Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
DOW JONES NEWSWIRES – June 22, 2011 –
“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.”
Social Security payments must be reduced. Promises were made – by lawmakers – that are beyond the government’s (the taxpayer’s) ability to pay. The latest scheme is a ploy by cowardly elected representatives who surreptitiously cut benefits for those most in need: the old and the frail.
First, the logic is indefensible: Gasoline prices rise; higher prices are unaffordable; people drive less; less gasoline is consumed; the Bureau of Labor Statistics (BLS) reduces the weighting of gasoline in the Consumer Price Index (CPI) calculation; this cuts gasoline’s (and, other products that are rising in price) influence on the CPI; the Consumer Price Index falls. Ergo, Chairman Ben S. Bernanke, in a future and “dreary” press conference (the adjective used by the Wall Street Journal to describe his session with reporters on June 22, 2011), states that inflation is falling.
Second, as mentioned above, this is hidden from public view. The official, government CPI which is used to increase Social Security benefits (e.g., if the CPI rises by 2.0%, next year’s Social Security checks go up 2.0%), will understate costs, reduce the ability to buy gas further, which will reduce gasoline’s proportion in the CPI even more.
By the way, this also reduces the inflation credited to owners of TIPS, or TIIS (Treasury Inflation-Protected Securities). The change reduces the value of TIPS.
It would be interesting to know if the amount spent on gasoline actually falls. The amount of gas (in gallons) might be less, but the increase in price could mean the dollars spent are proportionately greater to total costs. You can be sure the BLS has devised a method that has eliminated the possibility, which leads to:
Third, this latest scam is part of a long-running ploy to reduce Social Security benefits without inconveniencing politicians. Chapter 12 of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession is the history of Social Security and inflation manipulations between 1983 and the mid-1990s. From Alan Greenspan’s 1983 Social Security Commission through Michael Boskin’s contorted changes to the CPI measurement (1995), Social Security payments have already been reduced well below what they should be. One estimate, by Richard Karn, author of Emerging Trends Report, calculates that Social Security checks would have been 43% higher by 2006 if not for the chicanery of the scandalous Boskin Commission, a decade before.
Fourth, this latest effort shows the talk about reducing the deficit, cutting spending, and reaching an agreement on the debt ceiling is exactly that – talk. (As if you needed to be told.) Lawmakers may pat themselves on the back for this gift from the BLS, but a $220 billion spending cut is a drop in the ocean (and, probably a projection over the next 20 or 50 years). Social Security needs to be addressed by increasing, and by a substantial amount, the age at which retirement benefits can first be collected. Starving the old and the frail is not only a sick policy, it is also camouflage to win the next election.
Sheehan on Michael Boskin (January 2010)
Why Michael Boskin Deserves Our Contempt (January 2010)