“The Height of Outrage”, an Open Letter to President Obama on Chained CPI from CPEG’s Ron Baiman

Dear President Obama:

Please stop pretending that switching to a “chain linked’ CPI is, though unfortunately likely to reduce benefits, more “technically accurate” than the current “fixed basket” method of adjusting for the impact of inflation on social security benefits. It is not. It is more likely to result in an even greater underestimate of true cost of living increases for seniors than the current “fixed basket” method. You need to be honest with the American people and call this a “cut” and not try to camouflage this as a “technical fix” that more accurately implements the intent of the exiting Social Security program, as this is a “technical corruption” rather than an improvement of the method for estimating the impact of inflation on Social Security benefits for seniors, see Technical Postscript below.

Also, needless to say, at a time when more and more U.S. workers (through no fault of their own) have no, or much reduced (defined contribution) pension benefits, and less personal savings than at any previous time in modern history, it is the height of outrage to claim that this represents a “balanced approach” to budget cutting. Moreover, as you know, at a time when over 22 million people are unemployed and no progress has been made in increasing U.S. employment (especially not living-wage employment) relative to population since 2009, we need a budget stimulus supporting a large-scale federal jobs program that could be mostly financed by a Financial Transactions Tax, not more cuts to Federal programs.

Sincerely,

Ron Baiman
Chicago Political Economy Group

Technical Postscript

A simple Laspeyres “moving” or chain linked index where the base is adjusted every period is: “(last period quantities times current period prices)/(last period quantities times last period prices)” versus the standard fixed weight index which is: “(base quantities times current prices)/(base quantities times base prices)”. More complex versions geometrically average Laspeyres and Paache chain links but however the “chain linked” index is calculated, falling incomes that cause consumers to shift over time to less expensive quantities will cause the chain link index to increase less rapidly than a corresponding fixed weight index. Conversely rising incomes that cause consumers to shift to more expensive quantities will cause the chain link index to increase more rapidly than a fixed weight index.
This implies that if the chain-linked methodology were properly applied to consumption baskets of seniors rather than of the “average urban household,” the chain-linked methodology would probably produce a higher inflation COLA than the current fixed basket method due to continued use of new more expensive health care treatments.

The ruse here being used by the “budget cutters” is to use the “more accurate” chain-linked” methodology in a completely inaccurate way by basing COLA calculations on average households who (they/we – the bottom 99%) are becoming poorer and thus substituting for less-expensive goods and services causing the index to rise more slowly, but proposing to apply it (a chain-linked COLA) to entitlements used mostly by seniors for whom the index would rise more rapidly.

The appropriate response should then be: “fine move to a chain-linked index, but do it right!” and done accurately, properly calculated COLA’s for the folks that make up the majority of recipients of the programs in question will probably increase faster than they would under the current fixed-based CPI. The CPI, by the way, is also calculated inaccurately for “average urban households” and thus understates the true COLA for seniors – but less so than a similarly “improperly calculated” chain-link index would.

Image: FreeDigitalPhotos.net

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