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New CPI Means Higher Taxes, Lower Benefits

June 11, 2012
in Blog

A rose by any other name would smell as sweet, but a steak tastes not as sweet – if it’s a cut of horse  meat… The new CPI calculations are designed to further disguise inflation and the erosion of your standard of living.

Last month, the Bureau of Labor Statistics announced that they have enough Congressional approval to implement chained weighting, or substitution effects, to the calculation of the official Consumer Price Index (CPI).  In other words, Democrats and Republicans have shown once again that they do not have the guts to honestly cut entitlement spending, nor raise taxes, so they will do it behind the back of the American public.

Ever since the high inflation of the 1970s when the U.S. abandoned the gold standard and prices doubled, the Federal Reserve and politicians from both parties have argued that the original Consumer Price Index overstated price inflation. As Shadowstats.com points out, the Bureau of Labor Statistics knocked off about 7 percentage points to the annual measurement of price inflation by manipulating the method of the CPI. The newest change will make frequent substitutions to the basket of goods that the CPI is based on in order to reflect the changing habits of consumers as they face higher prices. Just as the preceding Fed chairman, Alan Greenspan, and the chief economist to first Bush Administration, Michael Boskin, argued 20 years ago, if steak becomes too expensive, consumers will stop buying steak and start buying hamburger meat. Conveniently, the chained CPI will only account for the price of hamburger meat in the basket, and exclude the price of steak. Due to all of the manipulations of the CPI it no longer measures the cost of supporting a constant living standard, nor the value of the Dollar, but measures a declining living standard and falsifies the value of the Dollar. While the experimental chained CPI has only been about .4% lower than the outgoing method on an annual basis, this makes a big difference when compounded over years. In addition, the new method will likely understate price inflation by more than just .4% as price inflation picks up pace. The chained CPI will not only further understate reality, but will bring painful economic consequences for years to come.

For starters, contracts such as union wages and Social Security benefits use Cost Of Living Adjustments (COLA) that are based on the CPI to help protect workers and seniors from losing out to price inflation. The Congressional Budget Office (CBO) estimates that $112 billion in COLA will be saved in Social Security alone over the next decade. Tax brackets also use COLA, which means that over time you will pay a higher tax rate even though your real income is falling. The CBO estimates that this will increase tax revenue by $90 billion over the next decade. Given the impact on benefits and taxes, it is a surprise that many liberal and conservative think tanks, such as the Center for American Progress and the Heritage Foundation, are supporting the new CPI. Lastly, the government will be able to save $44 billion in interest payments since interest rates account for the value of the Dollar. The latter may seem like a benefit, but lower interest rates on the national debt enable the very government spending on social and corporate welfare that increases prices and eats away at the incomes of the middle class. The sole reason that prices are rising is because the Fed has printed trillions to help finance Social Security, Medicare, unemployment benefits, and other social spending that is driving annual budget deficits past $1 trillion. While the Fed has also inflated the money supply to bail out banks and prop up housing prices, the two are of course intertwined.

During the 19th century the Federal Reserve, and all the welfare that comes with it, did not exist, but economic freedom in general did. As a natural consequence, the universal standard of living rose rapidly as the middle class was born. And all of this took place under a gold and silver standard. As baby-boomers continue to retire by the millions, spending on Social Security and Medicare will skyrocket, and high inflation will evolve into hyperinflation. Eventually the CPI will be widely discredited. If politicians continue to use the printing press to pacify prime voting seniors instead of making painful cuts to welfare programs, everybody’s living standard will suffer drastically.

Devin Roundtree received his M.A. in economics from the University of Detroit Mercy.

image: flickr.com/homiesinheaven