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Chained CPI and unbound illusions

Tucked into the morass of accounting fraud and tax increases that form the bulk of President Obama’s 2014 budget proposal is an endorsement of “chained CPI,” a new way of using the Consumer Price Index to calculate inflation.  It’s one of the few truly serious elements of Obama’s otherwise delusional budget and its $744 billion deficit.  (But that’s only half the size of the last deficit, so it represents “fiscal discipline” and “deficit reduction,” don’t you know!)

There is a good deal of informed debate about the merits of chained CPI.  It’s a complicated concept, and experts disagree on what its precise effects would be.  Peter Coy at Bloomberg Businessweek doesn’t seem to care for the idea, but he does a good job of explaining how it would work, based on the CPI-U figure “widely reported by the media every month as ‘inflation.'”

[CPI-U] is for all urban consumers, or about 88 percent of the population. It’s the one the government uses to adjust income tax brackets so people don’t get pushed into higher tax brackets by inflation.

Chained CPI is a flavor of CPI-U. The difference is that it takes into account shoppers’ ability to change what they buy in order to take advantage of bargains and avoid items that have risen in price. It’s called “chained” because the index is like a daisy chain in which the market basket of goods and services that are measured changes from month to month.

In other words, chained CPI tracks the actual behavior of consumers, unlike the current CPI-W metric, the general consumer price index for urban wage earners and clerical workers.  Coy argues that even the relatively high CPI-U figure doesn’t accurately reflect the inflation experienced by Social Security recipients because they spend so much money on health care, which has a much higher rate of inflation.

A shift to chained CPI would also change the way tax brackets and deductions are adjusted for inflation, resulting in a substantial tax increase for the middle class.  Of the $340 billion in deficit reduction from chained CPI anticipated by the Congressional Budget Office, “$127 billion would come from savings on Social Security, about $89 billion from savings on other spending, and about $124 billion from additional tax revenue from people moving into higher tax brackets.”

There are constant arguments about the best way to measure inflation.  Some contend that revisions to the official measuring system over the past few decades have been designed to conceal inflation, because it angers the public.  As can be seen from this discussion of chained CPI, the assessment of inflation has profound implications for government programs designed around the true cost of living.  The value of the dollar bills pouring out of Uncle Sam’s bottomless printing press must be carefully assessed.

But if chained CPI more accurately reflects the way consumers actually behave, isn’t it worth considering a shift to that metric – accompanied by other changes designed to prevent it from becoming a stealth tax increase?  Even with due allowance for the complexity and uncertainty of our immense economy, we’re constantly presented with deceptive data, our perceptions manipulated by figures that have meaning far different from what their names imply.  For another example, look at the difference between nominal and effective tax rates.  Liberals occasionally wax nostalgic for the high tax rates of yesteryear, without accounting for the massive exemptions that left only a small share of income vulnerable to the highest rates.

As for the higher inflation rate experienced by the elderly due to their heavy consumption of medical goods and services: we already have separate programs for that.  Social Security is not a medical plan.  In the interests of clarity, doesn’t it make more sense to deal with the health care costs incurred by older Americans through the gigantic (and, sadly, equally insolvent) programs designed to cover their medical needs?

Instead of chained CPI, Coy quotes the preferred Social Security reform of Brookings Institution senior fellow Henry Aaron: “The way to do it is to selectively reduce benefits for those with comparatively high average earnings, and the reason for that approach is that most of the gains in life expectancy have been accruing to those with relatively high earnings.”

Sure, let’s screw over the Evil Rich with more class-war confiscation.  And here we’ve been told for generations that Social Security is an “account” that we “own,” because we funded it with our money over the course of a working life!  But no, it’s just another welfare program, as ill-managed as the rest of them.  Too bad we weren’t given the option of investing all that money in private accounts that we really would “own.”  Then the system wouldn’t collapse because increased life expectancy was reducing the number of active workers supporting each retiree.

There’s not much illumination to be found in the shrieks of lightweight Democrats gasping over Obama’s inclusion of chained CPI in his budget plan.  Quotes from Politico:

“It was a bad idea then and it is a bad idea now,” Rep. Jan Schakowsky (D-Ill.) said. “We should not be negotiating with those who want to take Social Security benefits hostage and seniors shouldn’t be a bargaining chip. It’s time that the Republicans agree to raise revenues that put people back to work in good-paying jobs without demanding cuts to Medicare and Social Security in exchange.”

Sen. Sheldon Whitehouse (D-R.I.) blasted the inclusion of chained CPI, saying that Social Security hasn’t contributed to the deficit and shouldn’t be included in deficit talks.

“While I commend the president for including some smart provisions in his budget like investments in infrastructure and the Buffett Rule for tax fairness, I cannot support a proposal that would force seniors to pay for deficits Social Security had no part in creating,” Whitehouse said in a statement.

Social Security is a mountain of insolvency that dwarfs the existing national debt by a thousand percent.  The people “taking hostages” are the ones who want to preserve the current doomed system long enough to finish their endless Congressional terms and escape to enjoy their sweet government benefits.  And just savor the cosmic idiocy of exhorting Republicans to “agree to raise revenues that put people back to work in good paying jobs.”  Confiscating money from the private sector to fuel irresponsible government spending is what kills jobs, Rep. Schakowsky; your man Barack Obama has been proving that for years on end.

I hate to interrupt Senator Whitehouse’s party boilerplate with cold hard facts, but Social Security did run a deficit of $47.8 billion last year, $47.9 billion the year before that, and $36.8 billion in 2010.  This was, in part, due to the raid on funding staged by Barack Obama’s “payroll tax cut” gimmick, which he used to pump up consumer spending and conceal just how weak his economy really is, until he could secure re-election.  Those are small deficits by Washington standards, easily covered with a bit of discreet paper-shuffling, but no one will be able to hide the H-bomb of liability that will soon detonate in our faces.

In the bigger picture, Social Security has contributed to our government spending crisis ever since politicians started using paper shuffles to swap out entitlement dollars for I.O.U.s  Tricky accounting has allowed the political class to hide the true insolvency of the mega-State behind that huge pile of Social Security “contributions.”  If they had not been allowed to get away with this this, the public might have understood the folly of Big Government in time to prevent it from accumulating the level of debt we have grown accustomed to.

To fix any of this, we need clarity.  The debate about chained CPI should focus on its accuracy.  Of course, good ideas can be implemented badly, so implementation is a separate but equally important discussion.  But whatever our government does, it should be based on the most honest and realistic metrics we can find, because we’ve been fed a steady diet of illusions for far too long.

 

 

 

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