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[Editor’s note: Listen to Steve talk The Take with Charles Butler about chained CPI and other aspects of President Obama’s 2014 budget with the player above.]
President Obama today unveiled his budget proposal. Left-leaning groups are slamming it for aiming to cut Social Security and other entitlement benefits, mainly by using “chained CPI,” a new means of calculating inflation. I’m also slamming it for that . . . and for the additional harm chained CPI would do.
Reported inflation rates would drop under chained CPI because it adjusts for less expensive substitutes that people could buy to reduce the impact of inflation. For instance, if the price of butter rises, shoppers could buy less-expensive margarine. If the price of beef rises, people could switch to cheaper cuts or to other sources of protein, such as chicken. This leaves government bureaucrats with lots of leeway to toy with inflation numbers. Here’s how I described it in a Heartland media release a few days ago, tongue only a little in cheek:
Chained CPI is just another means for government to lie about the true rate of inflation. Basically, chained CPI says people can substitute lower-price items if other items go up in price, so there’s not really inflation – buying margarine if butter goes up in price, for instance. Following the logic of chained CPI, if the price of steak goes up, people can buy hamburger; if the price of hamburger goes up, people can buy chicken; if the price of chicken goes up, they can buy eggs. Eventually we’re down to no inflation as long as there are dead possums along the side of the road that people can bring home for dinner.
Chained CPI would do more than give government a way to fudge inflation calculations to reduce Social Security benefits. It would also reduce future incomes for working Americans because employers usually factor inflation into what they pay. Expect lower pay raises — raises that fail to keep up with true inflation — if the government starts reporting inflation based on chained CPI.
Personal exemptions and standard deductions in the personal income tax are also indexed for inflation. With lower reported inflation rates, the tax bite would grow, because the exemptions and deductions would fail to keep up with true inflation. Adjustments in the Earned Income Tax Credit, which millions of lower-income workers receive, also would shrink under chained CPI.
Rather than lie about inflation, people in government should declare the truth: The government cannot sustain these entitlement programs as they are structured, so they’re going to be cut. This would be a form of default but at least it would not be a form of deception.