At this point, it appears to be a "done deal": the CPI (Consumer Price Index) will be revised downward, to make it register less inflation. Since the report of the Boskin Commission, its major theme — that the CPI has exaggerated inflation — has worked itself into the lore of the land with practically no opposition. It is now taken as gospel in everything from investment advice to Congressional budget proposals.
This is a shame, because the deal would be far from done if people were thinking it through. Oh, sure, there’s opposition from the expected quarters: the AARP (American Association of Retired People) has complained, because a lower CPI will nibble at Social Security benefits, and they’re always opposed to a cut in benefits. Likewise the labor movement, as represented by the AFL/CIO, has registered discomfort. The arguments are of both these sources are cogent enough, in the light of their own concerns, but they miss some concerns which should motivate a much wider opposition.
Meanwhile, a few conservatives have noticed that the proposal will increase taxes as well as benefits, but for the most part, Republicans in Congress have supported the measure for the very reason that labor and the AARP opposed it: it will cut government-funded benefits, and "budget hawks" are routinely in favor of that. In the Senate, when President Clinton announced his opposition to CPI revision, Trent Lott declared bitterly that all cooperation was off. It wasn’t that the CPI was the most important item on Lott’s agenda, but he read Clinton’s action as a symptom of bad faith to come: the Administration would slyly make Republicans take all the blame for unpleasant cuts, when everybody knew that something had to give.
He may have been right, too, for there’s one thing on which all the participants seem to agree (beware when everybody agrees): that CPI revision is chump change. It’s a throwaway issue, a bargaining chip. Having made a show of reluctance, President Clinton may well accept revision of the CPI in the end (administratively if not legislatively). What’s more, dismissiveness towards the CPI is not just Washington’s attitude; it’s seen as a trifle out in the boonies as well, even among seniors whose benefits are the initial target. At a "town hall" meeting on Social Security reform, I heard an elderly woman declaim that we mustn’t be greedy and rob our children, so she was perfectly willing to give up her COLAs (annual Cost of Living Adjustments). To my mind, this was like dropping a quarter into the collection plate with a loud clink, in hopes of not being asked for anything more -- except that she mistakenly put in a rare coin.
CPI revision is riding to an easy victory, borne along by a nearly universal consensus that it’s not terribly important. But they’re wrong, all of them wrong. They’re overlooking some effects which far outweigh the immediate deficit reduction.
I have four major points to make. Only the last challenges any of the technical conclusions reached by the Boskin Commission. This is primarily an argument about statecraft and unintended consequences, not about econometrics -- though the claim of unanswerable "expert opinion" does need to be challenged, and will be.
1. The CPI as a barrier to inflation.
Nobody ever intended the CPI as a barrier to inflation, and the economists who criticize it are not thinking of it in that light. As conceived, it was only expected to measure inflation, while cost-of-living adjustments and tax bracket adjustments based upon it were supposed to compensate people (a little) for inflation. Inflation itself would roll on, or if it didn’t, something other than COLAs and tax indexation would be responsible for any slowdown. It is really doubtful that those in power deliberately robbed themselves of the inflation tool, which governments have used from time immemorial. COLAs and tax indexation simply developed as ad hoc, incremental responses to the pain of various interest groups. The world, though, is full of unintended consequences.
The point is this: cost-of-living adjustments and tax indexation, if they’re strict enough, take the profit out of inflation. What does it profit the government to run down the value of a dollar, if the dollar amount of entitlements immediately grows to keep pace with other prices (because of COLAs), and tax revenue expands only in proportion to the price index (because the brackets are indexed)? Indexation has been a major headache for politicians; it makes them live with the promises they’ve made. They can’t get off the hook by surreptitiously diminishing the real value of the debt. No wonder they’re ecstatic when they hear that the CPI has exaggerated inflation, and they can trim the compensations for it.
