What Does It Cost You to Live?
BROCKWAY, GEORGE P.
The Dismal Science WHAT DOES IT COST YOU TO LIVE? BY GEORGE P. BROCKWAY THE ENTRY in this space for April 5,1982, was titled "Let's Put Indexing on the Index." The occasion was a Reagan...
...Chairman Greenspan, though scarcely a close student of the physiological form of the problem, saw that many of the factors in the CPI were not essential costs of living...
...After much fretting and black coffee, the flack, inspired, rushes in to the director of public relations, whose door is always open...
...In short, taking 2.5 percent as the Bankers' cola rate for all debts outstanding in 1995 gives lenders a generous benefit of a serious doubt, particularly since it is not unknown for individual bankers to figure more than the CPI as the inflation premium...
...The CPI is a series of numbers...
...No, the colas were and are meant to offset the effects of inflation...
...Especially after World War II, it became common for contracts to contain Cost of Living Adjustments, or colas...
...In other words the total Bankers' cola, while supposedly designed to protect lenders from inflation, is about double what inflation costs the whole economy (lenders and borrowers and everyone...
...In the short run, it is a measure of inflation and deflation...
...The purpose was to ensure that no party to a contract either profited or lost from shifts in the price level...
...everyone knows its price has gone up, but no one has to eat it, even in England...
...Nor does Chairman Greenspan, who has noted that the CPI may be overstated in part because it overlooks shoppers who sw itch to bargain brands and discount stores, really believe the index should tell us citizens what to eat and...
...Fewer citizens than previously, it had been discovered, were buying houses...
...The occasion was a Reagan Administration announcement of a shift in the Consumer Price Index (CPI...
...In sad fact, it is probable the whole mess was caused by the childish attraction almost everyone in the government and the media seems to feel for acronyms...
...The chief says, "Not bad...
...Therefore I want to point out that if the Board Greenspan chairs devoted itself to getting rid of the Bankers' cola, it could lower the interest rate and put us on a fast track to a balanced budget and a more humane and more prosperous America...
...It was the "weight" of mortgage interest, for instance, that was scaled down in 1982...
...The cost of living, as Lear implies, may well require a standard, but index numbers are compared with each other, not an exogenous standard...
...the total indebtedness was $13,804.2 billion...
...This shrank the index as a whole and President Ronald Reagan got credit for controlling inflation, which President Jimmy Carter had not been able to do...
...As with any index, the items in the basket are weighted to reflect how frequently they appear on the typical shopping list...
...From its beginning in 1919 the CPI, issued monthly by the Bureau of Labor Statistics, has shown the changes in what urban consumers shell out for the goods and services they buy—commonly referred to as a "market basket...
...In 1972 and '73 the idea was adopted for Social Security benefits...
...Allow not nature more than nature needs: Man's life is cheap as beast's...
...They couldn't do that at any acceptable cost if we wanted them to...
...Our basest beggars are in the poorest thing superfluous...
...In 1986 the tax brackets in the Federal Income Tax were "indexed" to the CPI, so that taxpayers would not find themselves creeping into higher brackets even though their "real" incomes had not changed...
...Having said all that, let me say further that 1 am opposed to indexing in principle, for it is always and everywhere inflationary...
...We'll run it in caps," he or she adds softly, taking out a pad and a Mont Blanc pen and printing the word in big capitals: "COLA...
...The key point is that in only one of those 30 years (1986) was the change in the CPI lower than in 1995...
...Although the interest rate was out of sight, consumers had less interest to pay because not as many of them could afford it...
...Bankers also have long charged borrowers an inflation premium that is a cola in everything but name...
...As a result, the real estate market was sluggish, despite the fact that the children of the Boomer Generation were coming on line...
...They are not, and never have been, intended to lift Social Security benefits up to the poverty level...
...At first glance this seems as reasonable as any other cola, but it doesn't work out that way, because the total indebtedness of the nonfinancial sectors of the economy (you, me, the corner store, and the government) is almost double the GDP...
...Fear of inflation has been the economic neurosis of our time...
...And it is not discriminating...
...In particular, there are serious difficulties with the way the housing component is calculated that result, as Dimitri Papadimitriou and L. Randall Wray of the Jerome Levy Economics Institute have shown, in an accelerating upward bias of the index...
...The rest is history-Possessed of the misapprehension that when people spoke of colas they truly meant what it cost to keep a person alive...
...Let's call it a 'cost of living adjustment.' Then for short we can call it a 'cola.' Get it...
...You must have at least two numbers that are put together in the same way for a comparison to be possible...
...Alone, an index number means nothing...
...On the other hand, when senior citizens cozy up to the fireplace on cool evenings, they are apt to exchange anecdotes about how everything costs a great deal more than it used to...
