It’s history lesson time again.
An awful lot of talk and writing about the chained CPI has been focused on the results of its implementation on Social Security. Using this formula for figuring the cost of living ends up reducing the money citizens will receive in their SS checks. One of our commenters, Denis Drew labeled it the Cascading CPI. That’s pretty much how I see it because the formula is all about suggesting that accounting for people substituting lower priced items (lower price includes technical improvements) for the higher priced items (higher price includes earlier versions in a products history) they used to purchase means their quality of life has not changed. The only way to make such an argument seem reasonable is if the concept of “quality” has no meaning in the market place. However, if “quality” accounts for something when purchasing a specified level of living, then the accounting is not of inflation but of deflation, and deflation now has to be considered to float on either side of the zero, being positive or negative. There is no concept of inflation in economics anymore.
What I’m suggesting here is that the chained CPI reasoning is a massive amount of conflation. When I start seeing concepts and perceptions being conflated, I get suspicious and start asking questions. Usually the first question is what’s behind the promotion of the conflation. What’s the history and in that possibly will I find the intention? And, as I taught my daughter, life is intention.
Using Mr. Peabody’s WABAC machine we set the dial for 1995. Ever heard of the Boskin Commission
? Its formal name: “Advisory Commission to Study the Consumer Price Index”. It was created on the order of the Senate Finance Committee. The Senate majority leader then was: Bob Dole followed by Trent Lott. William V Roth Jr. was the chair of the committee.
This was the time of Newt Gingrich and the “Contract with America
”. The contract included social security reform. It also included welfare reform. (Clinton gave them that part of the contract.) Both were under the Fiscal Responsibility Act. You know, balance the budget rhetoric. Specifically: An amendment to the Constitution that would require a balanced budget unless sanctioned by a three-fifths vote in both houses of Congress…
Gee, 3/5 of congress or 60 votes, what’s the difference now?
Boskin is Michael Boskin. He is this man
. Rather accomplished. Held and holds some very influential positions.
In 1993, Bill Clinton enacted an economic program centered around some public investment, coupled with deficit reduction with higher taxes on the rich. Boskin was very, very sure it would fail. In a Journal op-ed entered into the Congressional Record by grateful Republicans, he accused Clinton’s administration of “fundamental distrust of free enterprise.” He made a series of predictions: “The new spending programs will grow more than projected, revenue growth will be disappointing, the economy will slow, and the program will reduce the deficit much less than expected.”
Boskin repeated his prophecies of doom in a summerlong media blitz. Boskin labeled Clinton’s plan “clearly contractionary,” insisted the projected revenue would only raise 30 percent as much as forecast by dampening the incentive of the rich, insisted it would “take an economy that might have grown at 3 or 4 percent and cause it to grow more slowly,” and insisted anybody who believed in it would “Flunk Economics 101.”
With that setting here is some history by way of Fredrick Sheehan
by way of The Big Picture blog:
In the early 1990s, Senator Patrick Moynihan from New York warned his fellow legislators about rising social security commitments. Then the worm crawled out of his hole, so to speak. Federal Reserve Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995. He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.
If Greenspan was correct, this was a godsend. Social security payments are increased each year at an inflation rate calculated by the federal government: the change in the Consumer Price Index (CPI). If the CPI could be increased at a lower rate in the future, benefits would rise more slowly, without Congressional action. This would reduce government spending and delight politicians, who knew of the looming crisis in social security but did not want to imperil their careers by reducing benefits, or, in this case, by cutting the rate at which social security benefits were raised each year.
The Boskin Commission was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President’s Council of Economic Advisers (CEA) from 1989 to 1993, a post previously held by such government functionaries as Arthur Burns and Alan Greenspan.
I’m starting to get a feeling here. “The fix is in” kind of feeling. Mr. Sheehan offers this quote: Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003, said at the time “the debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”
The commission is itself a delicious example of such bias: All its members were on record prior to the establishment of the commission as believing the CPI to be overstated. At the same time, the commission took no evidence from such well-known economists as Janet Norwood, a former head of the Bureau of Labor Statistics, and Dean Baker, of the Economic Policy Institute, who believe that the CPI provides a reasonable reading of inflation. In effect, the commission took account of all the evidence of overstatement of inflation by the CPI and downplayed the evidence of potential understatement.
