The Washington Post has joined the many supporters of using a more accurate measure of inflation, the chained CPI. We've written a paper before about the chained CPI as a potential piece of a deficit reduction plan. Not only is it a more accurate measure of inflation, it also raises revenue and reduces spending in a gradual way. The editorial board writes:
President Obama and Congress have hard choices to make as they try to fashion a long-term budget compromise. But not all of the options are excruciating. One measure would generate large savings over the next decade, split between entitlement spending and revenue increases. The pain it inflicts on beneficiaries and taxpayers would be minimal, widely shared and phased in gradually. And all it would require is a quick administrative tweak.
We refer, as we have before, to the long-standing need for more accurate cost-of-living adjustments to federal benefits and income taxes. Current law indexes Social Security and other federal retirement payments to one estimate of consumer prices; it indexes tax brackets, personal exemptions and the like to another. Both slightly overstate inflation, because they do not allow for the fact that consumers offset price increases in certain goods by switching to cheaper alternatives.
Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures. That difference doesn’t sound like much, but cost-of-living adjustments work like compound interest: This year’s increase in benefits pyramids on top of all the others that have gone before; ditto for tax adjustments.
This proposal has its critics, with the AARP leading the way. But as we've said in the past, many of the criticisms of the chained CPI do not have much supporting evidence. Some want to use an alternative measure of inflation CPI-E, an experimental CPI for the elderly. But given the many methological flaws of moving to the CPI-E--discussed by the CBO previously--it would make more sense to use the chained CPI unless a more robust and chained version of the CPI-E were made. Changes could be made elsewhere in the budget or within the affected programs if lawmakers felt the chained CPI had an adverse distributional impact--a clear advantage of a comprehensive fiscal plan. The Post itself mentions a few tweaks that could be made.
The chained CPI has clear benefits and bipartisan support, appearing in proposals from policy experts across the political spectrum. Price indices are supposed to reflect the cost of living, and chained CPI does so better than the current standard. We're excited to see the Washington Post come out in favor of a technical, but highly supported, proposal to help reduce future deficits.