Index and What Is Indicated for It

Your story on the CPI, starting with its headline about cheating and lying, was at best uncritical and at worst tabloid journalism.

Let’s start with a reality check instead of referring to the purported opinions of “the great majority of economists.” If it were evident that the CPI overstated inflation by 1% per year, there would be no problem at all. Congress could simply index Social Security benefits and tax brackets by the CPI-measured inflation minus 1%. The Federal Reserve would not misjudge the inflation rate and make erroneous policy; it would simply subtract 1% from the official number in making judgments.

Social Security benefits are based on a worker’s earnings history, age and other factors. Tax liabilities are based on income, dependents, charitable deductions, etc. Both are arbitrary formulas which Congress and the president could easily change, up or down, to decrease the deficit or for any other reason. At some point in the past, Congress made another arbitrary choice to adjust these benefits and liabilities proportionately to CPI movements. It could just as well have used a wage index (which would have eliminated most of the technical problems your article mentions), or some other price index, or--as is the case with most union escalator clauses--a CPI-based formula other than proportionality.

The issue is not technical problems with the CPI. Rather, it is the political temptation to hide behind “fixing” a price index to cut Social Security benefits and raise taxes without appearing to do so. Use of the CPI for that purpose will undermine public confidence in official data generally and should be of great concern to “the great majority of economists” who rely on such data.

DANIEL J.B. MITCHELL

Professor

Anderson Graduate School

of Management, UCLA

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In the real world, CPI has been understated, not the opposite. The middle-class family is faced with the huge increases in education costs, medical expenses and vacations that have outstripped the stated inflation rates of the last few years. These are all big-ticket items and weigh heavily on family budgets.

It is fashionable now to downplay the actual rise in living costs in order to justify the creative accounting that will allow putting a lid on entitlement increases. Entitlements, in my view, must be curtailed, but let’s avoid manipulating the figures to avoid the political consequences of facing the problem squarely.

SIMON A. SAYRE

Ojai