Page 506 - The Principle of Economics

518 PART EIGHT
THE DATA OF MACROECONOMICS
There is still much debate among economists about how severe these mea- surement problems are and what should be done about them. The issue is impor- tant because many government programs use the consumer price index to adjust for changes in the overall level of prices. Recipients of Social Security, for instance, get annual increases in benefits that are tied to the consumer price index. Some economists have suggested modifying these programs to correct for the measure- ment problems. For example, most studies conclude that the consumer price index overstates inflation by about 1 percentage point per year (although recent improvements in the CPI have reduced this upward bias somewhat). In response to these findings, Congress could change the Social Security program so that ben- efits increased every year by the measured inflation rate minus 1 percentage point. Such a change would provide a crude way of offsetting the measurement prob- lems and, at the same time, reduce government spending by billions of dollars each year.
IN THE NEWS
A CPI for Senior Citizens
ALTHOUGH THE CONSUMER PRICE INDEX may overstate the true rate of inflation facing the typical consumer, it may understate inflation for certain types of consumers. In particular, according to some economists, the elderly have experienced more rapid cost-of-living increases than the general population.
Prices That
Don’t Fit the Profile: Is Index Mismatched to Retirees’ Reality?
BY LAURA CASTANEDA
Low inflation, a driving force behind the nation’s economic boom, is having the
perverse effect of making life harder for millions of elderly Americans.
That is because increases in Social Security payments are based on an infla- tion index—the Consumer Price Index for Urban Wage Earners and Clerical Workers—that may not accurately reflect their expenses.
Based on that index, monthly Social Security payments will rise an average of 1.3 percent next year. But the costs that drain the resources of many retired people—notably medical treatment, pre- scription drugs, and special housing— are rising faster than consumer prices in general. . . .
Now the Bureau of Labor Statistics, which calculates the indexes, has devised an experimental index that does track some spending habits of older Americans, and it has shown a widening gap between cost increases for them and those for the general population. Between December 1982 and Septem- ber 1998, the experimental index rose 73.9 percent, while the official index rose 63.5 percent, said Patrick Jack- man, an economist at the bureau. . . .
The official index “is understating the true rate of inflation for the elderly,” said Dean Baker, an economist at the Economic Policy Institute, an indepen- dent research organization in Washing- ton, and the disparity is likely to get worse over time.
But Mr. Baker, the author of “Getting Prices Right: The Battle Over the Consumer Price Index,” said older people’s higher spending on some goods and services was not the only reason. The official index also considers price declines for consumer goods that they rarely buy, like television sets and computers.
While Congress balks at the cost, he added, a separate CPI for the elderly “would be the way to go” to correct the problem.
SOURCE: The New York Times, Business Section, November 8, 1998, p. 10.