I would say the fix was in. It has just been a matter of time and timing as to when the final promise made in the Contract with America would find its way into policy. The Democrats implemented the welfare the Republicans wanted and now they are going to give them the Social Security. All of it can be summed up in the Contract ultimate goal: An amendment to the Constitution that would require a balanced budget unless sanctioned by a three-fifths vote in both houses of Congress…
The article, besides being a good review of the commission’s report points out the ramifications of accepting an argument that the CPI has been miscalculated for years (similar to Dean Baker’s points).
If cost-of-living inflation has been overstated, then the growth of the economy and real wages has been much higher than previously reported. The commission has thus solved the problem of stagnating wages, which is now revealed to be a mere fiction. Far from experiencing a “silent depression,” the commission implicitly claims, American families have never had it so good.
If inflation, wages, and income have all been misstated, years of research have been conducted using incorrect data. Thus much of this research, which purportedly confirmed the profession’s theoretical claims, is no longer valid.
Lowering the CPI inflation rate would therefore affect income-tax exemptions and push many middle-class families into higher tax brackets. Adopting the Boskin Commission’s findings would be tantamount to imposing a tax hike that would particularly affect lower- and middle-income families.
Both Democrats and Republicans have been keen to see its recommendations adopted, because they provide a potentially uncontroversial way to achieve deficit reduction. Raising taxes is unpopular, and little discretionary government spending is left to be cut. Restating the CPI as a measure of cost-of-living inflation offers an easy way to lower Social Security payments through reduced COLAs and raise tax revenues through reduced exemptions. The hope is that the CPI can be presented as an apolitical and boring technical issue that voters won’t notice.
Revising the CPI would get the Republicans off the hook of deficit reduction, while simultaneously advancing the interests of business. This, however, would occur at the expense of working Americans and the elderly. Revising the CPI would get the Democrats off the same hook, but at the cost of another shameful desertion of the constituencies they claim to represent.
I told you there is no concept known as inflation in economics anymore.
What we have been living with Obama is very clear now. There is only the conservative ideology in play within our government. It’s just a matter of degree and time in setting up the play as to when a given policy will be implemented to achieve another phase of the goal. Right now, it looks pretty much like the official implementation of chained CPI pretty much puts the final cog in the conservative economic machine of social order.
I asked in 2008
if Obama’s appointment of Jason Furman was a qid pro quo for the DLC/Clinton et al keeping the money issues while Obama gets to be president. We have our answer for sure. There is no need to ask anymore as to the reasoning behind the policies and offers in negotiations that is Obama. It is what he wants. We are living the continual implementation of the conservative economic and thus social ideology that came in with Reagan and fully came out with Gingrich and The Contract with America.
And that my dear readers is where the idea for chaining the CPI came from; yesterday and today.
It is not just the pain that will be experienced by all of us (you’ll get old too) with the chained CPI, it is the fact that voting away from conservative economics has not lead us away from conservative economics since Reagan. Regardless of the party of the president or the majority of congress, the nation has not been able to achieve an ideological shift. That is a true signal of a problem with our form of democracy.
Dan B beautiful.
And ties in a neat bundle the simultaneous effort by Gingrich to have Medicare ‘Wither on the Vine’ not by proposing CUTS! Oh Noes, THAT was a vicious lie by opponents. All Gingrich was proposing was slowing the RATE of increase of Medicare in nominal terms.
Which only required ignoring three things:
Medical inflation in excess of effects of normal price inflation
Demographic effects that would add caseload.
And for those of us of a certain age the MSM ate up Gingrich’s take. Why Medicare expenditures would STILL be going up. And expenditures per recipient would still be going up. How could any rational person call that a CUT.
Which left some of us sputtering: “It is a cut in the amount of DELIVERED MEDICAL SERVICES”
And now that you point out the role of Boskin I have a dim recollection of him being in Gingrich’s circle as well.