Look at it this way: our government, in good faith or otherwise, has promised trillions of dollars in Social Security and Medicare payments for which the wherewithal is nowhere in sight, if it has to be raised by taxation. Politicians of both parties are crucified if they move to cut benefits, crucified if they try to raise taxes, and increasingly hemmed in by the national debt if they do neither. The pressure is intolerable. At the same time, we’ve long since developed a monetary system in which the government is perfectly free to alter the unit of account. Nothing much holds it back except its own undertaking to index benefits and taxes. Isn’t it obvious what is the major political temptation of our day?
Absent indexation, all Washington has to do is get a bit of inflation started. Then the onerous entitlements can be handled with ease: every dollar that was promised will be paid, it’s just that the dollars won’t purchase what the payees had expected when they agreed to a Social Security system. Taxes can increase with no nominal increase in rates, it’s just that taxpayers will be pushed into brackets that they intended for people richer than themselves. It’s all happened before, but how easily we forget!
The beauty of it is that nobody need declare, "Let the presses roll, we’re going to print a bunch of money and inflate our way out of this." That is not how a modern monetary system works. The starting point is an easing of credit at the Federal Reserve Banks. The accounts of the Treasury and of member banks are written up at the Fed in exchange for government IOUs; literal production of currency follows as a passive consequence. Politicians need never even understand that they’re touching off an inflation; to them, it will look like interest-rate relief for home-owners, business, and agriculture. When people begin to notice shrinkage in their purchasing power, half of the public will blame business and half will blame unions; politicians will be safely out of sight, serenely unaware of having committed the perfect crime. What everybody will agree, though, is that business is booming, and all but the holders of public debt (including the unfunded liabilities of Social Security and Medicare) will agree that times, once more, are good.
"If it’s that easy, why hasn’t it happened already?", you may ask.
The short, superficial answer is that for fifteen years the Federal Reserve System has been allowed to play its role as watchdog over the value of our money. This is generally attributed to Paul Volcker, who slammed on the brakes in a way that sent passengers reeling to the floor, and to Alan Greenspan after him, who has continued to tighten credit whenever there is the least suspicion that the economy might be "overheating". To give credit where credit is due, these two Federal Reserve chairmen have achieved what political theorists once supposed impossible in a democratically run country: a screeching halt to inflation. (Well, not a halt, but a dramatic slowdown.) At no time has this been popular: you could almost say that if the economy no longer overheats, it’s because Alan Greenspan serves as a political heat sink.
That, however, can’t be the whole story. The chairman of the Federal Reserve System serves at the pleasure of Congress and the President. If inflation is so tempting to politicians, why did they let Volcker slam on the brakes, and Greenspan continue to tap on them? Alan Greenspan is in his third term, appointed by three successive administrations, all of them gritting their teeth. Why?
My contention is that, in large part, it’s because cost-of-living adjustments and tax indexation took the profit out of inflation. That, plus the fact that by 1980 inflation had run into decreasing returns. The government can profit by a general rise of prices only if it takes people by surprise. Once they anticipate it, they write it into contracts (in the form, for example, of the interest rates at which they will lend, to the government or anyone else). Then the pace of inflation must be stepped up, to outstrip the increases that the market has already discounted. But people begin to anticipate the stepping up, as well, so eventually one gets the "stagflation" of the 1970’s.
For a while, at least, both Congress and the Presidency were willing to shut down the money mill, because the pace of inflation had grown scary, and it wasn’t profiting the government as much as before. It took a great deal of havoc (including the S&L crisis) to convince people that this time the process wouldn’t resume. Once the inflationary mind-set had been broken, though, and nobody expected inflation any more, politicans could have caught the public by surprise again — but now they were hemmed in by the COLAs and tax indexation.
Maybe, too, the memory of inflation was still strong enough so that a little renewal would lead to a disproportionately jittery response. The potential profit (to the government) of inflation would still be curbed, even apart from the effects of COLAs and tax indexation, by the public’s lingering skepticism of price stability.
But not any more! I expect a big yawn when people first hear that CPI revision may weaken a barrier to inflation. "Oh, but that’s a problem of the past. We haven’t had any significant inflation since the 1970’s." I can hear this coming, even before it’s said. Surely it’s the prevailing opinion of the day, and I’ve heard it urged often enough in defense of this or that economic policy. To which I rejoin: some lessons are never learned. One of them is that any blessings we may enjoy at the moment were achieved, they didn’t just happen, and they won’t necessarily continue if we cancel whatever we were doing to bring them about.
