Rose-colored lenses and the Consumer Price Index
Economics used to be called the dismal
science. Early nineteenth- century economists enlivened public discourse with
coldly rational predictions about the inevitability of poverty and the fate of
the poor. Their rhetoric was indeed dismal, but just how scientific it was is
another question. Talk of the inevitability of poverty has a strong element of
self-fulfilling prophecy. It contributes to a political climate that encourages
and sustains the very conditions it purports merely to describe.
Economists are striving once again to reclaim the mantle of science, and the implications of their claims are likely to be dismal for many of us. An expert commission on the seemingly arcane matter of cost of living adjustments issued a report late last year concluding that government statistics exaggerate increases in overall consumer prices. The commission implied that, despite cries of anguish from working citizens, things really have been getting steadily better for almost everyone over the past two decades.
The government measures the consumer price index by assembling a shop ping cart of goods the "typical" American buys and averaging their monthly prices at standard retail outlets. The commission argues that this standard methodology overstates inflation. It fails to assess improvements in the quality of standard goods, it doesn't recognize the increased role of discount stores, and it doesn't acknowledge that many goods have acceptable substitutes when their price becomes too high.
Mainstream media have been quick to point out that this seemingly innocuous
academic exercise has enormous implications. It is damaging news for recipients
of government pensions, whose checks are pegged to the CPI. But it is great
news for
Major senior citizen lobbies have responded angrily to proposals to change the way the CPI is measured, sensing that a conspiracy to slash benefits underlies such statistical "reform." They argue, quite rightly, that even a cut as small as $8 a month--the typical reduction if the revision goes through--would mean a great deal to those elderly citizens who depend primarily on social security. The current maximum pension is only about $15,000 a year, and most recipients receive considerably less. In addition, this effort to reform the CPI is being floated at the same time political leaders are contemplating Medicare "reforms" that would boost the out of pocket costs borne by most seniors.
While retirees may be directly and immediately affected by a "reformed" CPI, workers may be damaged in more subtle ways. Although a minority of union contracts still include automatic cost of living increases pegged to the government's CPI, that figure is more often used only as the starting point for many formal and informal negotiations between labor and management. Furthermore, government calculations of changes in the cost of living have been the basis for most proposals to reform or adjust the minimum wage.
Finally, one must recognize that this is a classic compound interest problem. Small changes in calculations of inflation rates--and wages or pensions based upon them--mount up over time. Calculate what a mere 1.1 percent change in your mortgage rate would mean in income for you and your bank over the next fifteen years.
Essentially, there are two related issues wrapped up in this one controversy: what is an adequate level of income protection for workers and pensioners, and how do we measure cost of living? Defenders of the expert commission that added fuel to the controversy would respond that pension, salary, and wage amounts are a political question, whereas the CPI is a scientific issue. Despite what we do about the former, we should have an honest measure of the latter.
This posture is inadequate for two reasons. Decisions regarding the CPI will have an enormous effect on some of the most vulnerable in our population. In our current political climate, there is no way to assure these citizens that, once the CPI is "reformed," inadequacies in the base guarantees for pensioners, union workers, or minimum wage recipients will be addressed. Government of late has had a way or telling us that it will "fix" problems for the most vulnerable once its basic agenda is enacted. Let's see how long we will have to wait.
More broadly, it is not even correct to argue that CPI calculations are, or ever could be, a neat scientific process. Every shopping cart of goods chosen by the government is a hypothetical construct that misrepresents some segments of the population. Their concerns deserve to be heard. I would argue that, over the last generations, the CPI actually understates increases in the cost of living for most of us.
While we wait for government bureaucrats to come up with an accurate interpretation of typical consumer behavior on which to base the CPI, let me pose my own version. Consider the experience of many middle class families, including those fortunate enough to have two healthy incomes. Over the last two decades, many have added an electronic security system in their homes, as well as a water filtration system. And some have joined health clubs. All of these new goods and services suggest that their economic standing has grown immensely.
On the contrary, I believe that many of these "upgrades" are forms of defensive consumption required by economic deterioration. For example, a friend of mine recently joined a health club because local parks were closed or eliminated by urban sprawl. Another friend added a security system because crime had increased and his house was vandalized. He also added a water purification system when local water quality began to deteriorate.
For many families, as good paying jobs have disappeared and wages have fallen, both adults have had to work full time--or even more than full time--to keep the family income reasonably steady, even in absolute dollar terms. At the same time, these families have faced substantial increases in clothing, transportation, and child care costs just to enable both adults to work.
Many of the amenities purchased by professionals deserve a second look as well, in terms of their impact. Do pagers and cellular phones really make life easier and more pleasant? On the contrary, they simply ensure that these people are never off duty. Purchasing these "toys, " in many cases, is not simply a matter of status; these innovations become simply one more cost of living.
I would argue that cost of living is best measured as the amount of income required to maintain one's typical family, cultural, and recreational activities. When the many changes in the con temporary economy are properly assessed, this cost has gone up far faster than government figures suggest.
Addressing the causes of declining real income will require far more than reforming the CPI. Nonetheless, effective economic policy is less likely if we allow expert commissions to define away our problems. All of us have the right to draw on our experiences in assessing how adequately government measures social health.
John Buell is a freelance writer with a special interest in labor and environmental topics. He most recently coauthored Sustainable Democracy: Individuality and the Politics of the Environment.
Buell, John, Rose-colored lenses and the Consumer Price Index.
(economic consequences of changing the way the index
is calculated)(Humanistic Economics)(Column). Vol. 57, The
Humanist,