51.9% to 48.1% vote is actually pretty decisive. In absolute terms "Leave" won 17.4 million votes and "Remain" had 16.1 million. Thus, it would have taken a swing of something like 700,000 voters to alter the outcome--and that's a lot of voters. As another perspective, President Obama won reelection in 2012 over Mitt Romney with 51.9% of the two-party vote, and that isn't (and shouldn't be) thought of as a narrow marginal victory, either.

7) Finally, consider in broadest terms the many ways in which the relationship between the United Kingdom and European Union, or between the United Kingdom and various subsets of European countries, might be arranged. Such relationships have many possible dimensions, involving trade, competition policy, environmental policy, immigration policy, workplace regulation, welfare policies, spending, taxes,  monetary policy, and others. This very multidimensional set of policy choices can't really be distilled into a binary choice labelled either "Leave" or "Remain." 

The Brexit vote doesn't determine what the eventual outcome of the renegotiated relationships between the countries will be, but it may alter the default negotiating positions of the two sides. In some sense, it's similar to the change that occurred in marital divorce laws. When divorce required that one party be found to be at "fault," the person in the marriage who least wanted to divorce had greater power to block the divorce. When divorce shifted to "no-fault," the party who wanted to get divorce had more power in the negotiation that followed. Similarly, before the Brexit vote, the presumption in Britain's negotiations with the EU, or other countries around the world, was that Britain would more-or-less follow the consensus of the rest of the EU. With that negotiating position, the European Union wasn't willing to concede much at all to Britain's Prime Minister David Cameron in negotiations before the Brexit vote. After the vote, the presumption will be that Britain will not follow the group, so any negotiations either with the EU or with other countries will have a different tone. The default negotiating position will be shifted. The United Kingdom will have less leverage in cutting international deals than the EU as a whole, but it will also gain greater flexibility.

Friday, June 24, 2016

China's Share of Global Economic Growth

How much any country or region contributes to global economic growth is based on two factors: the size of the economy of that country or region, and how fast that region is growing. China's economy is now big enough, and is (still) growing quickly enough, that it is now contributing as much to global economic growth at the advanced economies of the world. Here's a figure from the African Development Outlook 2016, which is an annual report written by the African
Development Bank, the OECD Development Centre and the United Nations Development

The report notes:
China’s high growth has boosted global growth in recent years (Figure 1.3). From 2011 to 2015, China’s relative contribution to global growth was on a par with advanced countries, despite stagnating at a high level for a decade. India’s contribution to global growth has also risen since the early 2000s. However, China has contributed almost 30% to global growth in recent years, approximately 20 percentage points more than India. As India is more closed and still considerably poorer than China, it cannot yet offset the impact of China’s slowdown on global growth and trade."
I still fairly often run into an implicit attitude that the US, or perhaps the US and the rest of the high-income countries taken together, dominate the global economy and can set the rules. That's a very twentieth-century point of view.

Thursday, June 23, 2016

Global Overpopulation Circa 200 AD

Global population is now almost 7.3 billion. But almost two millennia in the past, when total world population was (roughly) 200 million people, concerns about overpopulation were already being expressed.

I am deeply ignorant concerning the early centuries of the Catholic Church, but even I have heard of Tertullian, for his formulation of Trinitarian doctrine and his nickname as "The Father of Latin Christianity." Here's a comment from his A Treatise on the Soul, in a  chapter where part of the heading reads, "The State of Contemporary Civilization" (from the 1868 translation by Peter Holmes):
Surely it is obvious enough, if one looks at the whole world, that it is becoming daily better cultivated and more fully peopled than anciently. All places are now accessible, all are well known, all open to commerce; most pleasant farms have obliterated all traces of what were once dreary and dangerous wastes; cultivated fields have subdued forests; flocks and herds have expelled wild beasts; sandy deserts are sown; rocks are planted; marshes are drained; and where once were hardly solitary cottages, there are now large cities. No longer are (savage) islands dreaded, nor their rocky shores feared; everywhere are houses, and inhabitants, and settled government, and civilized life. What most frequently meets our view (and occasions complaint), is our teeming population: our numbers are burdensome to the world, which can hardly supply us from its natural elements; our wants grow more and more keen, and our complaints more bitter in all mouths, whilst Nature fails in affording us her usual sustenance. In very deed, pestilence, and famine, and wars, and earthquakes have to be regarded as a remedy for nations, as the means of pruning the luxuriance of the human race ...

