The Obama Budget Document includes 11 mentions of Chained CPI. Here are the first four:
In the interest of achieving a bipartisan deficit reduction agreement, beginning in 2015 the Budget would change the measure of inflation used by the Federal Government for most programs and for the Internal Revenue Code from the standard Consumer Price Index (CPI) to the alternative, more accurate chained CPI, which grows slightly more slowly. Unlike the standard CPI, the chained CPI fully accounts for a consumer’s ability to substitute between goods in response to changes in relative prices and also adjusts for small sample bias. Most economists agree that the chained CPI provides a more accurate measure of the average change in the cost of living than the standard CPI. P. 46
The first bold section tells us that Obama believes there is a bipartisan consensus that we have to cut Social Security and raise taxes on the middle class. I’m not seeing that in any segment of the political world except vicious jerks like the Club for Growth. I can’t wait to see the Hastert Rule operate in the House, forcing Speaker Boehner to admit that a majority of House Republicans thinks hiking taxes on the middle class and slashing Social Security is a terrible idea.
The second explains that this is good because when prices go up, or incomes drop, consumers can just buy some cheaper thing than the thing they really like. You can read a paper from the Bureau of Labor Statistics explaining this in detail here. The plain fact is that this is an outright admission of the utter failure of the consumption society.
The example you get is that if beef gets more expensive, you can substitute pork, without in any way affecting your life. In other words, the selections among beef, pork, chicken and catfood you currently make are assumed to give you a certain level of pleasure, but now you can’t have that level of pleasure. Either you eat less of something you like, or you just don’t get to eat it, and have to eat something you don’t like as much.
Suppose you lose your nice watch. If the price of your ideal watch has gone up for whatever reason, you get a cheaper watch, or no watch and use your phone. That nice watch you used to be able to have is now out of the picture, but that doesn’t matter because you can still tell time. That’s the magic of substitution.
There is an unspoken connection here: that your income is constant across all these time periods. That isn’t true either. People are losing their jobs and taking lower paid jobs. If you are still getting raises, they come in tiny increments every year. If you are retired, you get nothing on your savings, and little on any equities you might hold. To maintain your standard of living, you have to eat your savings or go into debt. Most likely, you can’t have nice things, so you get to substitute less nice things. No natural fibers for you, too expensive. So what? Just substitute something you don’t like as well, or do without.
There is one other key point: this analysis ignores the effect of substitution in oligopolistic markets. What is the free market for cell phone services or cable services? They are oligopolies. Your choices have nothing to do with the amount produced.Prices are not set based on the underlying cost of service, but upon whatever these people can get away with. They raise prices to maintain their profits. Your only substitution is to buy less service, in a downward spiral. Your life gets worse.
Of course, all this is irrelevant to the feral rich. Their income goes up as they suck out the money from you for your cell phone and your cable service and every other thing you buy. They don’t substitute for anything.
The real point of the Chained CPI is that you don’t get to live nicely. You can expect a declining standard of living. That is the message of your President and the oligarchy he serves.
The fifth mention of Chained CPI in the Budget explains that the switch to chained CPI will decrease the deficit by at least $230 billion over the next 10 years. This is the number in tables S-2 and S-3. P. 184, 186. Table S-5, p. 189, gives the number for Social Security: we are cutting payments to the elderly by $130 billion. Table S-6, p. 191, tells us that over 10 years the average savings is .1% of annual projected GDP. Table S-7, p. 193, gives the annual savings adjusted for population growth and some kind of inflation accounting. In those terms the total savings drop to $107 billion.
The last mention is in Table S-9. There is a line item labeled “Chained CPI: Adjust indexing and protect vulnerable populations”, which according to the footnote includes revenue effects. The ten year total is $230 billion, which includes Social Security cuts and $100 billion in new taxes that slug the middle class resulting from adoption of Chained CPI. That’s another chunk of not having nice things: you have to pay higher taxes, so forget that chicken, and buy a fifty-fifty mix of pink slime and hamburger.
Unless, of course you are in whatever the “vulnerable population” turns out to be. But don’t worry, even if you aren’t now, as inflation eats your savings and the Chained CPI cuts your Social Security, soon enough you’ll enter the vulnerable population. That’s already happening. This study says that 46% of Americans die with less than $10,000 in assets.
The President and the oligarchy are introducing the masses to their Brave New World of not-so-nice things. Or nothing at all. Read the rest of this entry →