‘Wither on the Vine’ ‘Chained CPI tweaks’, Le plus ca change, Le plus le meme chose. Dan B, thanks for the reminder.
You have to understand that every time SS/Medicare/Medicaid benefits are “adjusted”, real people really die. There’s a point at which the money just isn’t enough. So people don’t eat well or at all, turn off the heat, skip their meds, get shaky going down steps or curbs. When they get sick or break a hip, they don’t get well as easily. Eventually, they go to the hospital where they end up on a respirator, succomb to pneumonia, and die. For some people, it’s a long process. For others, it’s just one fall away.
Deal is this happens already. But now lurking in the background of everyone’s mind is the possibility of unemployment. Current unemployed people have typically been out of work a long time. There’s little or no help for aged parents or relatives to be had when everyone you know is unemployed or barely hanging on. And, it appears that this state of affairs is what we have to look forward to for a long time if not indefintely.
So, now the C-CPI is the fix for perpetually increasing entitlements. And, the demands of the middle class for tax relief are forgotten since a nice, neat feature of the C-CPI is that it kicks up tax brackets over time. What could be better? NancyO
The BLS published a report depicting the changes it made–and did not make–in the wake of the Boskin report and other 1990s critics. http://www.bls.gov/pir/journal/gj10.pdf But there is no end to efforts to politicize the work of professionals (aka “bureaucrats”) and, to assist, academics and think-tank employees who think they have revealed truth. Even ignoring the economic consequences of the chained CPI, economists should be visibly up in arms (figuratively speaking) to defend the BLS from what is an attack on their work and judgments.
Thanks Bruce, much appreciated.
PJR, when I was doing the digging I did read a few article that also suggested the economic profession should be defending the work of BLS. But, most interesting when googling the commission the first few things that come up are support of the commission’s findings including a paper by a Brown U reviewing it a few years after thinking everything was pretty correct with the commissions work.
Daniel my impression is that the Commission members did good work excluding the chained-CPI for which it is now best-known. I don’t know how many economists have seriously examined this metric. (I do recall one paper that fits your description, but it was written by a key economist on the Boskin commission who continues to advocate for the chained CPI. Googling quickly finds the paper at Brown U library.)
i would not count on academic economists not to be whores.
or any other academic.
when i was at the university of florida in 1975 or so i came upon a whole shelf of “research reports” that proved lead in gasoline was not harmful to human health.
sometimes you just have to judge it for yourself.
the chained cpi is dishonest on its face. you do NOT get a “more accurate measure of inflation” by switching the thing you are measuring because its caused went up and substituting it with something cheaper.
the think is such an obvious damned fraud that it sickens me to see people give it the time of day.
and it is beside the point. if the workers pay for their own social security they can decide where to draw the line between “enough” when they are retired, and how much they “need” while they are still working.
the chained cpi will “save” workers about thirty cents per week per year. at the cost of about a thousand dollars a year in benefits (they paid for, or could have paid for) when they are old and can no longer work and are trying to get by on about 12 thousand per year (in today’s terms).
so, dishonest, insane, stupid… and yet we stand here “debating” it when we ought to be tarring and feathering its promoters.
Dan B., “It’s just a matter of degree and time in setting up the play as to when a given policy will be implemented to achieve another phase of the goal.”
Wish I could describe things as well as you do!
Alan Greenspan and Social Security in the same sentence makes me nauseous.
pardon me for not clicking the link. life is short.
but your SS was not stolen. the tax was raised “so that” (Bruce will quibble) the boomers could prepay that part of their retirement that would not be collected under normal pay as you go because of the larger size of their cohort. That is the Trust Fund. It was lent to the government, and spent as people do with the money they borrow. Now the government is repaying the money it borrowed. No one stole nutthin. yet.
what they are fixin to steal your right to pay for your own basic retirement needs by saving your own money in a government run, but not government paid, program that protects it from inflation and market losses and pays a modest “interest” by the magic of pay as you go financing with wage indexing.
the tragedy is that the 300 million Americans who do not understand this includes the president.. and those folks who call themselves progressives.
