Mason A. Clark wrote: > > An important essay by James K Galbraith, pointing out the unanticipated > consequences of the proposed "Boskin corrrection" of the CPI is posted > on the web at: > http://pw2.netcom.com/~masonc/galbrat5.html > > > Mason A. Clark masonc@ix.netcom.com Hi, Well my first response to all of this is that it is about time. Economists have known for years the CPI over corrects for inflation. When in a post I claimed that "most economists" know this, I was corrected: ALL economists know it. See my web page file on "Inflation & Federal Reserve Policy" Now some comments on Galbraith on Boskin First, there is no need to balance the budget. ---JKG This is a debatable point: even the great Lord Keynes wanted it balanced over the business cycle. Since these are "boom times" we should not be running up the deficit now, even if it was justified during recession (like the early Reagan years).--jeb Second, there is no social security crisis.... And please also take my word on the soundness, generally speaking, of Social Security.---JKG This is even less obvious than "first". I think it clear that the US Social Security system was headed for a "crisis" from the moment it was passed in 1935. It is essentially a "Ponzi" scheme, based on an ever growing population. But with a falling birth rate, and ever longer life spans (all obvious in 1935) the system MUST depend on ever higher payroll taxes on the ever smaller number of workers to support an ever larger number of the retired who are living ever longer. I wish he would explain WHY this is not going to result in a "crisis": but SAYING it does not make it so. PS see the section on SS in the "It all Depends on HOW you SAY it!" file on my web page. ONE SIDE? Third, the Boskin Commission's arguments are suspiciously one-sided.-JKG Well yes, if composed of economists. See my opening statement. A panel of chemists evaluating the laws of thermodynamics would also be "one-sided" in favor of them. If we wanted a "balanced" panel to evaluate the laws of thermodynamics, we should include a professor of womens studies to point out that they were formulated by men and are an intergal part of a regressive capitalist patriarchy in which men dominate, oppress and exploit women. And a professor of African-American Studies to point out that while they are thought to be the product of White European culture this, is racism. They were known thousands of years ago, back when Egyptians were Black and flew around in airplanes; before the White Devils took away their culture and gave it to the Greeks. (And if you think that the laws of thermodynamics are too well established as scientific truth to avoid the criticism of not conforming to the standards of political correctness, look at the "Obesity" file on my web page.)---jeb Knocking Greenspan?? Fourth, even if Boskin were correct, their case would be a searing indictment of the Federal Reserve and the conduct of monetary policy, ---JKG I don't see why. Even by the "better" measure of Boskin, there has still been inflation since 1980. Just NOT as MUCH. If the goal of the Federal Reserve is to promote economic growth and limit inflation, they have done both very well since about 1983 no matter which measure of inflation is used. In fact, they have done an EVEN BETTER JOB than (some of us) thought.---jeb Re-Writing Economic HISTORY! What about the Boskin commission? True, there is upward bias in cost-of-living calculations. These have to do with the need for adjustments as products get better, as new goods are invented, with accounting for goods purchased on sale or discount, with changing patterns of consumption and changing patterns of shopping. Boskin adds these up. He concludes that true inflation has been about 1.1 points lower, each year, than officially reported. ---JKG Yes. The December 16 '96 issue of TIME has a rather good discussion of this. The current CPI is based on buying patterns in 1982-84. Anyone think they have changed since then?---jeb If inflation has been lower than we thought, then growth in real incomes, output and productivity must have been that much higher. Considered broadly, this argument requires that the entire economic history of the past generation be rewritten. We must believe that real average wages, instead of stagnating since 1973, have actually risen by, say, 25 or 30 percent. Since we must raise our measure of growth, we must believe that the past was poorer -- that up to one-half the population lived below today's poverty line in, say, 1960 (so economist Dean Baker, Boskin's most effective critic, has argued). ---JKG Well, YES. That is EXACTLY what I have been posting for several years. See the "Are THINGS getting BETTER or WORSE" files on my web page. Dean Baker might add that if Boskin is correct, we would even expect to see thousands of people from other countries trying to immigrate TO the US, rather than all those boat people fleeing Florida for Haiti and Cuba, or crossing into Mexico in search of a better life. I have wondered how long bogus statistics could convince economists that things keep getting WORSE while people keep living longer and better. See also my "Two Different Worlds and Baseball Players Syndrome" file.