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Three guesses on where chaining the CPI came from

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.
He is also this man.

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.”
From an article in the Atlantic, 1997 by Thomas L. Palley titled: How to Rewrite Economic History.
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.
PS:
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.

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Austerity and Budgets explained

In support of Beverly’s latest post and all her past postings wanting for Obama (or the Dem’s in general I would say) to explain the truth about how a government’s money really flows, I present this video from the Watson Institute. (via Didby at Hullaaloo.)  I happen to agree, it would be nice if our president would get it straight, but…

The Watson Institute presents Mark Blyth on Austerity from The Global Conversation on Vimeo.

 Of course, my pet peeve is that no one is talking about our nation’s equity.  I am confident that the American family would get that part of financing as it relates to borrowing and investing.  Heck, how long was it before Amazon broke even yet they kept right on borrowing and growing?*  Or lets put it closer to home.  How many Americans purchased a home that was valued at and borrowed against for the purchase that was equal to their annual income?  What was the old rule…3 times the median income was the average home price?

*incorporated 1994, 1st profit announced 2002

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Lifted from Robert Waldmann’s more private thoughts

Lifted from Robert Waldmann’s more private thoughts:

I love this video.

I agree that it is very odd for Romney to brag about balancing a budget with a 1.5 billion dollar federal bailout. But what exactly does it mean for a manager of a firm to balance a budget ? I’d say the very minimum is to keep the firms you control out of bankruptcy. By this standard Romney is not a budget balancer at all. At Bain he made huge amounts of money relying on limited liability. Several Bain controlled firms went bankrupt. Those were budgets under Romney’s control (sole shareholder CEO and all that) which were as un balanced as budgets can be.

I know I am mixing up budgets and balance sheets. I am doing that to bend over backwards to try to meet Romney half way. Really a corporations budget isn’t balanced if it issues debt. Unbalanced budgets are the key to private equity. Romney’s whole career as a businessman is based on understanding that an obsession with avoiding debt is costly.

On this he is consistent in practice as well as being consistently dishonest, since as you note, he proposes a huge increase in the US budget deficit. The approach of loading an entity up with debt and not worrying about what happens if it can’t pay has worked very well for him so far, so why shouldn’t he stick with it_
I’m very sorry I wrote an outraged comment on your post critiquing #rateloweringbasebroadening (RLBB)for not critiquing it completely enough. In this video you make the key point that extremely high income people will gain money they sure don’t need from RLBB as they just don’t have deductions on the order of their income (importantly this refers to Romney style RL and maybe a bit of BB (but no details) and things are different if the BB includes raising taxes on capital income and capital gains).

On Gas prices, I note that US consumption is a large fraction of world consumption. A US gas tax probably would cause lower petroleum prices in the medium run (not immediately only after people trade in their SUVs for cars). It makes no sense for a country to pretend it is tiny when it is large. Laissez faire is optimal only when price taking is optimal. In the world petroleum market, the US acts as a monopsony which has no interest in maximizing profits. It’s as if Saudi Arabia ignored the effect of their exports on prices. Of course you know this (you praised Mankiw on the gas tax). Fleet economy standards may be a silly way to do it based on the US obsession with low gas prices, but I suspect that Obama’s policies are causing lower petroleum prices and will eventually cause significantly lower petroleum prices. “There is nothing [more] a US President can do” is true given and only given political limits.

(OK so enough being responsible. Now a dumb joke about a smart guy — a smart Pollack joke
Love the denunciation of rate cutting and base broadening.  You are the most effective populist since  President  Jackson, Pollack.)

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