There’s another way to put this: taken together, COLAs and tax indexation have evolved into a de facto standard of value, substituting for the gold standard in an age of fiat money. If, however, Washington can administer the CPI to suit its budgetary convenience, then it can once again administer the value of its promises.
2. CPI Revision as "Stealth Technology".
Revising the Consumer Price Index is popular, in no small part, because it’s stealthy — so stealthy that it sneaks up upon the perpetrators as well as the victims. Let me recount the ways.
First, it’s stealthy because it trades upon everybody’s perception that it’s a trifle, when that expectation is based on nothing but a few years’ experience of low inflation. Because inflation is low now, COLAs don’t amount to much now. Yet, as argued above, COLAs and tax indexation based upon the existing CPI have played a substantial part in maintaining that selfsame low rate. It’s as if we were to decide that we can leave the barn door open now, because no horse has gotten out for a while.
It is stealthy, too, because it exploits public short-sightedness. Much of the public is unable to feel in its bones the prospective consequences of compound interest. The curtailment of benefits and increase of taxes will grow and grow, feeding upon itself, even if inflation remains low and steady. The impact will be felt in the "out years" — always a favored ploy when selling something painful to constituents.
For what it’s worth, one projection cited by the Boskin Commission (provided to them by the Congressional Budget Office) is that if 1.0 percent be whacked off the rate of inflation as measured by the CPI, the total change in the deficit will be $135 billion in the year 2006. Assuming a population by then of 270 million, that’s $500 per capita. Naturally, the burden won’t be spread evenly: it will land upon Social Security recipients and upon taxpayers in the peak years of their careers, of whom there will be considerably fewer than 270 million.
The projected $135 billion dollars, by the way, is split three ways. "Lower outlays on indexed programs" (i.e., reduced COLAs) are only 47.7 percent of it. Increased taxes make up 33 percent, and the remaining 19.3 percent is "lower debt service" — i.e., less interest to be paid on what the government would have to borrow if COLAs and taxes continued their present course. Cynics will perhaps wonder whether Washington would really borrow less, just because the pressure were off to pay COLAs.
But I digress. The point is that the impact is not small, even if it doesn’t include renewed inflation, but voters can be counted upon to underestimate anything that starts small and grows exponentially. So it’s stealth.
There’s a third way in which CPI revision is stealthy: it hides behind expert opinion, on technical issues which few members of the public understand. That doesn’t keep all of them from spouting off, but they lose the argument. I have heard acquaintances and callers of talk shows voice a heartfelt suspicion that inflation is underestimated, not exaggerated, by the CPI, but they’re no match for a mostly united economics profession. They wind up, in fact, being brushed off as the usual malcontents and whiners, uninformed and not worth listening to. As we’ll see, though, the experts can be challenged. I think that the "gut feeling" of the complainers is in this instance justified.
3. Standard of Value versus Measure of Well-Being.
Whatever we might say about COLAs and tax indexation as a barrier to inflation, and about the stealthiness of proposals which rely upon public short-sightedness, we wouldn’t want to block revision of the CPI if it were really true that it exaggerates inflation. That, however, is much more of a judgment call than is being publicized.
One reason the experts can be challenged (notwithstanding that they are able people, and they have thought about this for a long time) is that their attention is simply focused upon the wrong questions about a measure of inflation. Wrong, that is, for the discussion at hand. Their traditional approach assesses the CPI as one component in a measure of economic welfare, whereas, for the present discussion, the CPI has been pressed into service as a standard of value.
The distinction may seem obscure, but here’s an executive summary of the difference it makes: on the one hand, a subjective measure which requires ongoing administrative judgments of what’s good for people, versus a pre-agreed standard made up of things that can be more objectively counted.
