NPR

'Chained CPI' Seen As Tactic To Trim Deficit

Inflation doesn't account for the fact that when the price of one fruit goes up, consumers often buy another. Changing the way the government measures inflation would be one way to reduce the deficit. (iStockphoto)

The "Gang of Six" bipartisan proposal to end the ongoing debate over raising the federal debt ceiling would include a $500 billion "down payment" on deficit reduction.

A big chunk of that would come from changing the way the government measures inflation.

One of the advocates for the switch is Marc Goldwein, who was a staffer for President Obama's fiscal commission. He is now a senior policy analyst at the New America Foundation.

To explain the proposal, I asked Goldwein to join me on a shopping trip at the Safeway grocery a few blocks from the NPR offices in Washington, D.C.

Oftentimes when people talk about inflation, they talk about a market basket of goods, so I carried a little plastic shopping basket and we walked into the produce section.

"One of the problems of inflation is it doesn't account for the fact that when the price of apples goes up, you buy oranges or bananas," Goldwein pointed out.

"So the way we're calculating inflation now tends to overstate the change in prices?" I asked.

"That's right," he said. "Most experts believe this leads inflation to be overstated by about three-tenths of a percentage point per year."

That might not sound like much. But many federal programs grow at the rate of inflation. Over time, even a slightly lower growth rate produces big savings. Goldwein says the bulk of those savings comes in later years, which is just what the economy needs.

"We don't want to be cutting severely into the budget right now, because the economy is so weak," Goldwein said. "But we do need deficit reduction over the medium and long term. And we do need to reassure the markets as soon as possible that deficit reduction is coming."

Changing the inflation measure would also produce more tax revenue, because tax brackets would adjust more slowly. Over a decade, Goldwein estimates, the switch would shave about $300 billion off the deficit, with a mix of about 70 percent spending cuts and 30 percent higher taxes.

"It doesn't hurt that it does require a little bit of shared sacrifice. It does affect Social Security, which is so important to the Democrats, and it does affect revenues, which is so important to Republicans," he said. "And so even though I wouldn't call it a brave move, everyone is at least starting to put their sacred cows on the table."

Supporters call the switch to "chained CPI" (consumer price index) a "technical" fix. But not everyone buys that. Dean Baker of the liberal Center for Economic and Policy Research says the change would have a real impact on Social Security and other government benefits beginning next year. The change in cost of living adjustments would be small at first but would compound year by year.

"It ends up being a fairly substantial cut in benefits over time," Baker said. "And it's important to note that the people who get the biggest cuts in this story are the oldest of the old, who also tend to be poorest."

Baker also questions whether the elderly who depend on government benefits really make the kind of price-conscious shopping decisions that the chained CPI measure assumes, especially in areas like health care.

"Elderly people might be more set in their ways," Baker said. "They're not going to be running around looking for discounts. Or they might be less likely to. So if we're going to have an index that shows a lower rate of inflation because people are substituting, we should at least want to know the extent to which the elderly actually substitute."

Still, supporters of chained CPI say when it comes to deficit reduction, this is low-hanging fruit. And that takes us back to the produce section and Goldwein.

"We need something like $4 [trillion] or $5 trillion in deficit reduction to get our debt on a downward path. And we need it desperately," he said. "And that means — guess what? — Medicare and Social Security benefits are going to have to go down. People are going to have to start paying more in taxes. We're going to have to make some really tough choices.

"Using the right measure of inflation is not one of those tough choices," he asserted. "Using the right measure of inflation is a no-brainer that in the process saves us almost $300 billion."

That left me with one more question for the deficit-cutting shopper: "Are you going to have red delicious or fuji for lunch?"

"Well, it looks like the prices of apples are a little higher," he said. "I'm going to go for the peaches over there. I'm going to do a little substituting."

And if the Gang of Six get their way, the U.S. government will soon substitute a new measure for inflation.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

MARY LOUISE KELLY, host:

It's MORNING EDITION from NPR News. I'm Mary Louise Kelly in for Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Good morning.

The latest proposal to raise the federal debt limit is not so easy to summarize.