“No one stole nutthin. yet”
Yes, yes, yes. YET
This is what drives me crazy when I find self-styled progressives buying into “Reagan stole the Trust Fund” and other versions of ‘Phony IOU’.
Nothing in the history of Social Security whether in decades past or current suggests that any Administration or Congress could get away with abrogating the Special Issues in the Trust Funds. After all they didn’t in the long period from 1971 to 1983 when Trust Fund assets were driven down to near zero (below zero absent some fancy interfund borrowing in 1983), every such Treasury was honored. Similarly even the Bush Administration, which actually went public with ‘Phony IOU’, meekly started redeeming (on net) Special Issues held by the DI Trust Fund starting in 2008. Maybe because when it came right down to it nobody was willing to violate the clear language of the 14th Amendment or just throw Full Faith and Credit of the U.S. in the trash.
Abrogation can’t happen and won’t happen until or unless the American people concede the money is simply not owed, that the horse thieves got away clean. Even though on inspection the horses are still in the barn and the lock is guarded by the strongest of legal protections.
Every penny ever sent to Social Security was expended in accordance with then current law or retained in the forms mandated by that same law. And no amount of logic chopping about how entities can’t hold their own debt or invocations of Flemming v Nestor change that historical, operational and level reality.
And frankly progressives who have bought into this vicious Cato originated horseshit propaganda should don sack cloth and ashes and made to prostrate themselves on the grave of Frances Perkins begging for absolution.
Rather than just accept: “Damn they already stole it and gave it to the rich people” try taking a page from the Right and make the claim as to Trust Fund Assets “They’ll take My (or My Gramma’s) Social Security Check Out of My Cold Dead Hands).”
No one stole nuttin. Yet. And if we don’t collectively squish they won’t. Don’t buy any form of ‘Phony IOU’. Even the ones that make Reagan the Bad Guy. Because the Rigjt laughs themselves sick thinking you swallowed that one. Fish in a barrel.
Question: does the CPI ratchet in only one direction? When necessities are not replaced by cheaper necessities, but only increase in cost, will SS follow that cost?
Utilities and the cost of meds blew my mother’s budget out of the water, especially the meds. Those sorts of costs should be adjusted in real time. She died of COPD in part because she could not afford the co-pay on her COPD meds, especially the Spiriva. If these costs are no adjusted in real time, no one can every catch up.
You’re getting it now Noni.
The chained CPI is easiestly understood as Denis noted. As people keep substituting the inflation number it produces keeps declining or staying rather flat. The issue is “essentials” which is why there are some pushing for a specific cpi for seniors to reflect their true position.
Consider, if a price goes up a percentage, the chain finds that the product may have improved and thus the price increase is offset by the product improvement value. Quite the game no?
But then, we are using core CPI for most stuff for most people experiences which excludes food and fuel. I don’t know about you, but I don’t buy a TV every week or a lawn mower, or a…
On top of this, we are now hearing how overall medical expenditures are declining. Sure they are, because the deductables are now $1000 to $2000. This used to be the high deductable plan. Now it’s the norm. And medicare? Forget about it. My 2 parents both had hospital stays 8/12 and 9/12. There out of pocket: $4200. UHC Secure Horizons plan. A medicare Advantage plan which is all they can afford if I don’t put dad on medicaid and in the nursing home (which would kill him in no time). And for this plan, they are now both paying an addtional $20/month. 3 years ago, there was no additional monthly charge and their share of cost was capped at about $500.
CPI-U and CPI-W include food and fuel as of course does the derived Chained CPI. After all almost all the examples are drawn from the food categories (the famous ‘chicken for steak’ or the infamous ‘steak for chicken’ (as if they actually invert)).
The source of the belief that CPI doesn’t include food and fuel is inadvertently revealed by Dan’s use of ‘core CPI’ which near as I can tell doesn’t exist except as a bastardized cross of ‘CPI’ and ‘core inflation’.