...the cost of living would be less...
...Furthermore, although I am not scared silly by the present deficit, I am terrified by and ashamed of the budgeteers' mindless and compassionless trashing of American culture and civilization...
...Cake, as Marie Antoinette discovered, is not cheaper than bread, but rice (unhulled, of course) is...
...In the case of union contracts, they would not be worth bothering about if poverty were the best they could guarantee...
...Take away the Bankers' cola of $345.1 billion, and the economy is in deflation, not inflation...
...With the support of economic theorists, bankers (and lenders generally) divide the interest they charge into two parts: "real interest," which is what they would charge in a stable economy, and their cola, or "inflation premium," which is generally said to be the same as the year-to-year change of the CPI...
...Now a similar scheme is being suggested...
...The arithmetic is apparently too simple for most economists to understand: In 1995, the rate of change of the CPI was 2.5 per cent...
...One imagines a publicity flack being given the job of announcing a contract that provided for "an adjustment of compensation to offset, nullify, and render nugatory substantial shifts, if any, in the price level...
...The reasoning would be impeccable— if the CPI were supposed to measure the cost of living...
...Now colas appear in many kinds of contracts, public and private...
...Then he or she shows how he or she got to be chief...
...In every case where, as in the Weimar Republic, a runaway inflation has occurred, indexing has been at the bottom of it...
...At the same time, the GDP was $7,297.2 billion, which, when multiplied by .025, gives $182.4 billion as due to inflation...
...You may be sure there were "points" and lawyers' fees and title insurance and surveyors' fees and such to pay, too...
...a fortiori, how to clothe and shelter ourselves...
...The CPI is used by historians as well as economists...
...Similar series are created by those trying to compare the price levels of different countries and periods...
...There was a reason for that...
...I am, you may be sure, aware that the 1995 CPI applies only to indebtedness incurred in 1995, which is only about a twelfth of the total...
...I can already hear King Lear: "O, reason not the need...
...Over the long run, it needs periodic adjustments to accurately reflect the basket's cost...
...Not even Speaker Gingrich is likely to argue openly that the cost of biological existence is all that should concern us...
...As we have seen, it never pretended to...
...Look, chief," she or he cries, "let's drop all this garbage...
...Federal Reserve Board Chairman Alan Greenspan, who seems to have been the scheme's most prominent publicist, has a new and original end in view: He wants to turn the CPI into something it never was intended to be, in order to solve a problem no one thought existed...
...It does not try to measure the cost of what consumers ought to spend their money on: rather, it tells us what urban consumers do spend their money on...
...For my part, I do not think that there shall be no more cakes and ale, and I doubt that either the Chairman or the Speaker thinks so...
...Chicken is not only cheaper, it's better for you (less cholesterol, unless you persist in frying it...
...The going interest rate for mortgages had reached 15.84 per cent...
...With fewer houses sold, fewer mortgages were undertaken...
...What has been happening since Greenspan said last year that the CPI "overstates inflation" and should be corrected would be ludicrous if it were not liable to cause havoc in millions of lives...
...Bread (whole wheat or oatmeal, of course) is cheaper than chicken...
...Moreover, if Chairman Greenspan had time to stop and think, he would not only realize that the CPI is what is wanted in the sort of situation described above, but that the cost of living in a literal sense has nothing to do with it...
...But, as I've written before, "Bankers Have the Classic COLA" (NL, January 9, 1989), and as long as they have it, the rest of us are entitled to all the CPI-driv-en benefits we can get...
...So the Bureau of Labor Statistics reduced mortgage interest as a factor in the CPI...
...so chicken should be in the CPI basket instead of beef...
...That way...
...In sum, if there were no Bankers' cola, there would now be no inflation, hence no occasion for all the other colas, hence no need for Chairman Greenspan to raise the interest rate to "fight inflation," nor for Speaker Gingrich to weary himself dreaming up arcane tricks to play on the elderly...
...One hypothetical example seems to appeal to most of those who have taken up the idea...
...Indeed, in that event the argument could be carried a step or two further...
...Farmers get much of what they consume "free...
...It seems that either the Reserve Board Chairman or someone with access to him happened to notice one day that the CPI doesn't measure the cost of living...
...The other eleven-twelfths include mortgages and Treasury bonds stretching back to 1965, though almost all debts are of more recent vintage (the average length of current public debt is less than six years...
...Needless to say, the CPI is not a perfect yardstick...
...Think of beef, they say...
...THAT BRING US back to the purpose of colas...
...so the Bankers' cola was .025 x $13,804.2 billion, or $345.1 billion...
...No doubt there are even cheaper ways of keeping body and soul together, but I'm not anxious to know about them...
Vol. 79 • June 1996 • No. 3
