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EXPLANATION OF CONSUMER PRICE INDEX

Mr. HENLE. Let me add that this $60 increase in retail automobile prices did not appear as such in the consumer price index. The reason is that there are many factors which affect prices of new cars at retail other than direct production costs. These factors include discounts or overallowances on trade-ins by individual dealers, as well as freight charges and sales taxes. Aslo, in compiling the consumer price index, for the month of introduction of new models, the Bureau obtains prices not only on the new models but also on the outgoing models. For these reasons, the trend of retail prices as represented in the consumer price index may differ considerably from that of manufacturers' prices as represented in the whoesale price index.

NADER CRITICIZES BLS PROCEDURES

Senator RIBICOFF. Thank you, Mr. Henle.

Mr. Henle, you are familiar with Mr. Nader's accusation as to how you proceed. Let me refresh your recollection by reading the passage from Mr. Nader's report:

The automobile makers permit only economists and marketing specialists, not engineers, to meet with the Bureau of Labor Statistics statisticians. Selective information is given only to bolster claims of improved quality. The automobile companies put great pressure on the Bureau of Labor Statistics to accept these claims without their producing adequate data to support them. Industry then turns around and uses Bureau of Labor Statistics quality improvement credits as proof that the consumer is getting better automotive quality for his money.

That is quite an accusation Mr. Nader makes.

Mr. HENLE. Well, Mr. Chase, who works directly with the representatives of the automobile companies, may want to comment, but let me say, Mr. Chairman, that with reference to the Bureau's work, and in particular with reference to this most difficult task of adjusting prices for quality change, we feel that we are doing the best possible job with the materials that are given to us. We also feel that we are able to speak on equal terms in discussing the information that is given to us by the automobile manufacturers. We have at least some knowledge and expertise in this area, so we can, where necessary, question the data that is presented to us.

ABSENCE OF PROFESSIONAL ENGINEERS NOTED

Senator RIBICOFF. But, are there engineers that meet with you, or is Mr. Nader correct that the only people you see are economists and marketing specialists?

Mr. HENLE. Mr. Chase ?

Mr. CHASE. Mr. Chairman, it is true that we meet with the economists. However, they are really transmitting information that has been developed by their engineering and cost accounting departments.

Senator RIBICOFF. Do you have engineers in your department?
Mr. CHASE. We do not have professional engineers.
Senator RIBICOFF. You do not have professional engineers?
Mr. CHASE. Right.

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Senator RIBICOFF. Then, how can you analyze the material given you if you have no engineers on your staff? I mean

Mr. CHASE. We have gotten assistance from the National Bureau of Standards and from the GSA in evaluating the changes that have been made in the last 2 years. Prior to that time we did not get assistance from other agencies.

Senator RIBICOFF. Well, Mr. Nader indicates that a snow job is being done on you people by the automobile industry.

Mr. Chase. He is assuming, Mr. Chairman, that we accept the data from the automobile companies without question. I would be willing to say that probably not more than 5 or 10 percent of the data that are given to us by the companies are actually used as they are given to us.

ADVANTAGES OF CONFIDENTIAL REPORTING SYSTEM

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Senator RIBICOFF. Now, this question of confidentiality, if you have an agreement, I think you should keep it. I understand that, and I am

, for that, if you have an agreement of confidentiality. But information that is so basic, can't you get it and still remain independent of the automobile industry?

Mr. HENLE. I am sure you realize that this is an issue which transcends the question of automobile prices. In other words, it has to do essentially with the basic foundations of the economic statistics reporting system that this Government has instituted and which, in effect, has given us better economic statistics than any other country in the world. There may be some problems with our reporting system, with the basic pledge of confidentiality on which it rests, but it also has its very real advantages.

Senator RIBICOFF. What are the real advantages?

Mr. HENLE. Well, we feel that it has enabled us to receive from American business, not just automobile companies, a wide variety of useful economic statistics dealing not merely in the price area but in fields relating to employment, to profits, inventories, shipments, and production. The whole range of economic statistics on which both private and public decisionmaking rests is obtained through this basic voluntary reporting system.

PRICES OF INDIVIDUAL ITEMS UNAVAILABLE

Senator RIBICOFF. Now, you have given us an aggregate figure on the price of safety items at wholesale and retail. You have told us how much a total package of safety items costs on the wholesale and retail market. Could you go one step further and tell us the price of each individual item and could you also tell us the price of each individual item to the Federal Government? Do you have that information?

