Politicians Find Changing Colas Easy

Democrats and Republicans cannot believe their good fortune. They have been thinking about the upcoming session of Congress with sphincter-tightening apprehension, knowing they would have to pare Medicare and Social Security if they wanted to balance the budget. But just as they were about to pass the bad news on to senior citizens and poor people, a miracle arrived.

The Advisory Commission to Study the Consumer Price Index declared that our most popular gauge of inflation overstates general price increases by at least 1.1 percentage points per year.

This is a huge deal: More than one-third of all federal expenditures have some cost-of-living adjustment (COLA) tacked onto them. Within the next decade, COLAs will become the fourth-largest federal expenditure - after Social Security, defense and debt service.

These adjustments are expected to push Medicare into bankruptcy within the next four years and shove Social Security over the precipice by 2023. If the government were to chop 1.1 points from COLAs, Uncle Sam would save more than $1 trillion in expenditures over the next dozen years.

That seemingly tiny shift could add another four years to Medicare’s lifespan and a decade or more to Social Security.

In other words, it could let this Congress shove the unpleasant chore of entitlement reform onto the next generation of officeholders.

This explains politicians’ sudden interest in reforming the CPI. Although a few lonely voices, such as Sen. Daniel Patrick Moynihan, have argued in favor of the change for years, politicians didn’t get really excited until the advisory commission released its report on Dec. 4. The document gave Congress a device for balancing the budget without having to make appreciable spending cuts.

Although members of Congress say they merely want to correct a statistical anomaly, none of the solons has a clue about what goes into the CPI. The people who compile it don’t even understand it.

The index calculates on a monthly basis the prices of 71,000 goods and services at 22,000 outlets in 88 regions around the country. Statisticians also collect housing data from 5,000 renters and 1,000 homeowners. Computers crunch these thousands of separate figures to come up with a rough measure of inflation.

The advisory commission says the present formula, drafted decades ago, no longer makes sense. It doesn’t account for changing shopping habits - such as the trend toward superstores and giant discount centers. It doesn’t measure improving technology - and so equates a clunky computer of 1980 with 1996 models that boast thousands or millions of times the memory and computing capacity.

It ignores new products, such as Internet services and cellular phones. It overlooks a lot of things that add costs to our daily lives, from crime to taxes. And it uses the Laspeyres formula for calculating prices instead of the more nuanced “‘trailing Tornquist’ Index (weighted geometric mean of price relatives)” - whatever that means.

Key leaders in the administration and Congress have given their benediction to reforming the CPI, but neither side wants to take the first step toward making an actual change. A lower inflation figure not only would slash the deficit, it also would reduce payments to anybody whose federal benefits have COLAs and shove some earners into higher tax brackets. Nobody wants “credit” for either of those changes, which could inspire deliciously demagogic political ads during the next election season.

Lawmakers have every reason to be wary. The reforms proposed by the commission may address shortcomings in the present formula, but they don’t eliminate the most fundamental flaw. The new system still would tote up the costs of goods and services dubbed “typical” by a bunch of economists. Any such index will contain a whopping amount of subjective bias, with or without a trailing Tornquist adjustment. Today’s “correction” easily could contain the seeds of tomorrow’s fiscal calamity.

The CPI has become a cause celebre because politicians decided three decades ago to stop reviewing social-program expenditures each year and instead to let spending increase with the inflation rate. This little trick, designed to take the heat off lawmakers, has become the chief contributor to budget deficits.

It is an old feature of human nature that we tend to repeat mistakes rather than acknowledge them. A new inflation formula may relieve the pressure on Congress, but problems inevitably will arise - as they did after previous attempts to “perfect” the inflation index. There’s only one sure way to put an end to the fiscal problems created by exploding entitlement spending: Make every federal program justify its existence in terms of its performance - and not on the basis of an arbitrary-albeit-abstruse inflation statistic.

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