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November 27, 2017 at 09:30 AM
The tax reform plans released by the House and Senate differ dramatically in so many ways, from the fate of the mortgage-interest deduction to the number of tax brackets. But the two chambers actually agree on an immensely important point: a new definition of the Consumer Price Index, or CPI.
The new version of the statistic used to calculate cost-of-living increases for all manner of benefits is dubbed “chained CPI.” Not only may it be a more accurate overall measure of inflation than its predecessor, but it makes it easier for Republicans to cut taxes without breaking budgeting rules — by lowering price increases and therefore future spending.
But the CPI’s history reveals the dangers of selecting a single statistic to represent the economic realities of all Americans: improving the general score often comes at the expense of specific groups of Americans, sometimes extremely powerful ones. This particular revision hammers the elderly, a group that helped elect President Donald Trump, while helping those living in Democratic strongholds.
(Related: Social Security: The Impact of a Chained CPI Switch)
Government statisticians began building the nation’s first price indexes in the late nineteenth century. The Bureau of Labor took the lead, collecting data on the prices of foodstuffs and other commodities. But it wasn’t until 1903 that the Bureau built the first full-fledged price index. It covered 1890 to 1902, and relied on prices for some thirty different food items, each weighted by how much the average family consumed.
But what was an average family? The families surveyed by the Bureau all lived in major industrial centers; none had incomes over $1,200 a year (approximately $35,000 or so now). This wasn’t really representative. A subsequent index assembled between 1917 and 1919 was even worse: It sampled a larger swath of the nation’s geography, though limited data to families with a white male head of household.
Frances Perkins, who headed up the Department of Labor during the 1930’s, grappled with much the same problem. Under her direction, a new price index built on surveys taken between 1934 and 1936 focused on families of moderate means living in cities, and headed by a male breadwinner. This idealized constituency included some African Americans, but excluded single mothers, the elderly, anyone receiving public assistance, farmers — in fact, the majority of the population.
Not everyone was happy. Organized labor, worried about contracts tied to the CPI for cost-of-living increases, claimed the new figures underestimated inflation. Corporate economists argued that it did precisely the opposite. Meanwhile, a growing number of statisticians recognized an even bigger problem with the CPI.
A consumer price index tracks an unchanging basket of goods over time. What it doesn’t do, however, is capture changes in consumer preferences and technological innovations. For example, money spent on public transit sharply declined as owning automobiles became a norm. But a static price index that assigns a particular constant weight to a class of expenditures can’t capture that shift.
In 1959, the Office of Statistical Standards of the Bureau of the Budget convened a committee to study the problem. This group, headed by the economist George Stigler, backed the idea of a more dynamic price index. It was the forerunner to today’s chained CPI.