Of course, the fact that a writer in 200 AD had some mistaken views that the "teeming population" had already overwhelmed the natural resources of the the world doesn't mean that modern writers with similar views are incorrect in their concerns. Similarly, the fact that the economist Thomas Malthus was expressing concerns about global overpopulation back around 1800 when the world population had reached about 800 million doesn't doesn't mean that modern writers with similar views are incorrect in their concerns, either.

But these examples of the ongoing fear of overpopulation, and many more examples that can be given through history, do suggest that worries about overpopulation--together with an inability to imagine how the population might be fed--may represent an internal bias that is baked deeply into the human psyche. Sometimes biases turn out to be right, eventually--after all, even a stopped clock shows the correct time twice each day--but it's still worth being aware of their existence.

Wednesday, June 22, 2016

John Stuart Mill on Partial Truth and Many-sidedness

Perhaps especially during an election season, when one side is always 100% right and the opposition is always 100% wrong, it seems useful to reflect on the benefits of true diversity of opinion in a world where most opinions have at best a share of the overall truth.  Philosopher/economist John Stuart Mill offers some thoughts in his classic 1859 essay, On Liberty. Here, I quote from the fourth edition in 1869 (ch. 3, paragraph 34) freely available online at the ever-useful Library of Economics and Liberty website. (I've added some paragraph breaks for ease of reading.)

"It still remains to speak of one of the principal causes which make diversity of opinion advantageous, and will continue to do so until mankind shall have entered a stage of intellectual advancement which at present seems at an incalculable distance. We have hitherto considered only two possibilities: that the received opinion may be false, and some other opinion, consequently, true; or that, the received opinion being true, a conflict with the opposite error is essential to a clear apprehension and deep feeling of its truth. But there is a commoner case than either of these; when the conflicting doctrines, instead of being one true and the other false, share the truth between them; and the nonconforming opinion is needed to supply the remainder of the truth, of which the received doctrine embodies only a part. 
"Popular opinions, on subjects not palpable to sense, are often true, but seldom or never the whole truth. They are a part of the truth; sometimes a greater, sometimes a smaller part, but exaggerated, distorted, and disjoined from the truths by which they ought to be accompanied and limited. Heretical opinions, on the other hand, are generally some of these suppressed and neglected truths, bursting the bonds which kept them down, and either seeking reconciliation with the truth contained in the common opinion, or fronting it as enemies, and setting themselves up, with similar exclusiveness, as the whole truth. The latter case is hitherto the most frequent, as, in the human mind, one-sidedness has always been the rule, and many-sidedness the exception. 
"Hence, even in revolutions of opinion, one part of the truth usually sets while another rises. Even progress, which ought to superadd, for the most part only substitutes, one partial and incomplete truth for another; improvement consisting chiefly in this, that the new fragment of truth is more wanted, more adapted to the needs of the time, than that which it displaces.
"Such being the partial character of prevailing opinions, even when resting on a true foundation, every opinion which embodies somewhat of the portion of truth which the common opinion omits, ought to be considered precious, with whatever amount of error and confusion that truth may be blended. No sober judge of human affairs will feel bound to be indignant because those who force on our notice truths which we should otherwise have overlooked, overlook some of those which we see. Rather, he will think that so long as popular truth is one-sided, it is more desirable than otherwise that unpopular truth should have one-sided asserters too; such being usually the most energetic, and the most likely to compel reluctant attention to the fragment of wisdom which they proclaim as if it were the whole."

Tuesday, June 21, 2016

Ticket-Splitting in US Elections

Ticket-splitting refers to when a voter casts, say, a ballot for the presidential candidate from one party while also voting for a congressional candidate from another party. Obviously, a lot of factors about specific candidates and specific election will influence the extent of ticket-splitting. But at least in some broad sense, one can think of ticket-splitting as a willingness to consider candidates from both parties. Norm Ornstein, Tom Mann, and Michael Malbin offer some historical sense of the amount of ticket-splitting in some tables in their 2013 databook, Vital Statistics on Congress.