---jeb We must believe that quality improvements in some products have not been matched by declines in others, such as public transport and city parks. --JKG This is the first thing in this essay that has much validity. Yes, public transit has probably declined in many cities. But it is better in DC, and also around SF with the BART, I hear. (Anyone know about BART?) And this is due largely to the failure to keep the gas tax high enough, and to charge adequately for parking. Again, see my web page file on the "Gas Tax" --jeb Such things could be true. But are they? ---JKG Sure they are. It is obvious if you look a how people ACTUALLY live rather than at numbers that are supposed to represent how people live. How many families had 2 cars, a color TV, or home computer in 1960? (ANY of these things, not ALL of them like today)---jeb . Still, for the sake of argument, let's concede that the actual rate of inflation has been, and continues to be, somewhat lower than officially reported. So what? What should this finding mean for policy? --JKG Biases in the CPI apply most strongly to well-off Americans. They affect most strongly those who earn the bulk of incomes, buy new products, shop aggressively for discounts, and generally drive the economic life of the country. Indeed, such biases should be higher for higher incomes. Just as it is easier for rich people to avoid taxes, so it is easier for them to negotiate discounts and otherwise to avoid inflation. ---JKG Perhaps. The "rich" probably do "shop smarter". But my experience is that "luxuries" have increased in price faster than "necessities". Did you see the recent TV newscast on this (don't recall the network). They interviewed a rich yuppie who had a record of how much the prices HE pays has increased. Most "basics" were 20-40%, but tickets to Broadway plays, and fancy drinks at his bar had increased a lot (100-200%). The problem here is that many "luxuries" are now thought to be "necessary". But this could be dealt with by which items are in the new CPI "basket of goods".---jeb Therefore, one could read Boskin as providing an argument for changing the indexation of marginal income tax rates, perhaps for ending such indexation altogether. Income tax indexation was enacted under President Reagan. It was designed to keep taxes from creeping up on the comparatively rich.--JKG With his top bracket rate of 28%, this was not such a big deal. It would soon have become practically a "flat tax". And I will take this opportunity to point out that when the TOP rate was 28%, the "rich" (ie top 1% and top 10%) paid a higher fraction of the total income tax than any time before OR since.--jeb By Boskin-style arguments, the rich have been getting even richer than we imagined,---JKG We practically ALL have--jeb Social Security recipients, on the other hand, belong mainly to the lower half of the income spectrum. ---JKG Do they?? I would like to see some figures on this. And are we talking REPORTED TAXABLE income (excluding for example tax free bond interest). How about looking at total wealth, or spending, instead? My bet is that, while everyone is for the "old" and against the "rich", they are largely the SAME PEOPLE.---jeb Being older,.... Many live just on the right side of the poverty line, thanks to Social Security. ---JKG Perhaps. Lets see some figures---jeb And many are large consumers of health care and pharmaceutical products, whose cost inflation has been more rapid in recent years than overall consumer price inflation. So even if Boskin's findings are valid, it does not follow that Social Security indexation should be changed. If the CPI is upward-biased on average, it may be closer to "just right" for older Americans, whose inflation experience is also higher than average.---JKG Everyone does have a different "cost of living". Medical expenses do rise faster than the overall rate, as does housing. Older people buy more medicine but fewer houses. Hard to say who has the greater "cost of living". But is it possible to create a separate CPI for everyone? And a lot of the cost of medical care is covered by Medicare---jeb On the other hand, the same arguments have unmistakable implications for monetary policy. For if Boskin is right, then the Federal Reserve's hair-trigger anti-inflation policies have been, well, either totally unnecessary or else more effective than suspected. Either way, the unemployment rate has been kept too high. ---JKG Unemployment rate in the US is low enough that anyone who wants to can now find a job. Not always the one they want, but something. That is why wages are being bid up all over the country, and why there are so many immigrants. --jeb More directly, interest rates should be cut. The "real" interest rate is the difference between the actual rate of interest and the rate of inflation. If the true rate of inflation has been a point or two lower than reported, then the real interest rate has been that much higher. --JKG But isn't interest the "price of money"? While the FR sets the "discount rate" ultimately isn't the interest rate set like other prices: supply and demand? If Boskin is right, interest rates should now be cut, as quickly as possible, to reflect the new view of inflation. --JKG Sounds like he wants to put the "new" CPI up where the current one is: add back the 1 or 2 % we "lost". But the main concern here should be to have a CPI which is the most accurate measure of inflation, not something which we think will have "GOOD" consequences, or punish/reward the "correct" people. Is there to be a "science" of economics? Or is the subject just too political to even try to make it into a science? Perhaps the sci.econ and sci.econ.research newsgroups should disband and we should just stick with alt.politics.economics--jeb JKG: James K. Galbraith is Professor at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. This essay will appear in the December 20 issue of the Texas Observer, and is copyright 1996 by the Texas Democracy Foundation. Permission is granted to copy and circulate for noncommercial purposes, provided this notice and the essay remain intact. jeb: Jim Blair is a chemist in Wisconsin But he has a real neat web page. Check it out. -