As a real world example the lack of Social Security COLA for 2009 and 2010 was due to a 5.8% COLA for 2008 that was spiked by what turned out to be a temporary surge in gasoline prices. That is though exactly no retiree actually felt it as such they technically got their COLA early. Which is the measure used accurately reflected the mix in prices actually experienced by seniors wold have been a not bad thing. But without full development and implementation of a specific CPI-E to track actual year over year increases in the real pool of goods and prices experienced by retirees we can’t really judge. Although one might guess seniors are less exposed to retail gasoline prices than say fuel oil or medical.
But my main point is that Social Security COLAs are indeed set by a CPI index that includes both fuel and food and not by ‘core inflation’.
Here is a chart of the CPI-W, the CPI-U and the C-CPI-U normalized to December 1999.
SS benefits are indexed by the CPI-W.
Assuming that an average 65 year old senior began collecting $758 per month in SS benefits on that date, the monthly benefit today indexed by the CPI-W is $1,050 and by the C-CPI-U is $1,010.
Why is the $40 per month difference for the now 78 year old senior such a big deal?
Yes, my mistake.
Thanks for the correction Bruce.
“Why is the $40 per month difference for the now 78 year old senior such a big deal?” marmico
Try living on $1,010 monthly and you may gain a better sense of the importance of that $40. That’s a part of the problem. Those in a position to make decisions one way or the other have no personal skin in the game. That $40 is what you drop at the bistro on a given evening for just a bottle of modestly priced wine or a round of martinis for the group (if its not too large a group).
sorry. my flawed attempt at irony.
as Jack says, try living on 1000 a month.
but more than that, it’s a big deal because it’s dishonest. it is simply a way to starve.. a little bit… granny so that SS is not a meaningful insurance against poverty in old age. Then, the same bastards will come back and say, “See, Social Security is a bad deal. But I can sell you a sure thing on Wall Street.”
and what makes it worse, is that it’s entirely stupid. workers could avoid the benefit cut by raising their own “tax” (it’s really savings) by 30 cents per week per year.
once you embrace the principle that politicians can decide the “inflation” level… by twisted reasoning like “substituting cheaper goods” you are on the slippery slope to the immiseration of the elderly, and by extension to (of) all “poor” people, which will soon enough include YOU, if you are not one of the masters.
try not to be an accomplice to your own destruction, especially by being complicit in the harming “just a little bit” of others.
a bit more on dishonety:
i can guess how you’d react if the government decided to tax you an extra forty dollars per month. even if it left you with a great deal more than 1000 a month to live on. so “what’s the big deal?”
morevoer… Obama proposes cutting SS benefits. he does not propose raising the payroll tax… even pennies a week. and he does not propose raising the cap… even with an increase in benefits at the high end.
he is doing this all as a “grand bargain” to get a few more taxes from the rich… for a short time until they can weasel out of them. while the SS cuts will be forever.
note that SS does NOT cost “the rich” anything. So this bargain is, first, a kind of “you kill my jew so i kill your jew” exercise in Nazi logic. But more than that, what it comes down to in the end is that Obama gets more money to pay for his wars by literally taking food out of the mouths of old people without asking workers or “the rich” to pay even a tiny share for SS, but diverting the “tax” they would have paid to paying for “defense” … which results in higher taxes for “the poor” but relatively (to the need) lower taxes for “the rich.”
and just how DO you feel about being taxed an extra forty dollars a month?
there might be some confusion there. i recommend raising the payroll tax so workers can pay for their own Social Security needs fully.
i do not recommend raising the cap. i just mentioned that by way of pointing out that Obama’s “fix” for Social Security rests entirely upon the shoulders of the old and poor.
this is past dishonest. it is evil.
as Jack says, try living on 1000 a month.
The initial monthly SS benefit at retirement is not relevant to any change in the indexation. That’s a function of the initial benefit computation.
Civil servants, not politicians, statistically compute the various and sundry inflation measures.
The C-CPI-U is a closer approximation to a cost-of-living index than other CPI measure.
If canned baked beans are on sale this week and canned green beans next week, the senior will buy 2 baked this week and 2 green next week, no?
“The C-CPI-U is a closer approximation to a cost-of-living index than other CPI measure.”
Two questions, one dependent on the other.
One. Your evidence for this is what?