Here's a table showing the percentage of voters who cast a ballot for a presidential candidate from one party and a House of Representatives candidate from the other party for all presidential elections going back to 1900. What jumps out from the table?

1) The amount of ticket-splitting in 2012 was very low by historical standards. Not quite the lowest, because there was even less ticket-splitting in 1900 and 1904. But low. Moreover, the last four presidential elections going back to 2000 have had relatively low levels of ticket-splitting compared to other post-World War II elections.

2) The two years with the highest level of ticket-splitting were also years in which a presidential candidate won in a landslide. More or less by definition, winning by a landslide means picking up a lot of voters of the other party--but many of those voters presumably split their ticket and voted for a Congressman of their own party. Thus, the biggest years for ticket-splitting, according to this measure, were the Reagan wipeout in 1984, the Nixon landslide in 1972.

3) I don't know how to interpret this pattern, but it's interesting that the amount of ticket-splitting was about the same for the first-term election of Bush in 2000 and the first-term election of Obama in 2008, and then the amount of ticket-splitting diminished for both candidates in their second-term election.

Here's another Ornstein, Mann, and Malbin chart on ticket-splitting. (In this one, I cut a few of the columns to make it easier to focus on some main themes.) In this measure, voters are asked a series of questions to classify their party leanings. The question then is what share of voters cast a ballot aligned with their partisan preferences in presidential, Senate, and House elections.

1) Again, the general pattern is toward people being more likely to vote in a way that follows their partisan beliefs. The last few elections show partisan beliefs being followed by more than 80% of voters, which is higher than was common from the 1960s through the 1990s (although elections back in the late 1950s had a similar degree of partisanship).

2) There doesn't seem to be a clear pattern of partisanship being stronger in presidential than in congressional elections, or vice versa. It does appear that the extent of partisan voting across these three types of elections tends to rise and fall together--that is, some elections are more partisan at all levels than others.

There's certainly nothing wrong with taking a political side, and it follows that there's nothing wrong with partisanship. However, it does seems sometimes that people have strong attachments or reaction to the labels of "Democratic" or "Republican" or "Green" or "Libertarian" with relatively little thought about about what underlying beliefs they truly hold and the extent to which a given politician embodies those beliefs. Those on "your side" are forgiven everything; those on the "other side" are forgiven nothing. Jerry Seinfeld had a monologue at the start of a 1995 show about rooting for the trappings, rather than the person. He said:
"Loyalty to any one sports team is pretty hard to justify. Because the players are always changing, the team can move to another city, you're actually rooting for the clothes when you get right down to it. You know what I mean, you are standing and cheering and yelling for your clothes to beat the clothes from another city. Fans will be so in love with a player but if he goes to another team, they boo him. This is the same human being in a different shirt, they *hate* him now. Boo! different shirt!! Boo."
It seems to me that some of those who bewail a high degree of  political polarization and partisanship are also  people who may almost never have voted  for someone outside their own preferred party--no matter what actual person is running on their party's ticket. If a politician switched parties, their beliefs about that politician would also switch. In other words, they are opposed to partisanship on the other side, but not their own. Personally, I'm all for a healthy amount of partisanship, as long as its not just voting for the clothing, and is rooted in actual beliefs and skills of particular candidates. 

Monday, June 20, 2016

How Many Jobs in the Political Organizations Industry?

How many people work for the "political organizations industry," which the US Bureau of Labor Statistics defines as "political parties, political action committees (PACs), political campaign organizations, and political organizations and clubs that are engaged in promoting the interests of national, state, or local political parties or candidates"? Here's the BLS figure:

The relatively small size of the number, compared with the amount of attention, surprised me. Although the total number of jobs for people being professional athletes appears to be only about 13,700, and that group generates a lot of attention from the rest of us, too.

