Stanford University Home

Stanford Report Online

Economist Boskin sees slow changes in Consumer Price Index

BY KATHLEEN O'TOOLE

Each month, about 400 "comparison shoppers" fan out across the country to check the prices of such things as a particular kind of answering machine, a certain type of heart surgery, the price of a first-run movie ticket. Tracking thousands of products and services for the nation's consumer price index is a vast and in many ways impressive effort, but one that economist Michael Boskin believes is fundamentally flawed.

The lists of goods and services used for the index are "relics," he says, from the 1980s. Today people are beating the price of theaters by renting videotapes, forgoing the cost of both the theater and the baby-sitter. People who suffer heart attacks are often treated with clot-dissolving drugs instead of surgery, and cellular phones, not answering machines, are selling like hotcakes.

Boskin wants real shoppers' habits to show up quicker in the nation's consumer price index (CPI), the official measure of inflation. That, he says, will lower the nation's official rate of inflation by 1.1 percent.

A 1.1 percentage-point overstatement of inflation doesn't seem so much, but when the official rate is slightly below 3 percent, the change would lower the inflation rate to around 2 percent - about as stable as prices have been in decades.

Boskin became frustrated with flaws in official statistics when he was chairman of President Bush's Council of Economic Advisers. Now, four years out of that job, the 51-year-old Tully Friedman Professor of Economics and senior fellow at the Hoover Institution has created a firestorm in Washington over the unlikely subject of statistics. Last year, he headed a five-member blue-ribbon panel that told Congress the nation's official inflation rate has been wrongly measured. The commission's December report seemed to convince many influential national leaders, including Alan Greenspan, the highly respected chairman of the Federal Reserve Board. It caught elected politicians' attention because it pointed out a way for them to tackle the nation's budget crunch. The commission recommended that:

  • The Bureau of Labor Statistics adopt new CPI formulas and, with added financial resources, move faster to keep up with changes in the economy.

  • Congress and the president stop automatically adjusting the tax code and federal spending programs by the CPI. If Democrats and Republicans could agree to a downward adjustment of 1.1 percent, the commission said the federal government would save $1 trillion in a dozen years simply by stopping its practice of over-compensating Americans for inflation.

For a day last week, congressional and White House budget negotiators agreed to partially implement the latter recommendation. But on Friday, the Congressional Budget Office came up with less dire estimates of the budget deficit, and the agreement to adjust the CPI several tenths of a percentage point downward fell apart. By Friday night, the negotiators had decided against legislating any change in the index, which was unpopular with powerful lobby groups. Instead, they anticipated that the Bureau of Labor Statistics will make some of the technical fixes the Boskin Commission recommends. Negotiators assume that the bureau will lower the index by about 0.15 percent starting in 1999. If the estimate turns out to be accurate, the adjustment will cause the average Social Security recipient to forgo about a $2 raise in future monthly benefits, according to congressional sources.

Boskin was disappointed. He told the New York Times: "My reaction is that any step in the right direction is a good thing, but there is still a lot of bias left in the CPI."

He told Stanford Report: "We are going to have to rely fully on the Bureau of Labor Statistics" to implement changes. The likelihood that the agency will get added resources and move faster to address criticisms, he said, has been increased substantially as a result of the attention given to the commission's report.

The report has ramifications well beyond the budget deliberations, as evidenced by early press reports on it. "The Boskin report demolishes the theory that living standards have stagnated," wrote Newsweek in December, referring to conventional wisdom that holds that the nation has been falling downhill economically since about 1973. The New York Times said the commission suggests that "much of the economic debate of the last few decades has been based on the wrong premises, and therefore is simply irrelevant." The Washington Post asked, "Are we better off than we think we are?"

Boskin's answer to the Post's question is an unequivocal yes.

"Instead of falling by 13 percent, American real average earnings have risen by 13 percent from 1973 to 1995," he says. "Real median income over the same period grew 36 percent, not 4 percent. The poverty rate would be substantially smaller." Because components of the CPI are used to calculate the national income, "real growth in gross domestic product is understated."

Much of the change in the CPI that the Boskin commission proposes is relatively without controversy among economists. It relates to the fact that the index was never intended to be a cost-of-living measure but is used as if it was. The government began collecting data for an index of price change in 1918. Today, it collects prices each month for 71,000 goods and services from 22,000 outlets in 44 geographic areas. The items are a representative basket of urban consumers' purchases of food, clothing, shelter, fuel, transportation, medical services - even hair cuts - at a given point in time. From this, the government calculates changes in the price of the median household's market basket - assuming the basket's contents remain the same for about a decade.

High inflation in the 1970s prompted a heavy reliance on the CPI. By 1981, Congress had indexed tax brackets and Social Security benefits to the CPI. Even many people in private business who knew it wasn't a true measure of the cost of living used it, says commission member Ellen Dulberger of IBM, because it was published monthly in the Wall Street Journal and allowed them to agree on how to adjust contracts. It's as if the whole country got caught up. At a Senate hearing, Democratic Sen. Bob Graham of Florida likened it to "using a thermometer to measure distance." According to Boskin, that is how taxpayers get tax breaks and Social Security recipients, government employees and pensioners get larger checks than Congress intended.

"If there ever was a case of pick up the hood and fix the engine à la Ross Perot, this is it," Boskin says.

* * *

Anyone searching for an ivory tower at Stanford would be well advised to stay away from Room 214 of the Herbert Hoover Memorial Building. Since the Advisory Commission to Study the Consumer Price Index released its report, phone calls, faxes and visitors have poured into Boskin's office there. "It's better to be busy than bored, to be in demand than not," he says, parroting a lesson learned as a child.

(article continued)