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Tue Dec 18, 2012, 05:55 AM

"Chained CPI" - How the book-cooker's wet dream re-defines reality:



A few years after the Boskin Commission slashed SS benefits by rigging CPI to understate inflation, Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003, seeing no reason at the time to continue the charade, publicly admitted the truth everyone already knew: “The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”




Since, by the time of Mankiw's admission, the Boskin Commission's (bi-partisan) dirty deed had already been safely accomplished, resulting in a CPI that critics estimate understates real inflation by at least 1% annually to as much as 7% annually, little did Mankiw know that, in 2012, Republicans would have the audacity to try to manipulate Democrats into a repeat of the same scam .......to attempt to RE-RIG the CPI that Americans already recognized as fraudulent.

But, to the extent that Mankiw did not foresee a repeat of the CPI-rigging scam, he clearly underestimated the charms to politicians of dishonest accounting manipulation of CPI....... what Barry Bosworth of the Brookings Institute eloquently labeled "the ‘immaculate conception‘ version of deficit reduction in which spending is cut without Congress taking the blame.”


. . . . . . . . . . . . . . . . . .


In 2012, however, the book-cooking technique now being peddled has a much greater potential than any prior technique..... And anyone who drinks the kool-aide and actually believes that "chained CPI" will result in cuts of "only" 10% or so simply does not understand how "chained CPI" works.

"Chained CPI", because it DE-COUPLES CPI from comparing apples to apples, and because it will depend on the somewhat arbitrary criteria which will need to be determined to implement the "substitution effect", will be an infinitely powerful and flexible tool for artificially suppressing official CPI statistics.





This is how "Chained CPI" re-defines reality:

Suppose, over a given time period, prices rise 100%.

And suppose that you, and others, have been purchasing rib eye for $5/lb, and rib-eye rises to $10/lb.

Because of this inflation, you switch from rib-eye to hot dogs, which formerly were $2/lb, but rose to $4/lb.

Now, you might be tempted to assume that the CPI has risen by100%, since that is what individual items rose.

But "chained CPI", by allowing for a "substitution effect", says, in effect, that "Hot dogs are the new rib-eye", and that your meat expense actually went down from $5/lb rib-eye to $4/lb hot dogs, and magically transforms this 100% inflation in actual prices into a government defined 20% "deflation" - - - based not on real-world prices, but on the substituted consumption of inferior products.

(The peddlers of "chained CPI", of course, would prefer that you live in a dreamland and make the false assumption that consumer substitutions will be of superior products in an ever-improving standard of living.)




It does not take a rocket scientist to foresee the downward spiral that such a definition will create, with fraudulent COLA's resulting in increased substitution in a losing attempt to cope, which will result in even more harshly discounted CPI calculations based on those substitutions, which will result in lower COLA's, more substitutions, which will result in......





Will a disgraced & defeated Republican Party now succeed in manipulating Democrats to do such a thing?

Will we learn from the past?


In 1997, as the Boskin Commission's fraudulent rigging of CPI was on the verge of implementation, The Atlantic published an eerily prescient "How to Re-Write Economic History" which illustrates the profound attraction that cooking the books has for politicians:



“Given the questionable intellectual foundations of the Boskin Commission's findings, the commission's high standing in Washington requires explanation. Both Democrats and Republicans have been keen to see its recommendations adopted, because they provide a potentially uncontroversial way to achieve deficit reduction. Raising taxes is unpopular, and little discretionary government spending is left to be cut. Restating the CPI as a measure of cost-of-living inflation offers an easy way to lower Social Security payments through reduced COLAs and raise tax revenues through reduced exemptions. The hope is that the CPI can be presented as an apolitical and boring technical issue that voters won't notice.

“Revising the CPI would get the Republicans off the hook of deficit reduction, while simultaneously advancing the interests of business. This, however, would occur at the expense of working Americans and the elderly. Revising the CPI would get the Democrats off the same hook, but at the cost of another shameful desertion of the constituencies they claim to represent.”


- - - - - - - - - - - - http://www.theatlantic.com/past/docs/issues/97apr/econhist.htm















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Reply "Chained CPI" - How the book-cooker's wet dream re-defines reality: (Original post)
Faryn Balyncd Dec 2012 OP
djean111 Dec 2012 #1
HiPointDem Dec 2012 #2
xchrom Dec 2012 #3
newfie11 Dec 2012 #4
loyalkydem Dec 2012 #5
customerserviceguy Dec 2012 #6
JHB Dec 2012 #9
Cynicus Emeritus Dec 2012 #10
customerserviceguy Dec 2012 #13
muriel_volestrangler Dec 2012 #7
durablend Dec 2012 #8
madrchsod Dec 2012 #11
Faryn Balyncd Dec 2012 #12

Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 06:02 AM

1. Will we learn from the past?

Evidently not. We keep voting them in and hoping for the best even when the worst always happens.
This is a Kabuki drama, by the way - there are not really two discrete "sides" any more. In my opinion.