A measure of economic welfare inevitably involves some subjective judgments as to people’s well-offness. It’s designed to answer the question, "How are we doing?" That’s a question of real interest to economists, and their thinking about the CPI has evolved with that question in mind. Here is the Boskin Report’s definition of a cost-of-living index (italics mine): "A cost of living index is a comparison of the minimum expenditure required to achieve the same level of well-being (also known as welfare, utility, standard-of-living) across two different sets of prices."
A standard of value, by contrast, is supposed to define the contracts which people are making with each other (including their civic bargains as taxpayers and beneficiaries of public programs). It serves its purpose best if it enables people to grasp what they’re contracting to pay and what they’re to get for it, and enforces the bargain on both sides. To that end, it needs to be objective and intuitive. It should not change from the time the bargain is struck until the time it is fulfilled, nor be stated in inherently vague units of "well-being".
The report of the Boskin Commission, however, wants the CPI to be a "cost of living index", comparing the cost of equivalent well-being from period to period. Its criticisms are aimed precisely at making the CPI do that better.
Whether the CPI should ever have been used as a standard of value is open to discussion. but the fact is, COLAs, tax indexation, and indexed securities do use it that way, and this alters the criteria by which it should be judged.
When voters make an ongoing judgment whether to support a program such as Social Security, they are influenced in part by estimates of the government’s ability to deliver what it has promised, in exchange for what it is collecting. Those estimates assume a constant rate of inflation, and try to state quantities in a measure which voters understand: "current dollars". They would not agree to the same bargain if they thought the units would be revised in some unforeseeable way, according to somebody’s future judgment as to what leaves them "just as well off". In practice, future judgments of that sort amount to reopened negotiations.
The same may be said of price-indexed securities. A case of special interest is that the U.S. Treasury has recently begun to issue bonds whose return will be tied to the CPI. (The left hand evidently doesn’t know what the right hand is doing.) These have proven unexpectedly popular: the Federal Reserve at one point ran out of the forms for bidding on price-indexed securities, and had to advise people that they could substitute the form for a 5-to-10-year bond. What will be the consequence, though, when it dawns upon investors that the proposals of the Boskin Commission will not only downsize the present CPI, but set up machinery for continual revision, according to criteria that invite the same jostling among interest groups as does the tax code?
It is an interesting irony that some of the "budget hawks" who support downsizing of the CPI are also eager to privatize Social Security. One "success story" of which they are fond is the privatization that has already taken place in Chile. That reform, however, has relied heavily upon price-indexed securities to reassure voters that they won’t simply be swindled through inflation. What will happen to Chileans’ confidence in their price-indexed pension savings, when they look to the north and see that the measuring stick may be revised at government discretion? And what will happen here, in turn, when privatization is discredited in Chile?
This is not to say that the CPI as it stands is ideally suited to serve as a standard of value. After all, it originated as a practicable approximation to a cost-of-living index, and the administration of it already involves considerable guesswork and subjective judgment. The point is simply that the Boskin proposals would take it further in that direction. And no matter how sincere the intentions of the Boskin economists, no matter how suitable their proposals for a cost-of-living measurement, no matter how minor the immediate adjustments may seem, the perception of finagling is disastrous for a standard of value. (Is the perception justified? Yes, in my opinion, for future policymakers will have just as much reason as present ones to prefer numbers that make them look better. Any adjustments of this sort will have a leveraged effect upon people’s expectations, because they’ll be rightly seen as a precedent.)
To consider a single example, one thrust of the proposals is that more weight should be given, and applied sooner, to new products. This catches them during a phase of their "product cycle" when their prices are typically falling. There is a case for this if the CPI is to measure the price of "equivalent well-being". Surely we don’t want to be unappreciative — if we deflate GDP or National Income by the CPI, we don’t want to miss out on the good part of the news. It illustrates, however, the sort of opening which will be provided for future finagling, as applied to price-indexed promises. Ideally, a standard of value would prefer to base itself upon precisely those things which come in standardized quantities and are not in flux — not feverishly dropping in cost of production, not dropping out of the market in favor of newer models every year, not requiring a whole lot of guesswork and judgment to determine the applicable price.