KELLY: The plan comes from a bipartisan group of senators. It would cut the deficit, in part, by increasing total tax revenue, but mostly by holding down spending. And this morning we'll look at one huge and controversial way the plan would do that.

INSKEEP: It would alter the way the government measures inflation, which is a seemingly abstract change. Over time, though, it would affect billions of dollars in payments to social security recipients, among other people. NPR's Scott Horsley is our guide.

SCOTT HORSLEY: For a demonstration of the new inflation measure in the Gang of Six proposal, I turned to Marc Goldwein. He was a top staffer for the president's fiscal commission, and he's now with the New America Foundation.�I asked Goldwein to join me at the Safeway store, a few blocks from the NPR office.

HORSLEY: Oftentimes when people talk about inflation, they talk about a market basket of goods.�I've got my little plastic basket here and we're in the produce section.

Mr. MARC GOLDWEIN (New America Foundation):�One of the problems of inflation is it doesn't account for the fact that when the price of apples goes up, you buy oranges or bananas.�

HORSLEY:�So the way we're calculating inflation now, tends to overstate the change in prices?�

Mr. GOLDWEIN: That's right. Most experts believe this leads inflation to be overstated by about 0.3 percentage points per year.

HORSLEY: That might not sound like much.�But many federal programs grow at the rate of inflation.�And over time, even a slightly lower growth rate produces big savings.�Goldwein says the bulk of those savings come in later years, which is just what the economy needs.�

Mr. GOLDWEIN: We don't want to be cutting, severely, into the budget right now, because the economy is so weak.�But we do need deficit reduction over the medium and long term.�And we do need to reassure the markets, as soon as possible, that deficit reduction is coming.

HORSLEY: Changing the inflation measure would also produce more tax revenue, because tax brackets would adjust more slowly.�Over a decade, Goldwein estimates the switch would shave about $300 billion off the deficit.�About 70 percent of that would come from reduced spending, and about 30 percent from higher taxes.�

Mr. GOLDWEIN: It doesn't hurt that it requires a little bit of shared sacrifice.�It does affect Social Security, which is so important to the Democrats; and it does affect revenue, which is so important to the Republicans.�And so, even though I wouldn't call it a brave move, at least everybody's starting to kind of put their sacred cows on the table.

HORSLEY: Supporters call the switch to the new inflation measure, known as chained CPI, a technical fix. But not everyone buys that.�

Dean Baker, of the liberal Center for Economic and Policy Research, says the change would have a real impact on Social Security and other benefits.�Just like the government's savings, the reduction in cost of living adjustments would start small and compound, year by year.

Mr. DEAN BAKER (Center for Economic and Policy Research): So it ends up being a fairly substantial cut in benefits over time.�And it's important to note that the people who get the biggest cuts in this story, are the oldest of the old, who also tend to be the poorest.

HORSLEY: Baker also questions whether the elderly really make the kind of price-conscious shopping decisions that the chained CPI measure assumes, especially in areas like health care.�

Mr. BAKER: Elderly people might be more set in their ways.�They're not going to be running around looking for discounts.�Or they might be less likely to. So if we're going to have an index that shows a lower rate of inflation because people are substituting, we should at least want to know the extent to which the elderly actually do substitute.

HORSLEY: Still, supporters say when it comes to deficit reduction, chained CPI is low-hanging fruit. And that takes us back to the produce section, and Marc Goldwein.

Mr. GOLDWEIN: We need something like four or five trillion dollars in deficit reduction to get our debt on�a downward path. And that means, guess what, Medicare and Social Security benefits are going to have to go down. People are going to have to start paying more in taxes. We're going to have to make some really tough choices. Using the right measure of inflation is not one of those choices. Using the right measure of inflation is a no-brainer, that in the process saves us almost $300 billion.

HORSLEY: That left me with just one more question for the deficit-cutting shopper.

Are you going to have red delicious?�

Mr. GOLDWEIN: Well, it looks like the price of apples are a little higher, so I'm going to go for the peaches over there. So I'm going to do some substituting.

HORSLEY: And if the Gang of Six get their way, the U.S. government will soon substitute a new measure of inflation.�

Scott Horsley, NPR news, Washington.� Transcript provided by NPR, Copyright NPR.

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