Mr. HENLE. With regard to the information on the Government purchase of the cars, I do not believe we have any information on that separately. With regard to the problem of breaking down the total, this would constitute a very real problem for us, and let me try to explain.

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In trying to identify the safety features, we have found as I indicated in my testimony that in a number of cases the safety feature is interlocked with other changes that have been made on the new models.

DIFFICULTY OF INDIVIDUAL PRICE ANALYSIS One particular example was given to me which I might cite. It has to do with the question of the new requirement for a latch on the front seat in a two-door car which keeps that front seat rigid and prevents it from falling over in the event of a crash. In installing the latch, it appears that the most effective way to handle this problem by the manufacturers was to redesign and restructure of the entire back of the front seat. In other words, although the safety requirement as we understand it was simply the latch, what went along with it were several other operations.

Therefore, from our point of view—namely, the point of view of providing the most effective analysis of model changes and their effect on price we want to group those individual changes that are related, and thus we, for example, could not have for you the specific information, for this requirement—the latch.

CONFIDENTIAL INFORMATION KEPT IN BLS

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Senator RIBICOFF. Are you permitted to share the information that you receive on the basis of confidentiality with other Government agencies? Not the public. Do you make this information available to the Department of Transportation and GSA? Is that a breach of the confidentiality?

Mr. HENLE. Perhaps it is unfortunate, but the confidentiality pledge requires us to maintain this information within the Bureau of Labor Statistics. I might add, Mr. Chairman, that the Census Bureau, for example, has exactly the same requirement with respect to the information it collects.

Senator RIBICOFF. Do you feel that if this confidentiality were breached, then your whole sysem would tumble?

Mr. HENLE. Well, there would be a breach in it and questions would be raised and our good faith might be called into question.

DATA GUIDELINES SENT TO AUTO MANUFACTURERS

Senator RIBICOFF. All right. Now, you tell us that the automobile companies provide information to you on a voluntary basis as long as you pledge it will remain confidential. Can you tell us whether you request information or you take whatever is provided ?

Mr. HENLE. I might ask Mr. Chase to answer that.

Mr. CHASE. Mr. Chairman, we have a set of guidelines which we send to the automobile manufacturers telling them what we want. I will be glad to make copies available for the subcommittee. This is Senator RIBICOFF. The copy will go in the record. (The document referred to follows:)

EXHIBIT 17

GUIDELINES FOR ADJUSTMENT OF QUALITY

CHANGE FOR NEW AUTOMOBILES

I. DEFINITION OF QUALITY

The purpose of this paper is to clarify the concept of quality for measuring price change in automobiles, to state BLS procedure for handling quality change in new automobiles within the conceptual framework of the Consumer Price Index and the Wholesale Price Index, and to provide a basis for general agreement on what automobile price changes do and do not represent.

The characteristics of an automobile make it possible to describe its attributes in many ways. The purpose of an automobile is basically to provide a means of transportation, but it has come to mean many more things to owners or prospective owners, depending upon needs, desires, income, environment, and training. For example, consumers value an automobile in terms of reliability, durability, convenience, safety, economy, speed, carrying capacity, comfort, appearance, and prestige, to name a few. The emphasis placed on these "quality" indicators varies, however, depending upon individual needs and preferences.

Although there are many indicators of quality, makers of index numbers would, ideally, ildopt a concept of quality that is appropriate for the particular price measure, since the interpretation of the price measurement depends upon how prices are adjusted to take account of quality changes. In actual operations, however, technicians are frequently handicapped in implementing the desired concept because all of the data necessary to do so are not available. Thus, some intangible quality factors which are encompassed under some judgments of quality cannot be measured in terms of money.

The BLS follows the physical description approach in defining quality for both the CPI and the WPI. Collection of price data for the indexes is based upon the principles of specification pricing. The specifications describe quality in terms of the physical attributes and include other identifiable features of an article or service that are needed to identify the item from one pricing period to the next.

Although performance or serviceability is a quality-determining factor, there are very few commodities or services for which an index of performance for the product as a whole has been developed. Therefore, performance is generally used as a guideline rather than an element in the specification. We recognize performance as a quality factor but adjust for physical changes in specification which contribute to changes in performance. The basis for valuing these changes is generally differences in market prices insofar as they can be determined.

