December 26, 2012

NOTHING COSTS MORE THAN IT USED TO...EXCEPT GOVERNMENT BENEFITS:

A cost savings everyone should endorse (Ruth Marcus, December 25, 2012, Washington Post)

The difficulty -- and the money-saving opportunity -- arises because, in the view of most economists, the current method of calculating changes in the CPI overstates the inflation rate.

It fails to account for what economists call upper-level substitution bias, and what my mother would call plain common sense: If the price rises for a certain commodity in the basket of goods used to measure inflation, consumers will choose a cheaper alternative. In my house, when the price of beef soars, we substitute chicken.

The CPI doesn't and, as a result, taxpayers are undercharged and beneficiaries are overpaid -- a lot. The overestimate is small -- less than 0.3 percentage points annually -- but, much like compound interest, it adds up over time.

Changing the inflation measure to what is called chained CPI would save $225 billion over the next decade.

Of that, $95 billion would come from increased tax revenue, $80 billion from Social Security (assuming built-in protections for the very old and very poor, about which more later) and the rest from other programs. Because of the compounding effect, the savings in later years would be even larger.
Posted by at December 26, 2012 8:58 AM
  
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