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CPI Is A Technical Fix, Let’s Keep It That Way
President Obama unveiled his budget yesterday and liberal groups have responded angrily to the inclusion of Chained-CPI in the proposal. A quick recap: currently Social Security benefits increase each year to keep pace with inflation according to the Consumer Price Index (CPI). The current calculation for inflation does not take into account that when the price of one product increases, people will switch to a lower-priced substitute instead of paying the higher price. The classic example is that when the price of beef rises, people buy more chicken and less meat, so the actual increase in the cost-of-living is not equal to the rise in the price of meat. Chained-CPI takes this into account. Since Chained-CPI is a low measure of inflation, Social Security benefits will grow at a slower rate. Thus, liberals argue that Chained-CPI is a benefit cut.
However, both CPI and chained-CPI estimate inflation for the average person. But Social Security beneficiaries are not average people. Most of them are elderly and much of their consumption comes in the form of health care and housing. Since health care and housing prices have risen faster than the rest of economy, the cost-of-living for seniors has increased at a quicker rate as well. That means that CPI and Chained-CPI both actually underestimate inflation for Social Security beneficiaries. Their benefits should actually rise quicker than inflation.
Nevertheless, much of the discussion right now centers on the fact that Chained-CPI is a benefit cut. The Washington Post‘s Dylan Matthews outlines everything I’ve said above and more, but finishes his piece by saying:
But ultimately, the question of which you prefer likely has more to do with whether you think Social Security benefits need to be pared back to ensure the program’s long-run solvency, or whether you think the elderly need, if anything, a benefit bump. Those are policy questions, not technical ones, and all the debate in the world about chained CPIs and CPI-Es relative methodological merits won’t resolve them.
Slate’s Matt Yglesias has a slightly better take:
As a technical matter, the best way to express this would be to start with the most accurate possible measurement of the price level (I might prefer the PCE deflator) and then inflate it by a fixed amount. But using a measurement of the price level that slightly overstates inflation works too.
If we want to have real benefits increases slowly each year for beneficiaries, then let’s use Yglesias’s technical fix. But, let’s start by getting the level of inflation right. CPI is not correct. Chained-CPI is also not correct. The closest measure right now may be CPI-E, but it’s still experimental and not ready for use.
In the end, I’m with Kevin Drum: let’s budget a small bit of money to research and develop a precise measure of inflation and then implement it. After that, we can start talking about inflating it by a fixed amount (as Yglesias advocates) or pairing benefits back altogether (as many Republicans advocate). First, though, let’s get it right.
Question for Felix Salmon on Charitable Giving
Reuter‘s Felix Salmon wrote a blog post a few days ago on charitable giving and how the internet allows random acts of kindness. However, at one point Salmon asserts something and makes the rare error of not citing or linking to supporting evidence for his assertion:
The fact is that almost none of us have some kind of annual giving budget, from which we draw when we send money to someone like Karen Klein. Instead, we give as and when we’re moved to do so. Once you start giving money away, you’re more likely to give money away in the future; Stevenson’s implication, by contrast, is that giving money in one place makes you less likely to give money somewhere else. Which is completely wrong.
The first part of that paragraph I believe, but is it really true that once you start giving money, you’re more likely to give more in the future? When is “the future” exactly? For instance, if i give to a charity in April, am I then more likely to give in June? Or not until next year when I’ve earned more money (or in my case, hope to have earned more money)? I wish Salmon had linked to a study or any academic literature that shows this.
Also, at the extreme, giving money in one place DOES make you less likely to give to another. If you give your last $20 to one charity, there’s nothing left for you to give to another. Of course, that’s the extreme, but there has to be some point where an individual giving money to once charity makes them less likely to give elsewhere. That point may vary with each individual, but it does exist and Salmon seems to act here like it doesn’t.
Nevertheless, I agree with Salmon that the advent of the internet has changed how people give and charities must react to these changing times. Will this lead to a rise in charitable giving? I hesitantly say yes, but I’m not sure. Will it lead to less giving to charities and more to individual people? I’m very unsure about that, but it will be interesting to see how it plays out.
GOP Chooses Big Business Over Free Markets
I don’t link to other articles and blog posts on here enough. I’m trying to do it more. So here’s a piece by Ezra Klein on former Republican Study Committee staffer Derek Khanna and his support for more relaxed intellectual property laws, starting with allowing consumers to legally unlock their cell phones and to create a backup of legally purchased DVDs. In November, Khanna wrote a memo for the RSC on how to reform copyright law. It was filled with great ideas and received widespread praise across the blogosphere. Unfortunately, Republican congressmen immediately faced significant pushback from Big Business, which is very happy with the current restrictive copyright regime. The RSC pulled the memo after a few hours and informed Khanna a few weeks later that he would not be retained at the start of the new Congress. Big Business had won.
Here’s Klein:
There’s a difference between being the party of free markets and the party of existing businesses. Excessively tough copyright law is good for big businesses with large legal departments but bad for new businesses that can’t afford a lawyer. And while Khanna, like many young conservative thinkers, believes in free markets, the Republican Party is heavily funded by big businesses.
If Republicans really were for free markets, they would openly embrace Khanna’s reforms, such as stricter term limits on copyright, expanded fair use and reduced statutory damages. These policy ideas push government policy towards free markets and less regulation. As Khanna writes at the end of his memo, “[c]urrent copyright law does not merely distort some markets – rather it destroys entire markets.”
By ignoring and refuting Khanna’s ideas, Republicans are confirming what many Americans already believe: the GOP is the party of the rich and Big Business. Republicans cannot claim to be in favor of free markets and small government when they oppose such sensible reforms that would reduce government overreach in intellectual property law. It’s hypocritical to claim otherwise. At the same time, this is the perfect opportunity for Republicans to improve their image. Supporting copyright reform would prove to Americans that they are still the party of free markets.
Alas, there have been no sign that the GOP will embrace Khanna’s ideas. As for the young Republican, he’s pushing ahead promoting intellectual property reform and just earned White House support for allowing consumers to unlock their cell phones. That’s a big victory for Khanna, but there is lots more work to be done. Unfortunately, it doesn’t look like he’ll have Republican support in his pursuit of freer markets.
