Is Chained CPI Better or Not?  

A blog about business and economics.
April 11 2013 9:16 AM

Does Obama's Positition on Chained CPI Make Any Sense?

US President Barack Obama speaks on the budget as Office of Management and Budget Acting Director Jeffrey Zients watches, in the Rose Garden of the White House on April 10,2013 in Washington, DC.

Photo by MANDEL NGAN/AFP/Getty Images

The White House's decision to embrace the idea of switching to the Chained CPI for a cost-of-living adjustment in the context of a larger budget deal seems to have achieved its intended purpose of securing praise from the Washington Post editorial page but that doesn't mean the strategy will work. As I've noted before, the ways of BipartisanThink are strong and you can see the Post already laying the groundwork for a return to "both sides are equally wrong" thinking:

Mr. Obama too often casts entitlement reform as a concession to extract Republican assent to higher taxes, rather than a worthy end in itself. This is especially odd regarding his proposed new cost-of-living measurement for Social Security: Mr. Obama’s own budget documents say that it’s “more accurate” than the measurement now in use. Isn’t “more accurate” better?

Today the line is that Obama has a more serious proposal than the GOP. Tomorrow the line will be that it's unreasonable of Obama to insist on higher taxes as part of a deal when he could just make a deal with the GOP around using this "more accurate" measure of inflation.

That said it's perfectly coherent to think that the Chained CPI gives a more accurate read of the actual trends in consumer prices without being enthusiastic about using it to reduce Social Security benefits. I can speak from experience since I think the CPI-W overstates inflation, but I'm not excited about switching to the C-CPI-U. That's because to say that the CPI-W slightly overstates inflation is simply to say that the real value of Social Security benefits increases slightly from year to year. But is that such a bad thing? On the contrary, I'd say it's an excellent thing. If you retire at 65 and live to be 90 your real living standards should increase during that span of time in the context of a growing economy. As a technical matter, the best way to express this would be to start with the most accurate possible measurement of the price level (I might prefer the PCE deflator) and then inflate it by a fixed amount. But using a measurement of the price level that slightly overstates inflation works too. The point is that the normative question of whether value of Social Security benefits is "too high" doesn't ultimately have that much to do with the question of what's the best way to measure consumer prices.

As for Obama's specific proposal, I think it's okay. All things considered the Obama budget is a good one that does substantial redistribution from rich to poor. But I can tell just reading this post over that it's a politically dicey move he's trying to execute.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



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