Friday, June 17, 2016

The Origins of the Producer Price Index

When it comes to measuring inflation, the Consumer Price Index gets most of the attention. But while the CPI just celebrated its centenary a couple of years ago, its elders sibling the Producer Price Index is celebrating its 125th anniversary this year. Lana Conforti offers an overview of "The first 50 years of the Producer Price Index: setting inflation expectations for today," in the June 2016 issue of the Monthly Labor Review, which is published by the US Bureau of Labor Statistics. For answers to questions about how the PPI now operates, a useful starting point is the BLS FAQs page on on the PPI

From a modern perspective, the original production of what was then called the Wholesale Price Index looks a little rough-and-ready in  how it defined goods, collected prices, and put together the index. But it meant that people and policymakers from the early 1890s on did have some actual data--not just anecdotes--on major deflationary and inflationary episodes of this time either as they were happening or soon after, including the deflation of the 1890s, the post-World War I inflation, and the deflation of the early 1930s. Here's is Conforti's overview of the origins of the PPI, with more detail about how the methods and approaches of the PPI evolved available at the link (footnotes omitted): 
March 3, 2016, marked the 125th anniversary of the PPI—one of the oldest economic time series compiled by the federal government. The index, known as the Wholesale Price Index (WPI) until 1978, was established as part of a U.S. Senate resolution on March 3, 1891, the last day of the last session of the 51st U.S. Congress. This Congress was famously known as the “Billion-Dollar Congress,” because of its expensive initiatives, such as expanding the Navy and creating pensions for families of military members who served in the Civil War. It operated in an era of industrialization, immigration, and economic growth. Two of its most well-known bills were the Sherman Antitrust Act, which sought to protect consumers from certain anticompetitive business practices that tended to raise prices (e.g., monopolies and cartels), and the McKinley Tariff Act of 1890, which raised duties on imports with the goal of protecting domestic industries from foreign competition. Born out of the necessity to measure the impact of such economic policies, the resolution marking the origin of the PPI read thus:
Resolved, The Committee on Finance be, and they are hereby, authorized and directed, by subcommittee or otherwise, to ascertain in every practicable way, and to report from time to time to the Senate, the effect of the tariff laws upon the imports and exports, the growth, development, production, and prices of agricultural and manufactured articles, at home and abroad…. 
In response to this resolution, Senator Nelson W. Aldrich, who later played a role in the establishment of the Federal Reserve System, authored a report on Retail Prices and Wages in July 1892. According to this report, the demand for price and wage data arose because the lack of reliable data had caused persistent disputes over economic facts. In addition, legislators realized it would be impossible to judge the relative economic progress of the United States and its people without measures of prices and wages. For these reasons, the Senate Committee on Finance made sure to establish a legacy of objective and accurate data:
There was no expectation that the members of the committee would agree about the political or even the economic bearings of the facts ascertained; but all were desirous that hereafter there should be no reason to question the integrity of the facts.
A Bureau of Labor Statistics (BLS) [which had been founded in 1884] committee headed by Dr. Roland Falkner, a statistics professor from the University of Pennsylvania, was tasked with collecting prices and producing the original index data. At the Senate committee’s request, prices were collected from seven main distribution centers across the country:
  • Baltimore
  • Boston
  • Chicago
  • Cincinnati
  • New Orleans
  • New York
  • San Francisco 
Over a 28-month period beginning in mid-1889, BLS obtained 52,393 price quotations for 218 items purchased by wholesalers (commonly referred to as “jobbers” at the time). In a rather informal collection process, experts in the field (today known as field economists) received the following instructions:
As soon as you have completed the collection of wages and prices in [your city], please collect the quotations for wholesale prices….You can change the word “retail” to “wholesale” and make the blank conform. By “wholesale prices” I mean…the prices to jobbers. 
Once collected, these data were compiled by BLS into the first WPI, which was made up of eight equally weighted groupings of products:
  • Food
  • Cloths and clothing
  • Fuel and lighting
  • Metals and implements
  • Lumber and building materials
  • Drugs and chemicals
  • House-furnishing goods
  • Miscellaneous 
The data produced by the BLS committee were published in Senator Aldrich’s 1892 report, which showed that prices fell 0.3 percent from June 1889 to September 1891. After this first publication, in 1893, the Senate committee and BLS completed their initial mission by publishing a report on historical prices for the years 1840–90. This massive compilation was the first of its kind in U.S. history and was made possible only by the dedicated efforts of field economists and with cooperation from the business community.
After several years of planning, in 1900, BLS published Wholesale Prices, 1890 to 1899, the first publication produced without congressional oversight. But it wasn’t until March 1902 that the regular annual publication of Course of Wholesale Prices (hereafter referred to as Wholesale Prices) began.