Two. Does that evidence actually accurately measure cost of living for the populations that would be most effected by Chained-CPI?
And no answering question one “Boskin. Bush I’s favorite economist/apologist” doesn’t begin to even get to that. And certainly doesn’t get to question 2.
Economist Dean Baker estimates it would take $80-90 million for BLS to tranform the experimental cost of living index for seniors and disabled CPI-E (where ‘E’ oddly stands for ‘experimental’ and not actually ‘elderly’) into a fully accurate cost of living index for that population. And considering that this index would be used to set literally TRILLIONS of dollars of benefits and tax brackets and God knows what over the next couple of decades that $90 million doesn’t seem like a lot to pay.
If the actual interest of promoters of Chained CPI were really interested in accuracy.
You simply assert something (accuracy and approximations thereto) that has yet to be put into evidence. The kind explanation for this is ignorance of the history of the CPI index. I’ll leave the unkind explanations for the entertainment of the audience.
For actual serious people. The logic of Chained CPI suggests continuing substitution all the way down, as this years substitution becomes next years baseline. That is the end result is a third world diet that in varying places manifests as rice and beans, tortillas and beans, cornmeal fried in vegetable oil, or rice eked out by whatever vegetables or river/sea food products are available.
Which no doubt will prompt the wealthy to say “Hey what is the big deal, I pay $85 a plate down at that new Salvadorean place/Ethiopian restaurant/Sushi joint/Scotch Haggis speciality pub. And that food is GOOD for you.”
Yeah which doesn’t involve you eating the same rice/oats/beans/cornmeal every day that you can actually afford to buy even that. People forced by resource restrictions will substitute consumption right down to rags and garbage and tar paper shacks. Something you can see in most of the Third Rail today and BTW was fully documented by the WPA in both white Appalachia and black Delta areas during the Depression.
Chained CPI’s logic simply places us on a path to repeal the New Deal both as an ideal and a set of practices. And the smart evil people understand that real well.
While the dumb enablers may not be actually evil at all. But certainly dumb. Not the choice I would like to be faced with, but hey—-
One. Your evidence for this is what?
Substitution effect, both across consumption items (example given supra) and establishments (e.g., big box stores aka “The Walmart Effect”). For instance, the CPI-W is calculated as the average price of an item at retail establishments, not the quantity sold times the average price divided by the quantity sold.
Two. Does that evidence actually accurately measure cost of living for the populations that would be most effected by Chained-CPI?
That’s not relevant. The price C-CPI-U index like the CPI-W and CPI-U indicies are computed across the aggregate population. Each household has a unique price index as a function of their preferences. Household A may prefer sirloin steak whereas Household B may prefer refried beans/rice. There is some scope to consider C-CPI-E as a deflator for SS benefits but it is not ready for prime time.
Progressives are barking up the wrong tree. They ought to be insisting that SS benefits are indexed to wages, which tend to rise faster than consumer prices.
”Rather than just accept: “Damn they already stole it and gave it to the rich people” try taking a page from the Right and make the claim as to Trust Fund Assets “They’ll take My (or My Gramma’s) Social Security Check Out of My Cold Dead Hands).” [Bruce Webb]
Bruce, different version – Long run reduction or reduced rate of increase of overall social wage [typical within neo-liberalism or, if you like, Reaganomics]….permits reduction of corp. tax as well as greater corporate welfare, both of which can effect share prices.
Simply put, large bottom to top transfer which I choose to call theft and became noticeaable from Reagsan onwards.
[can’t recall which URPE pub. went into detail with an article by A. Shaikh but the numbers are there].
one at a time:
the initial benefit has not a damn thing to do with what we are talking about. there are lots of people living on less than 1000 a month SS. after 20 years (average life expectancy in retirement… no. that does not mean everyone dies after 20years) that 1000 would be effectively cut to 940 by the chained CPI, all else being equal.
civil servants compute … etc. but the chained CPI is a political act, and once the politicians are deciding what is inflation and what is “substitution” or “quality improvement” then the politicians are deciding what “inflation” is.
no doubt the consumer will buy beans as you suggest. but that is hardly a serious observation about inflation.