4. Shaky Ground: Measuring "Equivalent Well-Being".
Since my principal challenge is to the use of a "cost of living" index in the first place, in matters where a "standard of value" would be more appropriate, I should perhaps avoid engaging the Boskin Commission economists upon their home field: measurement of changes in the cost of living. They have thought about this matter long and hard, and brash challenges risk crushing answers — at least to challengers who are capable of recognizing when they’ve been crushed.
Just the same, I do see some weaknesses in the Boskin arguments, and they must not go unexamined, for there are those who will hold that the purpose of COLAs should be to maintain "the same level of well-being" throughout retirement. Folks in that frame of mind should at least be concerned whether the proposals do what they purport to do.
The Boskin Commission has not entirely escaped expert criticism. A review of the literature by Eric Weinstein points out two main lines of criticism. Both take aim at the squishiness of any index which purports to measure the "well-being" of an economy. One is that it’s invalid to aggregate the impact of price changes upon different groups of people: the price of bread and the price of a limousine affect the poor and the rich differently. The other is that people’s preferences among goods change over time, so that the falling price of a hamburger may not be as helpful after the rise of vegetarianism as it would have been before.
Neither of these criticisms is new to the members of the Boskin Commission, and they claim that various studies have shown the effects to be negligible. My own doubts also involve the difficulty of measuring well-being, but take a different tack.
The commission states its criticisms in terms of "upward biases" which it sees in the CPI. It estimates the total bias to be about 1.1% of the index value each year.[1] Of the 1.1%, the lion’s share is divided between "substitution bias" and "quality bias", where the latter includes "new products bias". Let’s examine these.
a) The substitution effect.
First, there is the "substitution effect", much emphasized by the commission, and even popularized in talk shows and news magazines. (This notion was not concocted ad hoc for the political battles of the day; I can vouch that it has been received opinion in the economics profession for decades. I first heard it in an economics class around 1958.)
The argument goes like this. Any price index is based upon a "market basket": it compares the price of buying a particular collection of goods and services in two different periods. Now, if the "market basket" consists of what a consumer typically bought in the earlier period (as does the CPI), it will exaggerate inflation, because it ignores the way people typically duck the full consequences of inflation. Namely, they shift their expenditures toward things whose prices have risen the least. They don’t just go on buying the same mix. Thus the earlier market basket is overpriced, compared to what they actually buy in the later period. Conversely, a market basket based on what consumers buy in the later period will underestimate inflation. So the commission’s proposal is to scale down the effect and/or split the difference. (The "geometric mean" and the Tornqvist index which they endorse are ways of doing that.)
COMMENT:
There’s a great deal to be said about this — too much, and too interesting, for an article in which it will distract attention from the main points I want to make. Economists and adventurous souls who aren’t afraid of a little math are encouraged to look at my semi-technical note, Substitution and Income Effects in Various Forms of Price Index. Briefly, what it says is that:
b) Quality changes and new products.
Of the 1.1 percent "upward bias" which the Boskin Commission discerns in the CPI, 0.6 percent — more than half — is attributed to quality changes and new products whose impacts are inadequately registered in the index.
This is a real and vexing problem for any index which attempts to measure the cost of living. If you were to calculate a "personal CPI" of your very own, using whatever receipts you may have kept in shoeboxes or records you kept on file, you’d soon enough be scratching your head over this one: what to do with the price of something like a car, or worse yet, a personal computer, whose model changes every year? How do you compare the price of a new car in 1997 with the price of one in 1990, when the older model is no longer on the market? If the price doubled, is it because the new model is twice as much "car" as the older one was (when it was new)? If so, the price per "util" of satisfaction hasn’t risen at all.
The price for a personal computer is even more perplexing. A new computer in 1997 will do a great many things that a new computer in 1990 couldn’t do, and what counts as a "computer" in 1997 includes attachments such as scanners and CD-ROMs which were not included in 1990. Yet the overall cost of a "system" remains fairly constant, in part because people can spare about the same fraction of their budget for personal computing, and tend to take what they can get for that much of their budget. Obviously, the price per "util" of satisfaction has fallen drastically — but how to put a figure upon it?
