Waltzing Around the Price Index Issue

The Clinton White House and congressional Republicans insist they are committed to balancing the budget by 2002. But everyone knows that goal is all but impossible unless the consumer price index is revised to reflect the real rate of inflation.

Virtually every economist agrees that the CPI, which among other things is the basis for cost-of-living adjustments in Social Security and other federal pensions, is set up in a way that distorts how actual living costs are measured. If the CPI gave a truer picture of inflation, the government would save tens of billions of dollars in years to come. That includes $50 billion over the next five years, crucial to achieving a balanced budget.

What’s holding up agreement on revising the CPI are some powerful constituencies with a deep interest in keeping things as they are. These include such advocates for pensioners as the American Assn. of Retired Persons as well as anti-tax conservatives who oppose the modest changes in tax brackets that a revised CPI would produce.

Yet the basic issue here is a simple one. By exaggerating the rate of inflation, the CPI leads to overpayments in cost-of-living adjustments, contributing significantly to deficit budgets. Revising the CPI wouldn’t eliminate cost-of-living increases; it would simply reduce them somewhat. They would remain the shield against inflation that Congress originally intended.

The big political problem is that neither the Republican leadership in Congress nor the president wants to draw political fire by appearing too ready to tinker with the CPI. So for months there has been a kind of shadow dance over revising the CPI, with each side trying without success to push the other into taking the lead.

High-level budget negotiations are bringing the moment of truth closer. The latest idea to emerge from those talks is for a marginal adjustment in the CPI, perhaps by as little as one-fourth of a point, based on revisions in the index that the Bureau of Labor Statistics is studying. This offers a more or less politically risk-free way out for the two parties. Ah, but does it make good fiscal sense? Our concern is that once a small adjustment is written into law, relieved politicians would be only too eager to consider the matter closed. But of course it wouldn’t be. The CPI would still be overstating the true rate of inflation, perhaps by three-quarters of a point or more, costing the Treasury billions each year. The budget negotiators have to do better than that.