This comment has been removed by the author.
tHEFT – Kill the social wage and provide greater corp. welfare, etc.
”It is clear from Figure 2 that the net social wage was negative
during much of the 1980s. It became positive in 1991, but the
c u rrent cyclical expansion, which began in 1992, and “welf a re re f o rm” are driving it—along with the govern m e n t
deficit—down to zero. As a whole, during the last 20 years or
so the net social wage (outside of cyclical variations) had virtually zero growth. Yet the private saving rate, especially for
households, fell dramatically in these years, contrary to the
m a i n s t ream prediction. These facts immediately raise a key
question re g a rding the effects of dismantling the social safety
net: If this dismantling has not succeeded in promoting the
v i rtue of thrift, what has it done?”
asked a fair question and got a fair answer.
but i can no longer regard his comments as serious.
marmico the BLS already addresses the substitution effect at low aggregation levels when calculating the CPI-U. The chained CPI-U would address it at higher levels. The BLS CPI-U approach balances the risk of overstating inflation (by ignoring substitution effects) against the risk of understating inflation (by attributing too much to substitution effects). The chained CPI moves the needle far to the side of understating inflation. It’s a bad measure.
…the BLS already addresses the substitution effect at low aggregation levels when calculating the CPI-U.
True enough, in the 1999 geometric mean tweaking of the index.
The beans example is demonstrative of the higher level aggregate substitution of vegetables to legumes and back which is captured by the C-CPI-U. You have yet to account for quality bias, new product bias and establishment bias at the higher level aggregates. C-CPI-U is a superior measure.
Another random thought, PJR.
The CPI in its various forms computed by the Labor Department is a theoretical construct. The PCEPI (personal consumption expenditure price index) computed by the Commerce Department is a measure of the price level of actual consumption by households in the economy.
The C-CPI-U is more closely matched to the PCEPI than the CPI-U. See chart. That matching is an out of sample confirmation that the C-CPI-U is a superior measure.
In fact the argument regarding which CPI to use as the basis for COLA adjustments has little to do with the “accuracy” of either measure. It has only to do with the concept of requiring beneficiaries to alter their choices of products as they lose ground by receiving adjustments based upon the ability to find cheaper stuff to buy. The concept turns the COLA on its head. In stead of keeping up with the increasing cost of goods and services the beneficiaries are being required to find a way to make due with less. This is exactly the ideological perspective of the Simpson-Bowles Cat Food Commission. If the benefits become inadequate substitute your source of protein.
The entire issue is just another smoke screen in the Social Security budget debate and its conflation with the general federal budget debate. It has been demonstrated repeatedly that the financial stability of the SS program requires little more than slight modifications of the FICA rates, pennies per week. That FICA revenue is too tempting for some to lose sight of. It supplements the general budget annual income too easily. If benefits are kept at lower levels there will then be more excess FICA to artificially reduce the “unified budget,” itself an extra legal concept.
Having to reach all the way back to the Boskin Commission and Newt Gingrich’s concept of America is a good example of just how out of date and out of touch the adherents of the plan actually are. Yes, that includes our neo-liberal President. That TED.com tape of Larry Lessig’s description of Lesterland is all the explanation needed to understand what is, and has been, taking place. http://www.ted.com/talks/lawrence_lessig_we_the_people_and_the_republic_we_must_reclaim.html
marmico the problem, as I see it, and correct me if I’m wrong, is that the higher the level of aggregation of the substitutions, the greater the likelihood that the substitution simply ignores consumer choices based on their perceptions of real differences. The substitution, in other words, is that of economists’ judgments for consumer judgments. At the lowest level of aggregation, for example, who’s really to say that Pepsi and Coke are the same to you or me? The question becomes more serious at a higher level of aggregation, like judging that steak and chicken are both meat products, like gristle.
Exactly. As Jack also notes in chained cpi turning COLA upside down, it makes a mockery of the idea of “the rational consumer”. It makes a mockery of the idea of “market competition”.