So the general idea of "quality bias" and "new product bias" in the CPI is that it takes rising prices too much at face value, whereas in fact the underlying products are delivering more utility per unit purchased, so that the price per "util" is rising less, or even falling. If the Boskin Commission has failed in any way to measure this effect properly, it certainly isn’t for lack of trying. As they say (quoting someone else), this effort is "the house-to-house combat of price measurement". Their report cites many detailed studies, both their own and those of other economists.
The problem, to harp again upon my theme, is that the project is inherently unobjective and doomed to be challenged. Any precision it may achieve is false precision. The Boskin Commission included earnest, highly competent economists who have worked hard upon this kind of measurement, but their opinion of "well-being" is about as good as that of twelve prudent citizens selected for a jury. This springs from the nature of "well-being", not from any personal shortcomings or the defects of a profession.
Take the matter of automobile prices. The Boskin economists are well aware that mandated safety and anti-pollution devices pose a problem. The question is whether to regard these as a tie-in sale of additional well-being (safety, environmental quality, and fuel efficiency) along with "car" utility. If so, the precipitate rise in the price of new cars since 1967 would exaggerate the price per "util" of well-being which is purchased with each new car. If allowed into the CPI, it would impart an upward bias. But then, the same could be said of a sales tax, which purchases all sorts of government services in combination with the things which are taxed. The CPI already treats sales taxes as part of the price paid by the consumer, so, for consistency, it can be argued that the cost of mandated devices should be treated the same way.
In the end, The Boskin Commission compromised: the cost of mandated anti-pollution devices would be treated as an indirect tax, but mandated safety devices would be treated as additional utility whose usefulness is felt by the consumer. The upshot is that the cost of safety devices, but not of anti-pollution devices, is to be subtracted from the CPI’s measure of price increase.
Notice the subjectivity of the distinction which is made. To quote the exact words of the Boskin Report, "…our feeling is that consumers see the connection between their own safety and the devices more directly than they do between anti-pollution devices and air quality".[2] "Our feeling"? What about the feeling of those who don’t like the devices?
While the Boskin economists are careful to distinguish between well-being appreciated by consumers and that which they take for granted, neither they nor the BLS ever consider whether mandated devices might contribute negative utility. In that case, shouldn’t we impute a downward bias to the CPI?
If the Boskin Commission wanted to, it could certainly find evidence that some mandated devices are economic "bads", at least to a significant part of the consuming public. Consider the fight over motorcycle helmet laws. It is no easy matter to repeal a law, once it’s on the books, and once it has the support of a major interest group such as the insurance industry. Yet helmet laws have been repealed in state after state. Isn’t this evidence enough that mandated devices may have negative utility to someone? The fact that parents whose children’s heads have been broken in motorcycle accidents are equally vehement in the opposite direction doesn’t obviate the point: devices whose use has to be mandated are distasteful to at least the purchasers. Doesn’t their price in that case underestimate the increasing cost of a "util"?
A similar argument could be advanced concerning any coerced purchase. The CPI sweeps all indirect taxes into the prices of the things which are taxed. As a practical matter, it could hardly do otherwise: there is no direct measure of the value which the consumer places upon the government services which are purchased. Indeed, the consumer sees the price inclusive of tax as the price of the thing which is bought, and presumably shifts expenditures towards things which are not taxed. But then, what is our comfort level with a calculation of "quality bias" which takes no account of negative quality introduced by government?
Motorcycles may be a minor item in the average consumer’s market basket, but what about tobacco? Surely the crowd who hang around the entrance to a workplace while they smoke in disgrace must feel a declining utility in what they purchase. As a non-smoker only too happy to be rid of the stuff, I must still say: a CPI which registers the price rise in tobacco products at face value surely must underestimate inflation as experienced by a smoker. The Boskin report imputes zero bias to this part of the index.
