(E) Con Artists

Kevin Phillips, publisher of the American Political Report, is the author of "The Politics of Rich and Poor" and "Arrogant Capital: Washington, Wall Street and the Frustration of American Politics" (Little Brown)

They're baaackk! Those pesky Washington eco-gremlins, parading for "smaller government" and "no more deficits," who want to put Middle America on a fiscal diet so that Upper America can continue to expand its already ample economic waistline. Their newest demand is, as always, bold and deceptive: Rewrite the federal Consumer Price Index to revise inflation downward.

Two years ago, the 104th Congress got into trouble, rightly, for trying to reduce projected Medicare spending by $270 billion, while earmarking $240 billion for a tax cut favoring the upper brackets. Public opinion curdled like 3-week-old milk.

The new game is more subtle. This time, Congress and the lobbies want to keep the tax cuts well up their sleeves until the funding is in hand. But the Senate Finance Committee let the strategic cat out of the fiscal bag when it released a new study contending that the U.S. inflation rate, currently about 3%, is overstated and should be reduced by roughly a point--and presto!

The money involved could be staggering. In the 1930s, John Dillinger said he robbed banks because that's where the money was. Today's politicians, economists and deficit fear-mongers attest to an updated version of this. They're after the middle class and its entitlement programs, like Medicare and Social Security, partly because that's where Middle America's grabbable dollars are; but also because the money of Upper America--the .5% who have almost a quarter of America's wealth and make about half of Washington's political contributions--seems to be off limits.

Thus, the enormous importance of a budget ploy thinly disguised as an inflation adjustment. It's a political back door--a second way to cut entitlement programs. If inflation can be reduced by a wink and the stroke of a pen, so can the money the government spends each year on tax indexing and cost-of-living increases for Social Security and federal pensions. At first, the savings would be $7 billion a year, but by 2002, the annual savings could be as much as $63 billion. Serious money. And a big hole in some Americans' future disposable income.

But certain cautions could stand in the way. First, it's a statistical flimflam, as well as a staggering example of what conservatives purport to deplore--bald-faced income redistribution by politicians and government bureaucrats. This new proposal is also part and parcel of a broad shift in Washington toward soaking ordinary folks or neglecting their interests in order to feed the fires of a speculative economy anxious for ever more budget cuts, tax breaks, monetary accommodation and regulatory permissiveness. Even Federal Reserve Chairman Alan Greenspan has finally begun to hint about the threat: a mega-bubble, a potential U.S. stock-market meltdown akin to the one that halved the value of Japan's Nikkei index over the last decade.

The irony is that the CPI does have a lot of flaws. But they go far beyond those singled out by the Senate report, which is principally interested in harvesting the fiscal savings from a 1.1% fix. Arguably, though, whatever the CPI measures in its own precise and limited ballpark, it almost certainly understates the more comprehensive negative impact of price and purchasing-power changes on most average Americans.

This month, Americans told a consumer polling firm that they estimate the annual U.S. inflation rate at 7%, up from 5%-6% this summer--far from the 3% that the government claims and the Senate would like to lower to 2%.

So a major political brouhaha may be taking shape. For these ordinary Americans, who keep seeing higher charges for health care, education, mass transit, shampoo, razor blades and cups of coffee, it's no big deal that computer prices are dropping, a major talking point of the Senate report. A majority of Americans don't even own computers, especially the elderly, whose pensions and Social Security would be clobbered by any downward CPI rejiggling.

The notion that the official U.S. inflation rate should be reduced because the improving quality of products means we're getting more for the same dollars--another argument of CPI cutters--is historical hogwash. Nobody adjusted the CPI of the 1950s for the greater "quality" and speed of transcontinental jets replacing DC-3s; or for 16-inch televisions retiring 11-inch boxes. And the same argument could have been made in the 1920s, when telephones, radios and Model-T Fords improved.

Besides, if we're going to take larger societal considerations into account, then the CPI clippers neglected some more important ones. Cheaper computers are a two-edged economic sword because, for the last decade or so, the computer revolution has made it possible to shift state-of-the-art manufacturing technology to low-wage plants overseas, displacing millions of U.S. blue-collar workers. Much the same technology has also helped replace several million U.S. white-collar employees and supervisors with computers and word processors. For rich Americans, it's been a bonanza. But a large chunk of Middle America has seen its purchasing power shrink in ways that deserve serious attention from genuinely interested economists

This raises a related point: It's nonsense to apply the same single-version CPI to all Americans. Inflation's effects vary too much from group to group to make tax and pension policy this way. Perhaps there should be a medical and mass transit-weighted CPI for retirees, and a diapers, crib and education-shaded index for young marrieds. Such diversity would provide a better look at real-world prices and purchasing power. And it's also unfair for the CPI to ignore increases in income taxes and Social Security taxes. They should be part of the cost of living, too. But, presumably, the Senate Finance Committee knew what it did--and didn't--want.

Just imagine a liberal-controlled Finance Committee publishing a study urging a one-point upward revision of the CPI to protect pensioners and workers whose real wages have been declining. Senate conservatives would be howling about class warfare and income redistribution. But that's exactly what's going on here. Slicing a point off the CPI would hurt Social Security recipients; poor and middle-class pensioners who need to keep up with inflation; wage earners whose annual raises would be cut back, and middle-class taxpayers who would get less benefit from federal income-tax indexing against bracket creep.

And where would the huge benefit go? To employers and millionaires who don't care about Social Security, pension indexing or bracket creep, and who want to make sure that Middle America pays the budget bills so Congress will keep its hands off corporate subsidies and upper-bracket tax loopholes.

Meanwhile, as the stock market blows itself into a speculative froth, the pace of public-policy favoritism to finance and the upper brackets has become nearly as frenetic. Washington lobbies are humming with talk about 1997 tax breaks--projected capital-gains reductions and corporate-rate cuts--big enough to cost $10 billion to $20 billion a year in lost revenues and jeopardize popular-program outlays, but important to provide economic liquid oxygen to keep the Dow Jones rocketing. Officialdom, in the meantime, is unwilling to plug the tax and regulatory loopholes that, according to recent studies, have enabled the rich to avoid capital-gains taxes, which seem to burden only mutual-fund investors.

Then there's the talk about privatizing Social Security by repackaging it into individual investment accounts without future federal guarantees, then directing the freed-up funds into the stock market. Other plans under discussion in Washington seek to cut the deficit by means-testing Social Security. That would make Social Security unpopular with middle-class families in the $35,000-$50,000 range, where eligibility would start phasing out, thereby probably speeding its privatization.

One can almost compare the bubble-driven stock market to a railroad engine in a grade-B Western movie. It has run out of coal, its normal fuel and has begun the public-policy equivalent of stripping the caboose for wood and chopping up the passenger seats and parlor-car tables to maintain its speed.

The CPI "fix," with its potential revenue and budget payoff, is part of this freneticism. Anybody who thinks that Potomac Pooh-bahs are weighing this revision because of their sincere devotion to accurate measurement of inflation probably also reads the ads each day to see if the Brooklyn Bridge is for sale.

But, in the meantime, with the economic stakes growing, the big question is which will come first: the CPI flummox; the collapse of the bubble Greenspan fears or the slowly aroused fury of the American people.*

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