In other words, chained CPI is just another example of the economics profession showing no consistency of thought throughout their reasoning. It’s all disjointed to fit what ever the desired outcome is wanted and not simply observational.
With than, why should substitution even be considered as an off setting activity to inflation? Substitution of any type is a normal activity in the economy and is homogenous within the activity of the market. Pricing is what it is regardless of how it got there. To now account for 4 events within pricing removes the homogenous structure of “market pricing” (another mocking of a hallowed econ idea).
Right Daniel, chained CPI conflates different types of behaviors, and economists who promote it don’t seem to entirely grasp that. BLS professionals do, and they are wise to try to balance sources of error. The Boskin Commission should be commended for encouraging them to find a better balance than they had at the time–but they are guilty of promoting a huge swing to an imbalance in the other direction. Imho.
but they are guilty of promoting a huge swing to an imbalance in the other direction
Wow, 30 basis points, maybe less, a year is a huge swing to try to balance sources of error. As Bruce Webb, your go to expert on SS states upthread, I’ll leave your unkind explanations for my entertainment.
The point, marmico, is not the precise measurement, which is imprecise to begin with, but the focus on alternative market choices being added to the calculation. The economist’s responsibility is to work toward precision of measurement of gross human activities as they have been occurring in the economy. It is not the economist’s role to make suggestions as to how the measured phenomenon can be influenced by market choices,i.e. cat food instead of hamburger. Measure what is going on and avoid making personal decisions as to how to influence that measure. There is always a cheaper route to an end, but it is not necessarily one of equal value.
Conservatives are the ones who are supposed to be opposed to government intrusion on our personal liberties, even the liberty to choose one source of protein over another. The chained CPI is just such an intrusion. Measure general cost of living changes and make appropriate adjustments to benefits. Then allow the beneficiary make the market decisions they may prefer. Besides which all of this has little to do with the solvency of Social Security. Any issues of solvency have far more accurate methods of adjustment than the guess work inherent in CPI, chained or otherwise. The most dangerous player in the game is the economist spouting the certainty of measures being used to effect people’s lives.
I’ll take the liberty of adding Barkley Rosser’s 2 cents to the discussion, from his post at EconoSpeak.
“There are many economic arguments for why this new proposal is a bad idea(the proposal to switch to chained CPI-W).”
“The obvious one that has been discussed by many is that it is highly likely to reduce the growth of SS benefits for seniors in an era when arguably they should be increased more due to the collapse of defined benefit private pension plans.”
And couple that point to:
“The other is the point that over a long period of time it appears that the cost of living for seniors has been rising more rapidly than the overall cost of living, so that the experimental CPI-E for elderly should be used after getting it into proper shape. This higher rate of elderly cost of living increase has been largely due to the greater use of medical care by the elderly, which has risen more rapidly than the general rate of inflation for a long time, and has been 0.2% greater per year between 1982 and 2011 than the CPI-W. Among those making this point previously have been Dean Baker http://www.cepr.net/index.php/blogs/cepr-blog/thoughts-on-the-chained-cpi-social-security-and-the-budget,..”
It was a bad idea in the mid-90s when introduced by the Boskin Commission and championed by the likes of Gingrich. It is still a reactionary concept that seeks only to take from the poor so that the rich can have yet more by paying less tax. Isn’t that the crux of the matter? Where do we look for revenue? Don’t ask those that have so much when you can simply take from those with little. Maybe Republicans will be true to form and reject the idea because Obama has embraced it.
the reason i can’t take you seriously is you never answered how you would feel about having your taxes raised 6%. nor have you even attempted to address the arguments against the chained cpi presented here. merely repeating your original “question”(claim): which is to say, begging the question.
the chained CPI essentially taxes the retired 6% over their life expectancy.
as for substitution effects. the fact is the folks are substituting medicine for food already. the dishonesty of the chained cpi is that it “measures” substitutions driven by inflation and uses those substitutions as a new “more accurate” measure of inflation.
all of which adds up to you are a simple troll… that is, a person with no serious interest in learning or honest “debate,” but simply wasting time and spreading the infection of bad “memes,” which is standard Big Lie technique.
I see no reason to consider you an honest person.