Nonstopdrivel
13 years ago

22.06.2011 00:41, Dow Jones
Change To Inflation Measurement On Table As Part Of Budget Talks -Aides
 

WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.

According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.

Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.

The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report.

According to two congressional aides familiar with the budget negotiations, the shift is being "seriously discussed" as part of the ongoing talks to strike a budget deal, that would be used to ease the passage of a required increase in the country's debt limit.

Those talks involve Democratic and Republican lawmakers from both chambers and are led by Vice President Joe Biden. The group held its latest meeting Tuesday as they strive to reach the broad outlines of a compromise on federal spending by the end of the month.

In a press conference that took place before the meeting, House Majority Leader Eric Cantor (R., Va.) declined to comment on the specific proposal, other than to say that "a lot of things are on the table." But asked whether the proposal would be interpreted as a tax increase and therefore a non-starter for Republicans, Cantor said it could be seen as both impacting tax rates and benefits paid out by the federal government.

When asked about the idea after the meeting, Rep. Jim Clyburn (D., S.C.) said everything is being discussed.

It is a rare proposal in that it would likely lead to both lower benefits paid to seniors and higher taxes paid by most people who pay federal income tax. As such, it could allow Republicans to argue they are tackling federal entitlement programs such as Social Security, and permit Democrats to say they are increasing taxes as part of any budget deal that is reached.

It could be easier for both parties to agree on than a significant overhaul to the Medicare proposal or an increase of taxes on wealthier Americans.

"It's certainly something that is going to be considered," said James Horney, director of federal fiscal policy at the Center for Budget and Policy Priorities, a liberal think tank. "There are questions whether it would be politically easy."

Several senators that are not party to the Biden-led talks voiced support for the proposal including Budget Committee Chairman Kent Conrad (D., N.D.), while Sen. John Thune (R., S.D.), a member of the Republican leadership team, said it should be looked at as part of the negotiations.

-By Corey Boles and Janet Hook; 202-862-6601; corey.boles@dowjones.com

(Kristina Peterson contributed to this article.)


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Nonstopdrivel
13 years ago
"Tyler Durden" over at zerohedge.com  comments:

America's Latest Proposal To Deal With Its Insolvency And Pursue Stealth Dollar Devaluation: Change The CPI 

Submitted by Tyler Durden on 06/22/2011 09:39 -0400

A few months ago we reported on Goldman's proposal to change the definition of GDP to make the US economy appear to be growing faster than it really is. So far, it has not caught on, as even the revised definition will soon confirm a contraction. But that proposal appears to have given Joe Biden some ideas, who now has taken the Fukushima approach to (sur)reality, whereby one merely changes the terms of data measurement when the data does not cooperate. Enter the revised CPI: "Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks." And because nobody has an issue with the current artificial hedonic and otherwise adjustments to the CPI which always reflect a far lower increase in prices than what is actually happening, here comes the government with another idea to make inflation appear to be rising even slower: "According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically. Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government. The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report." What does this mean practically? SImply said, the worst of all worlds for the US middle class: "[the proposal] would likely lead to both lower benefits paid to seniors and higher taxes paid by most people who pay federal income tax." We expect this last-ditch accounting gimmick will be implemented shortly, and the broader American population will not care one bit that it's purchasing power will see a step function drop yet again in the ongoing crusade to destroy the dollar.

[...]

Washington just took extend and pretend to a whole new level.



by ElvisDog
on Wed, 06/22/2011 - 09:38
#1391432

Wow, all that and a deficit reduction of $22B a year? What a deal.


by mkkby
on Wed, 06/22/2011 - 16:56
#1393162

Let's just get this over with. Let Goldman decide what each person should pay in taxes, and let them collect it directly for themselves.


by Hugh G Rection
on Wed, 06/22/2011 - 10:31
#1391636

Who uses food and energy anymore?

New CPI needs to be based on Ipads and dildos


by TruthInSunshine
on Wed, 06/22/2011 - 13:08
#1391952

My advice to the Bernank, NerObama and CONgress if they really want to swing for the fences (aka keep on doing what they've been doing, only harder - destroying the economy):

Get the BLS to Adjust the CPI in the following ways -

1) Remove anything that is digestable.

2) Remove anything that is tangible.

3) Remove anything that constitutes a service.

4) Remove anything that has any relationship to or involvement with 'energy.'

5) Remove anything that is derived from commodities of any kind (see 2 above).

6) Remove anything containing High Fructose Corn Syrup (HFCS), now known as Corn Sugar (contained in most Americans products).

7) Remove anything that is produced, manufactured, processed, designed, engineered, assembled, planned, or filmed, in whole or in part, either in the United States or in any other nation.

That should fix the inflation problem rightful concerns over inflation growing far more serious a problem in the coming months/years, and get Amerika back on track.


by Hondo
on Wed, 06/22/2011 - 09:43
#1391447

These people don't really understand economics. If in fact I have to change my spending habits because of inflation......I'm losing utility and therefore purchasing power and that in fact is what inflation really is. I guess they can try this game until we are all eating dirt because we have no spending power left due to corrupt government.


by Madcow
on Wed, 06/22/2011 - 10:07
#1391548

US policy makers are basically saying "we're going to keep things as they are for now - but in another couple years, we'll raise taxes and interest rates to bring the financial system into balance."

They may as well release a bulletin: WARNING: any investment a business makes in plant, equipment, or work force is guaranteed to result in financial losses. Sane and reasonable people and businesses will hoard cash and prepare for a long term depression.


by rwe2late
on Wed, 06/22/2011 - 10:18
#1391575

This is not something new. The CPI statisticians have already been doing this price shifting to reflect so-called changing consumer patterns.