In the public at large, there may be underwhelming sympathy for macho bikers and thoughtless tobacco addicts. But what about the pint-sized driver who is obliged to buy a life-threatening airbag? What about parents who don’t want to strap their children into a back seat, in order to salvage the airbag mandate? (The way things are going, the family dog will soon receive more sensory stimulation from a car ride than the kids.)
It would be possible, I think, to construct a systematic parody of the Boskin Commission’s report, using their own methodology, and coming up with a negative bias in the CPI. Just reverse the polarity of the well-being attributed to government services and government-mandated behavior, and reverse it strongly. (Promising fields for a curmudgeonly review include trendy educational fads, mandated pooling of insurance, third-party payment for medical services, and so forth.) No wonder so many people feel that the cost of living is rising faster than the CPI!
5. Well, Then, Where Do We Go From Here?
It’s easier to punch holes in other people’s proposals than to offer adequate alternatives. My drift, though, may be summarized in two propositions.
a) Separate from the CPI, we need to establish another index as a standard of value.
What we need is an index which can be confidently employed for striking long-term bargains, whether public or private. For these purposes, the components of its "market basket" should be:
Some traditional criteria for a medium of exchange or a physical store of value can be dispensed with. This is an index; transactions can be conducted in the usual currency, whose value may fluctuate relative to the index. Contracts, however, which are agreed in terms of the index must be redeemed in terms of it; if the price of the bundle changes, so must the amount of money owed. The store of value is in the contracts. No part of the market basket is required to be portable, durable, or conveniently small, since it needn’t be carried around. Nor is it necessary that the bundle as a whole be of any particular value, since contracts can always be stated in fractional units of the index.
Some casual ideas for the market basket come to mind, but I haven’t really investigated the stability of their cost or their market prospects for the future. The reader may find it amusing to suggest suitable candidates, and a suitably broad selection.
The main point is that, for this index, the market basket should emphasize the changeless things in life, not the volatile items of which progress is made. Where a "cost of living" index must assure a representative balance, a standard of value must emphasize stability and familiarity.
b) Public and private promises should be kept or explicitly renegotiated.
— NOT evaded by fudging the unit of account.
That’s blunt language, and once again I must reiterate: I’m not accusing the Boskin economists of chicanery. I’m simply pointing out the temptation which their long-held convictions about a cost of living index have offered to political leaders, when presented in a context where it would be better to discuss a standard of value. If we go the way recommended by the Boskin commission, this won’t be the last time. Nor will the advice always be so innocent: we’ll inaugurate a system and people will learn to game it.
As for the politicians, they too are human, and don’t like to dodge brickbats from their constituents, nor are they quicker than other people to admit to themselves the failure of their pet projects. For that matter, the constituents are just as tempted to demand and reward overblown promises, as politicans are to offer them. Once we set the precedent that the CPI can be redefined to suit budgetary purposes, it will become subject to the same processes that created our tax code.
To bring the discussion down to earth, this means that I, for one senior, would rather see my Social Security and Medicare entitlements curtailed up front and aboveboard, than nibbled away by future inflation and dubious reinterpretations of what was promised. Who knows, the real curtailments may be the same, but one way we get an honest society, in which we can see what’s coming and plan our private actions accordingly; the other way, we get a milieu of distrust, in which everything we do must compensate, and perhaps overcompensate, for one more element of risk.
Needless to say, not everything that is promised in good faith can be delivered. Life is full of honest mistakes and unforeseen catastrophes as well as shabby frauds. When this sort of thing happens in the private sector, the promisors are obliged to declare bankruptcy and negotiate how much they will pay on the dollar, and to whom. When it happens in the public sector, the same adjustment is unavoidably carried out through a political brouhaha. The public sector, though, has a dodge which is not available to private defaulters: it can alter the unit of account, without ever admitting that it has defaulted. We need to head that off.
A stable unit of measurement comes in handy. It clarifies the extent of defaults (private as well as public), hastens the day of reckoning, and educates those who must judge whether to make (or receive) certain kinds of promises. We should design one which we can keep above the fray, and we should be prepared to give up other benefits rather than allow any funny business with the yardstick.
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Dick H. Fredericksen Tucson, AZ October 20, 1997 |
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