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Inflated Concerns
Every so often in science, history, or economics, an important discovery is made, but is so embarrassing or dangerous that it must quickly be swept under the public carpet. This category includes the "missile gap" that never was; the limited extent of the Fed's powers; hysteria aside, that silicone implants turn out to be harmless; and revisions to the Consumer Price Index.
Early this month, a non-partisan commission headed by the non-doctrinaire Michael Boskin reported that the CPI overstates actual inflation by approximately 1.1%, and has done so for at least the last 25 years.
The trouble with the CPI is the constant need to update the "market basket" of goods and services whose prices are to be measured. The keeper of the CPI is the slow-moving Labor Department, while those in charge of the real market basket -- us -- move at Price Club speed, instantly changing our purchasing behavior as prices and quality change.
Adjusting for quality is far harder than tracking prices. For example, today's personal computers cost about the same as those ten years ago, but today's run at 30 times the speed with 50 times the memory. The nominal price per unit may be the same, but the free-fall in the price of computing power means the CPI should be adjusted down. The same sort of quality improvement is found throughout electronics and in the automotive world. "Changing a spark plug" is passing into the ancient language chapter alongside "letting out the choke."
Harder yet are adjustments for complete transformations in consumption, or those where the quality improvement is in the quality of life. A hundred years ago, keeping a horse was a relatively cheap necessity; today it's a hideously expensive hobby. In the homes of the generation which fought World War II, less than half had central heating or a refrigerator, virtually none had air conditioning, and most rural homes had neither running water nor electricity (all of which may help us better to understand Bob Dole).
The toughest CPI adjustments are for combinations of innovation and price increase. For example, a two dollar movie now costs seven bucks; but on the other hand, you can rent a video for the same two bucks. Some feel the inflated price is worth paying, others happily switch. (For me, videos are better: no driving, no parking, no lines, cheap popcorn, a glass of wine, and I can read through the dull parts. These advantages are somewhat offset by my wife's objection to datelessness.)
The Boskin conclusion met general agreement in the economics profession, as nearly all had suspected an exaggerated CPI, and the Fed has acted on the assumption for a decade or more.
Let loud hosannas ring, right? A proper CPI, and most of the country's economic problems are fixed! Real economic growth turns out to have been almost a trillion greater than we thought. Real wages have not been flat for twenty years; they have risen 30%. The budget will balance by itself, and Social Security is as good as gold.
Not a chance. Headline, Daily Camera: "New Index Would Hurt Old, Poor." Robert Reischauer, former director of the Congressional Budget Office: "I don't think the proposal [corrected CPI] has political legs; no politician wants his fingerprints on it." AARP has gone ballistic: we want our cost of living adjustments no matter what the cost of living is.
And so, the corrected CPI is about to become a permanent lump under the carpet. The Fed and bond traders will use it, economists will refine it, and frightened politicians will ignore it. The lump should, however, be worshipped as yet another monument to our helpless devotion to entitlements; earned, deserved or not.
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