Monday, January 24, 2005

Economic Mumbo Jumbo

It's amazing how arcane little terms can sometimes define a public policy debate and effect the lives of ordinary people. One component of budgetary and fiscal policy, from either the right or the left, is to control inflation so that a rising cost of goods doesn't decay living standards. Of course, to control inflation you have to measure it and the most popular tool is the Cinsumer Price Index, which basically tracks the prices of a bunch of consumer staples.

A few years ago, the Bureau of Labor Statistics started tracking what they call a "Chained CPI" which is a variation on the theme -- the chained CPI tries to monitor consumer behavior, not just prices. When prices for one thing go up, consumers tend to stop buying it and start buying cheaper items instead. Because the Chained CPI take this consumer behavior into account, it's measurement of inflation is lower than the plain vanilla CPI.

But, reread that. What's causing the consumer behavior measured by the chained CPI, anyway? Higher prices! See, if the price of steak goes up and I stop buying it and start buying hamburger, I am still a victim of inflation. In fact, inflation is doing just what we're supposed to fear by (if you'll accept for the moment that steak is just better than hamburger) forcing me to make decisions that result in a lower standard of living! It seems that all the "chained CPI" does is mask the importance of inflation which is its effect on living standards.

I'm bringing this up because a lot of convervative economists want to use the Chained-CPI, rather than the vanilla CPI as a trigger for increases in government spending. It's really just economic mumbo jumbo that makes inflation look lighter and will allow for convervatives to cut federal spending for programs that help ordinary Americans.

This also has a Social Security component. In Today's Wall Street Journal, Stanford economist Michael J. Boskin says that Social Security should "price instead of wage index" benefits. See, right now, Social Security is designed not to keep up with inflation, but with even faster growing living standards, as measured by average wages. This is important. Say you retire in 1980 and start taking out Social Security. If your checks only kept pace with inflation over the past 25 years, then you would basically be maintaining a 1980 standard of living in 2005! But Boskin thinks even that's too generous -- he wants to index social security to inflation and he thinks that inflation should be measured by the Chained CPI, not the vanilla one. As I said before, the Chained CPI claims there's no inflation because you stop buying expensive things and start buying crap. So under the Boskin plan, our retirees will simply fall further and further behind.

All because of a little academic debate that nobody's paying any attention to.


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