The quality of an automobile cannot be described solely in terms of its physical makeup. There are a number of other factors such as safety, durability, performance, and comfort that must be taken into consideration in judging quality and in determining whether a change in physical characteristics is an improvement or a deterioration in quality. Therefore, the BLS specifies the quality of an automobile in terms of physical characteristics, but makes its decisions on comparability of product over time by reference to changes in performance, safety, and durability. In summary, then, the “physical characteristics” definition of quality is a practical approach for measurement purposes.

II. GUIDELINES FOR QUALITY ADJUSTMENT BEGINNING WITH 1968 MODELS Criteria for Quality Change Adjustments

The revised guidelines set forth in this section recognize that for automobiles it is a practical impossibility to make all the minor price adjustments necessary to estimate a price measure for automobiles with complete physical identity from year to year. The criteria stated below for the adjustment of quality changes for automobiles are the same as the principles adopted and used since 1959 in many respects. There were a few important changes made in the 1967 models, however, and others are being made effective for the 1968 cars.

The quality changes for which adjustments should be made are:

1. Structural and engineering changes that affect safety, performance, durability, and/or comfort and convenience. Examples of changes in this category are: Changes that contribute to the safety of the occupants of the car through strengthened chassis, improved headlights for better visibility, more securely fastened backrests when back is designed to be lowered for access to back seat, fuller sweep design of windshield wipers ; engineering changes that reduce

the possibility of mechanical failure, improved braking and steering systems, and addition of safety features such as safety door hinges and latches, impact absorbing steering wheel and column, automatic light dimmer, backup lights, padded dash boards and visors, seat belts; changes in mechanical features that affect the overall operation or efficiency of the automobile, or the ability of a component to perform its function, such as changes which affect the brakes, acceleration, steering control, stabilty, horsepower of the engine, transmission, compression ratio, carburetor; changes in design or materials which affect the length of service, need for repairs, or strength of the item, such as improved oil filter, self adjusting brakes, weight or quality of materials used in relation to their function; and changes that contribute to comfort such as redesigned seat belts, change in type of seat cushion.

2. Accessories and equipment changes included in the price of the equipped car specified for pricing, regardless of whether or not the item was originally offered as an extra cost item in the same series.

This criterion is adopted on the premise that all changes in equipment and accessories included in the price for the specified equipped car should be han(lled in the same manner regardless of how first offered by a manufacturer, that is, as an option or as standard equipment. Examples of accessories and equipment that they may or may not be offered initially as options are: shatterresistant inside mirror, trunk light, folding center arm rests, foam padded seats.

Changes for which adjustments should not be made are:

1. Style or changes in appearance designed solely to make the product seem new or different, unless previously offered as options and purchased by the majority of customers. Such changes relate primarily to trim and conformation, such as amount or contour of chrome trim, instrument panel trim, changes in body shell styling, design of radiator grill.

2. Physical changes in separate components or parts that are new in design or constructed of different material, such as simplification of component, subsitution of plastic for metal in the instrument panel, unless it is apparent that there has been a change in the ability of the component to perform its function, or unless the changes are necessitated by a significant change in another component. Pricing-adjustments

Selection of series.-New models selected for pricing at the beginning of each: model year are those most nearly equivalent to models priced in the preceding year. Four conditions govern the choice of a specific model. First, it must be produced by the same manufacturer. Second, it must have the same body type. Third, it must be in the same size class (i.e., compact, intermediate, or standard). Fourth, similarity of quality must be determined by feature comparisong rather than the line and model name assigned by the manufacturer.

The third condition, which treats the three sizes as three different items, oce casionally presents a problem of identity when a modification in size. (overall length) shifts the automobile into another size class. When this happens, wheelbase length rather than overall length is used as a criterion for determining size comparabilty. The past history of size changes for models previously selected for comparisons are also considered when selecting the replacement model.

In some instances, the new model most nearly comparable with the previously priced model does not represent the current volume seller in a particular series. When this occurs, the new volume seller may be introduced later in the model year after the changeover to current year models is completed.

Specifications.—“Equipped cars” are now priced for both indexes. For the WPI, prices include optional equipment factory installed on 50 percent or more of the cars priced. As an objective, the CPI specifications for automobiles will be modified to include optional equipment which is factory intsalled on 50 percent or more of each of the series priced nationwide, except where climate is a factor in local demand for a particular option (e.g., air conditioners in the South); Where climate is a factor, the option in question will be included or excluded on a city-wide basis. Reporting by producers

All significant changes in physical characteritsics should be reported including those which involve lower quality, as well as those which cover product improvement. There are times when lower quality or lower cost may offset all or part of the cost of some quality increases. Frequently a significant change in a

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