History lesson: Who’s responsible for ‘chained CPI’?

at 06:00 AM ET, 04/22/2013


(Andrew Harrer/BLOOMBERG)

“We should not be providing the Republican Party in this Congress a trophy, a trophy they’ve always wanted, to begin to dismantle fundamental programs that the American people want, have supported and continue to support.”

— Rep. Raul Grijalva (D-Ariz.), speaking at a rally held by the Congressional Progressive Caucus, April 11, 2013

“I think it’s important to note that the chained CPI was originally a Boehner-McConnell demand in negotiations back in December. But it was a bad idea then, and it’s a really bad idea now.”

— Rep. Jan Schakowsky (D-Ill.), at the same event, April 11

President Obama’s budget included one budget reduction item that, as shown by the quotes above, has riled some Democrats: “chained CPI.”

That’s a cumbersome name for a different version of the consumer price index. Under this measure, the Bureau of Labor Statistics attempts to account for the fact that when prices rise, people may substitute an equivalent but lower-priced item, such as getting turkey meat rather than chicken. In other words, rising prices would not necessarily affect a person’s cost of living. Under the president’s proposal, tax rates and Social Security benefits would be adjusted according to this slower-growing formula.

The implications for government policy are profound, because while the shift appears to be modest — 0.3 percentage points per year — over time the shift could result in large budget savings (lower than projected Social Security benefits) and more revenues (higher than projected income taxes).

The Fact Checker takes no position on whether this is good or bad policy, but we were struck by the suggestion in the quotes above (made at a rally to protest the idea) that this was a solely Republican concept. Where did this idea come from?

The Facts

The Consumer Price Index, over time, measures changes in the cost of purchasing a fixed market basket of goods and services, assuming average consumption patterns. But times change, as do buying patterns. The BLS has often made technical changes to the price index in an effort to make it as accurate as possible.

Social Security benefits, unlike virtually all annuities, is adjusted every year to keep pace with inflation as measured by the CPI. Thus benefits are always increasing, making it very valuable to retirees — but also a big part of the federal budget. (For more on Social Security, read our popular primer on the program.)

During the balanced budget debates in the 1990, concerns grew that increasingly the index was not reflective of consumer behavior and possibly overestimated increases in inflation. In congressional testimony in early 1995, then-Federal Reserve Chairman Alan Greenspan urged Congress to take a look at correcting the problem in an effort to reduce the federal deficit:

Although little can be done to remedy the errors of the past, greater efforts should be made in the future to ensure that the indexing of spending and tax programs accurately reflects trends in the cost of living. In that regard, concerns have been raised that, for a variety of reasons, the official CPI may currently be overstating the increase in the true cost of living by perhaps 1/2 percent to 1-1/2 percent per year. To be sure, the overstatement may be a little less for retirees, whose spending patterns differ from those of younger age groups and who are the main recipients of indexed federal benefits. But even for this group, it doubtless remains significant. Thus, when the Congress reviews the methods of indexing spending programs and taxes, attention should be given to the biases in the price indexes that are used. Removing the bias in the CPI would have a very large impact on the deficit.

Greenspan is a Republican, but his notion was quickly championed by then-Sen. Daniel Patrick Moynihan (D-N.Y.). He repeatedly pushed for revisions in the CPI, suggesting it could be overstated by as much as one percentage point. “The money is sitting there, asking to be picked up,” he told the New York Times.

The Bill Clinton administration did not dispute the idea, though it questioned whether the overstatement was as large as Moynihan believed. Meanwhile, both Republicans and conservative “Blue Dog” Democrats crafted budgets that assumed some gain in budget savings from CPI revisions. With Moynihan’s prodding, the whole issue was thrown by the Senate to a commission, headed by economist Michael Boskin, who had served in the George H.W. Bush administration.

The commission’s report, issued in 1996, concluded that the CPI overstated inflation by about 1.1 percentage points a year, though the overstatement had been slightly higher before the BLS had instituted a fix earlier in the year.

The last point is important: The BLS, on its own, had made a tweak that shaved 0.2 percentage points off the inflation rate.

