Criticism of proposals to shift to the Chained CPI have focused almost exclusively on how the switch would harm seniors. But as Alan Barber and Nicole recently noted in a CEPR brief, the switch would also harm people with disabilities, children, and low-i

Tonight, in a ceremony presided over by U.N. Secretary General Ban Ki-moon, BBC correspondent Mark Doyle and producer Piers Scholfield will be presented with an award from the U.N. Correspondents Association (UNCA). The award, one of many to be handed out, is described by the UNCA as being for “the best coverage of the United Nations and its agencies.” Certainly by “best” they do not mean the most flattering. The BBC radio documentary that earned Scholfield and Doyle the prize was an investigation into the source of the cholera outbreak in Haiti, which over the past two years has killed over 7,800 and sickened over 625,000. A host of scientific evidence, as well as on the ground reporting, including by Doyle and Scholfield, has pinpointed a U.N. military base as the source of the outbreak.

Just last week, Ban Ki-moon announced that the U.N. would be starting a new initiative to secure funds for a 10-year, $2.2 billion plan, set to be formally announced in January, that aims to provide Haiti and the Dominican Republic with the clean water and sanitation infrastructure needed to eradicate the disease.  Yet despite the U.N.’s pledge to support this plan, the U.N. has failed to ever accept responsibility for the epidemic. Despite a legal complaint filed with the U.N. on behalf of over 5,000 victims of cholera by the Institute for Justice and Democracy in Haiti and Bureau des Avocats Internationaux, U.N. officials continue to avoid their own role in its introduction.

Writing in Foreign Policy on the U.N. announcement last week, Jonathan Katz and Tom Murphy note:

One of the primary means by which the U.N. has deflected blame since the beginning has been to insist that efforts to find the source of the epidemic would detract from fighting it. By relaunching an existing Haitian-Dominican effort under the guise of a U.N. initiative, the world body can once again claim to be too busy saving Haitian lives to comment on how those lives were put in danger in the first place. It took no time for this to happen. When an AP reporter asked on Dec. 11 whether humanitarian coordinator Nigel Fisher thought the U.N. caused the cholera epidemic, he refused to comment, saying: "My focus is on today."

In announcing this new initiative the U.N. pledged just $23.5 million of their own funds, less than four percent of what they are spending on keeping MINUSTAH troops in the country this year; the same troops that introduced the disease in the first place. As Mark Doyle commented after last week’s announcement, “The United Nations is good at launching appeals for aid. It is less good at admitting its own faults.”

Shawn Fremstad and Rebecca VallasSpotlight on Poverty and Opportunity, December 19, 2012

Dean Baker
Valor Econômico (Brazil), December 19, 2012

Em Português

Mark WeisbrotAl Jazeera English, 18 de diciembre, 2012En Inglés

Mark WeisbrotAl Jazeera English, December 18, 2012En Español

According to reliable sources, the Obama administration is seriously contemplating a deal under which the annual cost of living adjustment for Social Security benefits would be indexed to the chained consumer price index rather than the CPI for wage and clerical workers (CPI-W) to which it is now indexed. This will lead to a reduction in benefits of approximately 0.3 percentage points annually. This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent. If a typical senior collects benefits for twenty years, then the average reduction in benefits will be roughly 3 percent.  

There are a few quick points worth addressing:

1. The claim that the chained CPI provides a more accurate measure of the cost of living;
2. Whether Social Security benefits are now and will in the future be sufficient to allow for a decent standard of living for retirees; and
3. Whether this is a reasonable way to be dealing with concerns over the budget.

This are taken in turn below.

Is the Chained CPI More Accurate?

While many policy types and pundits have claimed that the chained CPI would provide a more accurate measure of the cost of living for seniors, they have no basis for this claim. The chained CPI is ostensibly more accurate for the population as whole because it picks up the effect of consumer substitution as people change from consuming goods that increase rapidly in price to goods with less rapid price increases.

While this is a reasonable way to construct a price index, it may not be reasonable to apply the consumption patterns and the substitution patterns among the population as a whole to the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W.

The main reason for the higher rate of inflation is that the elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. It is also likely that the elderly are less able to substitute between goods, both due to the nature of the items they consume and their limited mobility, so the substitutions assumed in the chained CPI might be especially inappropriate for the elderly population.

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade. It makes sense to try to get the indexation formula right.

Dean Baker
Truthout, December 17, 2012

Last week the Fed announced that it would continue to maintain its zero interest rate policy until the unemployment rate fell below 6.5 percent. While the Fed has always targeted low unemployment in addition to low inflation as part of its legal mandate, this was the first time it had explicitly tied its monetary policy to an unemployment target instead of just an inflation target.

This decision has Robert Samuelson very worried. Samuelson warned that the last time the Fed tried to target both inflation and unemployment was in the 1970s and complains that this ended disastrously. Both parts of Samuelson's claim are wrong.

In fact, in the decades since the 1970s the Fed has maintained a commitment to lowering unemployment in addition to inflation, even if its priority was always on the latter. It would be very difficult to explain the decision to lower interest rates in the 1995 and again in the recession in 2001, except by a concern over excessive unemployment. This concern is certainly reflected in the transcripts of the meetings from these years. The only difference between last week's announcement and the Fed's past actions was the decision to explicitly set an unemployment target for its monetary policy. In the past, analysts would have found it necessary to review the minutes and public statements by members of the Fed's Open Market Committee to infer a target.

The notion that inflation just exploded out of the blue in the 1970s is also inaccurate, as an examination of price movements of that decade shows.

Source: Economic Report of the President (Table 63).

The chart shows the inflation rate over the last 40 years. The blue line shows the official CPI that is most widely used in public discussions and in most legal contracts. The red line shows the core CPI, which excludes energy and food prices. The green line shows an error adjusted core CPI. In the years prior to 1982, the official CPI used a homeownership component. This measure showed a much higher rate of inflation when mortgage interest rates spiked in the mid-70s and again in the late 70s. In 1982 the index was changed to include an owners' equivalent rent component that imputes a rent for owner occupied homes. The green line applies this methodology to a core index going back to 1969, in effect showing what a core CPI using the current methodology would have looked like in that period.