So long as a cheaper item is substituted, the now more expensive item can be discounted.

Thus when the price of steak rises, it becomes less "relevant" and is statistically discounted as consumers switch to hamburg, then to tripe.

Eventually, when we are reduced to eating mud and grass ( as are many Haitians already), it won't be because of rising prices, but because our food "preferences" have changed.


UserPostedImage
Wade
  • Wade
  • Veteran Member
13 years ago
Sigh.

More evidence that Economics 101 teachers have failed for a couple generations. And, simultaneously, more evidence that current politicians can't be trusted.

/enter rambling lecture mode

I.
Almost every comment there reflects a misunderstanding of how index numbers work. Yes, boys and girls, when the price of a good goes up, we substitute away from that good. And that's true whether it's gasoline, bread, or anything else. And so any price index that fails to adjust for changes in the "basket" we buy will overstate the amount of inflation.

How much it will overstate things depends on the elasticity of demand for the goods in the basket of commodities used to construct the index. If the good whose price has gone up has demand that is relatively "inelastic" (fancy economist talk for "the quantity we buy won't change much when the price goes up", e.g. gas for someone who has to drive to work every day). If the good has relatively "elastic" demand (i.e., the quantity we buy changes a lot; example: the gas at station X, when the commuter can easily choose station Y who hasn't changed its price.

But elasticity only refers to the AMOUNT of the substitution, not to the DIRECTION. The law of demand (when price of something goes up, people are going to buy less of it) hold for every good. Even gas. Even food. And so any index number that fails to account for this substitution is going to overstate the effect on inflation. Some. Even if prices of every good in the current basket of commodities used for the CPI goes up, there will be substitution away from those basket goods to non-basket goods.

Using something like the CPI for an estimate of inflation will ALWAYS have this problem, because indices like the CPI work by keeping the basket fixed over time (if you don't keep it fixed, you have a comparing-apples-to-oranges problem.

II.
So, in principle, the politicians are right.

Unfortunately, they're at best, stupid, and at worst disingenuous and deceitful, in their application of the principle here.

They're stupid in that they're wasting time trying to fix multi-trillion dollar annual problems with tweaks involving a couple hundred billion dollars over a decade.

They're disingenuous and deceitful, because they're manipulating numbers for transient political purposes, nothing more. The substitution effects aren't going to disappear, just because they make this sort of change. They're still going to be there. Tomorrow's CPI is going to have the same kind of problem as today's. They aren't making a permanent fix of the CPI. (With this sort of error, no permanent fix is possible.

They are simply trying to hide evidence of today's price changes. To find ways of saying "things aren't as bad as you think." To find ways of distracting us from noticing how profligate they are continuing to be. To find ways of hiding how little they have helped and how much they have hurt with their "quantitative easing," their "stimuli," their "jobs programs," and all the rest.

And its insidious. Because not only are they doing the usual politician things of covering their asses and perfuming the smell so we think they're Hollywood starlets worth taking out for still more expensive dinners. But because they're doing it in a way that makes the statistics not just imperfect (which is unavoidable, after all), but incapable of effective interpretation.

If they really cared about "accuracy," what they would do instead of trying to make perfect that which cannot be made perfect, is be honest about margins of error and the like. Instead of talking about how the CPI is tenths of a percent bigger or smaller, or how changes in tenths of a percent affirm their policy claims or refute their opponents', they would admit that the margin for error in the CPI is on the order of tenths of a percent and is always going to be. Instead of bragging about savings of tens of billions in GDP (a magnitude of change which is probably too small for us to measure), they should be confronting the waste of trillions.

Fat chance of that, of course.

III.

Finally, the commenters and the politicians, both, have missed the fact that "inflation" is something qualitatively different from an "increase in prices/change in the cost of living."

Inflation is a decline in the purchasing power of money. Every dollar purchases less of ANYTHING than it did before. It doesn't just purchase less gasoline (as it does when the price of gasoline goes up), or purchase less bread (when the price of bread goes up). And it doesn't just purchase less of the 200 or so goods in the CPI either. It purchases less of any of the tens of millions of goods traded daily in the economy. It purchases less of the goods we "live on"; and it purchases less of the goods we "use to produce stuff," and it purchases less of the goods we "save for use later."

Of course, no one, not even the smart people at the Department of Commerce, can measure the decline of purchasing power of money directly. They can only measure price changes. And of course no one can keep track of tens of millions of prices either. So we sample. We pick 200 or 2 prices, track them, and use the changes to estimate inflation. We sample.

And since we sample, we have various errors in the amounts we measure. One part of which is the substitution bias.

But the bigger error we make is the use to which we put the calculations.

If all food prices go up, its bad ... when we're looking at food as consumers. But if we're looking at food as sellers of food, it can be a good thing. (If the demand for the food the seller sells is inelastic, that is. Not all food, e.g., lobster, has inelastic demand.)

The same for gas.

So when you see this price, or that price, or the other group of 200 prices, change, your interpretation is going to change based on which point of view you're coming at things from.

All of which is fine and good. But that is NOT what inflation is about. Inflation describes something that happens across the board, regardless of whether they're looking at things as producers or consumers, as farmers of corn or eaters of corn, as employers or employees, etc., etc.,

Complain about rises in prices, or in the cost of living, all you want. But don't call it inflation.

/exit rambling lecture mode.
And do not be conformed to this world, but be transformed by the renewing of your mind, that you may prove what is that good and acceptable and perfect will of God.
Romans 12:2 (NKJV)
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