In fact, after the Boskin report was issued, the BLS made a number of other changes in response to its recommendations. A move to chained CPI, in fact, would represent fulfilling the last key recommendation of the Boskin commission, but it requires a vote in Congress because current law says that benefits and tax rates must be adjusted according to the nonchained index. The other recommendations, because they could be implemented administratively by BLS, did not require a vote by lawmakers and thus stirred little controversy.

The 1999 Economic Report of the President detailed these changes (see Table 2-4) and estimated that all told, the annual inflation rate measured by CPI was reduced by 0.68 percentage points. Recall that shifting to chained CPI is estimated to reduce the inflation rate by 0.3 percent percentage points. Together, the changes add up to 0.98 percentage points — which comes very close to Moynihan’s long-ago claim of a one-percentage-point overstatement.

Economist Dean Baker, who was a prominent critic of the Boskin Report, thinks that the 0.68 estimate is a bit high and, to be conservative, would say the reduction was about 0.5 percentage points. But notice that the impact of the previous changes still is actually higher than what would be contemplated under chained CPI.

Using Baker’s estimate, that means the current average monthly benefit of about $1,230 a month would have actually been $1,295 a month if none of the previous changes had been implemented.

It’s important to note that the BLS says these changes were not made in response to political pressure, but simply to make the index more accurate. “The improvements chosen by the BLS that some critics construe to be a response to short term political pressure were, in fact, the result of analysis and recommendations made over a period of decades, and those changes are consistent with international standards for statistics,” the agency says on its Web site.

Moreover, the changes can cut both ways: A measure for housing costs that was replaced in 1983 would likely have been a drag on the index after the 2008 collapse in housing prices.

In any case, chained CPI is the last step in a decades-long process in adjusting the inflation gauge that has already “cut” benefits for seniors. The importance of that fact is open to interpretation. For some, that might strength the case for not taking this final step, whereas as others might say it shows that the CPI is always in flux and there is no guarantee on future benefits.

Rep. Schakowsky was a member of the Bowles-Simpson commission, whose leaders recommended a shift to chained CPI — she voted against the final report — and spokeswoman Sabrina Singh said she was aware of the previous changes made to the CPI. Singh said her concern is that chained CPI does not accurately reflect inflation for seniors, who would be most affected by any changes in benefits.

As for chained CPI being a “Boehner-McConnell demand,” referring to House Speaker John Boehner and Senate Republican leader Mitch McConnell, this echoes a talking point made by the White House. McConnell did mention chained CPI in a television interview as an indication that Obama was serious about reducing mandatory spending; Boehner implicitly referenced in a letter to Obama by urging a proposal, along the lines of a new plan advanced by Erskine Bowles, as an “imperfect, but fair middle ground.” Bowles, incidentally, is a Democrat and former chief of staff to Clinton.

Adam Sarvana, spokesman for Grijalva, said that the congressman was referring to what he considered years of efforts by Republicans to alter Social Security benefits, of which chained CPI is the latest example. “I understand your interest in the Moynihan material, but it doesn’t change the fact that Republican policies (not throwaway quotes, but policies) would lead to the program not meeting its financial obligations,” he said.

The Pinocchio Test

Schakowsky’s and Grijalva’s quotes are very different — his statement could be dismissed as partisan opinion; her comment is a possibly defensible interpretation of the negotiation dynamics — but they both leave the impression that chained CPI is a purely Republican creation.

White House statements certainly add to the confusion. Although this is a presidential proposal, spokesmen frequently suggest Obama is taking the step only in response to GOP demands.

Yet a prominent Democrat was a driving force behind the development of the concept, and others, such as Bowles, have embraced it, as well. (We should note that other Democrats, such as the late Sen. Edward Kennedy of Massachusetts, were also fierce opponents.) Moreover, the BLS, through its various changes to the index, has shown that it is primarily concerned about accuracy in measuring changes in the cost of living.

Opponents of chained CPI would do better to drop the partisan attacks and acknowledge that some Democrats are as responsible for promoting chained CPI as Republicans.

One Pinocchio






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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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