Changing the inflation yardstick would still leave much else to do

The Outlook

December 08, 1996|By Jay Hancock

LAST WEEK, a congressional commission recommended that the government create a price index that measures inflation better than the current standard -- the Consumer Price Index.

The CPI misses quality improvements in products, the commission said, and doesn't adjust for people's tendency to shop at discount retail stores in recent years or to buy generic drugs instead of brands.

The report attracted much attention because the CPI is linked to cost-of-living increases for Social Security and other programs. A lower CPI would cut Social Security payments.

Does the current index really overstate inflation? And will the government do anything about it?

Gary Robbins

President, Fiscal Associates, Arlington, Va.

Overall, I think the commission has done a fairly thorough job, at least in exposing some of the problems with the Consumer Price Index. But having said that, the reality is that it's going to be very difficult for the Bureau of Labor Statistics to implement some of ,, the recommendations they've made.

If you look at the recommendations, you're going to find that there were an awful lot of judgments made, and those judgments are not going to be something that a disinterested party like the BLS could implement easily. There's a lot of art involved, and a sort of mechanistic operation like the BLS doesn't have the luxury of using that kind of art.

They have to be able to show what they've done in detail and have it withstand scrutiny and criticism on all sides. My guess is that as much as half of the change they're talking about could be of that type. That's not to say that the changes that they point to aren't real. I believe that they are real, but it's not going to be possible to get at them.

Let's look at the example of health care. The difficulty in health care is that we measure inputs; we don't measure outcomes. The result is that all we can see is the rising price of the input. What we really don't see is that those prices are producing a much better product. Medicine as practiced today is quite different from the medicine practiced 40 years ago, or 30 or 20 or even five years ago. And that medicine is worth a lot more.

I for one wouldn't go back to the medicine even as practiced in 1980. I had a friend who just had quadruple bypass surgery. He'd be dead. How do you measure that? How much is that guy worth? It's those kinds of things that are going to defy quantification."

Robert Sweet

Chief economist, Allied Investment Advisors

As long as I've been watching economic statistics, the economists that I follow have all pretty much concluded that the CPI does overstate actual inflation. It's the magnitude that's questioned. The Bureau of Labor Statistics has thought that the CPI is overstated by about half a percentage point. I'm in that category -- between a half and 1 percent. So yes, I do believe there is an overstatement by about a half to 1 percent.

The quality issue is a factor. Products have improved since the 1980s. Quality is a factor especially in the computer area and automobiles.

But it's going to be a political football. I'm almost ready to say that it'll end up like Bob Dole's 15 percent tax cut -- there'll be a lot of talk about it, and then nothing will be done about it. It does provide a nice way to close the deficit, but it'll take away entitlements.

Anything that comes of this panel's research won't come to fruition for another year or two -- if it does, and I don't think it will. I'm of the feeling that it'll be talked about for a long time, but I can't see much being done that will hurt Social Security.

Kenneth T. Mayland

Chief economist, Keycorp

These problems that the commission talked about have been known by economists for a long time. I've read some of the academic research, and, yes, it's blatantly clear.

On a number, I'd have to defer to the commission. People have said, the minimum of the overmeasurement is a half a percent, and as much as a percent and a half. So a number like 1.1 percent doesn't surprise me. The real question mark is quality changes -- when you buy things for the same price that last longer. TVs are better than they were. VCRs are better. They're easier to use. They have more features. And the CPI accountants just measure the price of a VCR. How do you put a price on something that's easier to use?

There seems to be a lot of political juice to do something, and part of it relates to broader, budget-deficit problems. It's well known by any professional actuary or economist that the Social Security system is not viable under current benefits and rules, and requires a fix. Although changing the CPI cannot be a complete fix of it, it becomes part of a fix.

If ever there were a time to do something, early 1997 is the time to do something, politically. We're not going to have congressional elections for another two years. We're not going to have a presidential election for another four years. But it's going to get ugly. This literally pits children against their parents.

Pub Date: 12/08/96

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