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 06:06 AM

2. kr. as another poster said, it's a measurement of consumers' reactions to inflation, not a measure

 

of inflation.

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 06:12 AM

3. du rec. nt

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 07:16 AM

4. And I would bet half the folks on SS will not even know about it

I know now how the Indians feel about things they were promised. We paid for SS and this CPI is wrong!

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 07:17 AM

5. This is one more reason why I'm wanting to sell my screenplays

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 07:22 AM

6. If it makes you feel any better

They're planning to use chained CPI to index the tax brackets, personal exemptions, and standard deductions, too. So, taxpayers will take a haircut from this, as well.

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Response to customerserviceguy (Reply #6)

Tue Dec 18, 2012, 07:43 AM

9. The taxpayers at the lower end will be forced to take bigger haircuts

...since those at the top are already in the highest bracket, and there aren't exactly plans to add a dozen or so brackets at the top.




http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/11/everything-you-need-to-know-about-chained-cpi-in-one-post/

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Response to JHB (Reply #9)

Tue Dec 18, 2012, 08:38 AM

10. As the rich pay less in progressive taxes the burden is progressively

 

put on those with less.

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Response to JHB (Reply #9)

Tue Dec 18, 2012, 08:35 PM

13. Agreed

The rise of the lowest bracket from 10% to 15% will affect the working poor and seniors (with modest pensions) the most.

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 07:39 AM

7. Actually, that's not quite how it works; but the problem is the elderly face higher inflation

Your example has both low and high price goods doubling in price. In that situation, both chained and unchained CPI would say inflation is 100%. The indices are only different when the rate of inflation is different for each product. See http://crr.bc.edu/wp-content/uploads/2011/09/IB_11-12.pdf for a detailed explanation; and the actual calculation used is a very complicated "Törnqvist index", involving exponentials and logarithms. But, adapting your example, the explanation would be something like:

Suppose, over a given time period, prices of good quality products rise 100%, while cheap ones rise 50%.

And suppose that you, and others, have been purchasing rib eye for $5/lb, and rib-eye rises to $10/lb.

Because of this inflation, you switch from rib-eye to hot dogs, which formerly were $2/lb, but rose to $3/lb.

The simple CPI says prices have risen by 100%, since that is what the items that were being purchased at the start of the period rose by.

But "chained CPI", by allowing for a "substitution effect", says, in effect, that "Hot dogs are the new rib-eye", and that your meat expense went up somewhere between the 100% for the beef, and the 50% for the hot-dogs.


In this case, where there's total substitution, the formula works out as

PT = exp( 0.5 * ( ln(10/5) + ln (3/2) ) ) = 1.73

ie chained CPI inflation was 73%.

If the high quality goods went up in price slower than the cheap stuff, and people switch to the more expensive stuff, this formula would still give an inflation rate somewhere between the 2.

But the real problem is that the goods and services used to calculate the CPI (whether CPI-W, for 'urban workers' (used for SS increases), CPI-U for 'urban residents' (used for tax bracket increases), or the chained CPI-U (the measure some want to switch to, for SS) don't represent the expenditure of elderly people - eg they spend more on healthcare. As my link points out:

The Older Americans Act of 1987 directed the BLS to develop an Experimental Price Index for the Elderly (CPI-E) for Americans 62 and older.
...
A key difference in the spending patterns of the old and the young is medical care. The Consumer Expenditure Survey shows that health care accounts for 13 percent of expenditures for those 65 and older compared to 5 percent for those under 65. Since medical costs are rising rapidly, putting more weight on this component would be expected to produce more rapid price increases. And, indeed, over the period 1982-2010, the CPI-E has increased 0.27 percentage points faster each year than the CPI-W (see Figure 3).


What might be 'fair' is a chained CPI-E index; but that might well work out at about the same as the current CPI-W. So sticking with the CPI-W would be the simple 'fair' thing to do.

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 07:42 AM

8. It's OK, folks

Just clap louder and you won't feel a thing...

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 09:02 AM

11. being on social security i`m well aware of this fact

with the price i have to pay for the upcoming fucking over i`ll get on my medicare i`ll be reduced to around 125 dollars a week from social security.

voting is picking the lessor of two evils

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Response to Faryn Balyncd (Original post)

Tue Dec 18, 2012, 10:25 AM

12. Just 13 months ago Sherrod Brown was introducing legislation to FIX the understating of inflation...



...using CPI-E.

http://seniorsleague.org/2011/s-1876-consumer-price-index-for-elderly-consumers-cpi-e-act/

Now we are rumored to be actually considering intentionally worsening the understating of inflation, with "chained CPI", to mollify Republicans.



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