The Consumer Price Index “Reform”

Against the Current, No. 69, July/August 1997

James Petras

WITH THE ADVENT of the Clinton administration and the Republican Congress, the bipartisan establishment has conjured up the danger of Social Security “going bankrupt,” in order to lay the groundwork for “privatization.”

Such a “reform” would segment beneficiaries into those who can pay and those who cannot; reduce payments; increase the retirement age; and make coverage “optional,” meaning that benefits would depend on payees’ capacity to contribute.

Yet because of the continued mass popularity of this essential life-sustaining support system for the elderly, Social Security “reform” must be a gradualist strategy, aiming by stages toward its eventual destruction.

The opening wedge toward weakening Social Security would be reduction of payments through reducing the annual cost-of-living adjustments based on the Consumer Price Index (CPI). (This proposal was dropped in the course of this year’s budget negotiations, but will surely continue to arise.)

By changing the manner in which the CPI is constructed the state can claim a lower rate of inflation, hence a smaller adjustment in Social Security payments as well as all private and public wage and benefit programs which are pegged to the CPI. The debate on the CPI thus not only affects a vital support system for tens of millions of retirees, but also millions of wage and salaried workers.

Moreover, the assumptions that govern the reasoning behind the proposed downward shift of the CPI will lead to a downward spiral. The initial decline of income can contribute to future declines; further, should the rate of inflation accelerate the effects of the reconfigured index will be even more devastating.

The principal attack on the way in which the index calculates the rest of inflation was formulated by the Boskin Commission, established by the Clinton administration to examine the CPI.

The Commission chair, Michael Boskin, is a notorious free-market professor at Stanford. The principal “discovery” of Boskin is that “consumers” (pensioners and workers) substitute cheaper items when prices rise. From this, it is deduced that the effective inflation rate is lower, and hence the cost-of-living adjustments should be lowered.

This is, to say the least, a perverse logic. If consumers cannot afford to maintain living standards because of price increases or because they cannot afford to buy a needed commodity, this should be a signal to increase the adjustment.

 The process of reducing adjustments will in fact encourage more “substitutions.” Consumers will lower the quality and quantity of their necessary purchases, which according to Boskin will be a good reason to further lower the CPI…until the elderly or sick buy dog food in place of fresh beef for their protein.

This whole “substitution” concept first, abstracts the individual from a nutritional matrix; second, assumes a kind of “rationality” of calculation of equivalence that is false; third, makes inadequate assumptions about “standard of living;” fourth, has a minimalist conception in which “subsistence” is interchanged with human existence.

No Choice

The downward substitution phenomenon is not a voluntary decision, but is imposed on people by concrete political and economic circumstances. Upwardly mobile economics professors can choose to substitute upward — they can shift from living year-round in a cold climate to a two-home, winter/summer pattern. Lower class tenants with declining Social Security payments will “substitute” from a four-room, two-bedroom flat to a single-bedroom, three-room place.

Downward substitution is a class phenomenon and reflects the relative powerlessness of most consumers/workers/pensioners. If Boskin and other Commission members were asked to accept the “interchangeability” of a three-room flat for a palatial California ranch house as “substitutability,” they would grouse about the Failed Gods of communist egalitarianism destroying the incentive of the free enterprise system.

Inasmuch as substitution is a product of duress for the poor, they shouldn’t be even further pun<->ished by reducing the cost of living adjustments in their already meager Social Security payments. One suggestion would be to adjust Social Security taxes upwards for all those upwardly mobile professionals (simply by raising the “ceiling” of earnings subject to Social Security tax), to pay for any forthcoming deficits.

Secondly, as a New York Times article inadvertently reveals, the “substitute” is usually not equivalent in nutritional content. “(R)esearchers will find out this year with the help of scanner data from supermarkets how consumers respond to, for example, a rise in the price of romaine lettuce relative to iceberg lettuce, two products assumed to be reasonable alternatives.”

In fact, these are not equivalent in nutritional value: Iceberg lettuce has virtually none, while romaine is high in green leaf nutrients. The “researchers” are probably free-market economists ignorant of nutritional facts but driven by the price dogma of their ideology.

Technical Adjustmen and Class Politics

Who decides what in fact is a “reasonable alternative”? Should the “researchers” accept a definition that provides poor tasting, less nutritious food because both items are “lettuce”?

Beside the coercive aspects of “choices” of substitutes, the informational “inputs” and “outputs” of those choices are unequal. A highly educated person who studies a can of vegetables can measure harmful levels of sodium and possible health effects better than less educated consumers.

The “substitution” notion needs to be located in the broader context of living standards. The CPI is all about maintaining living standards; upward adjustments are made each year so people’s living standards will not decline. This obvious assumption is now obscured in the haste to use reductions in pension and wage payments in order to reduce the federal budget deficit.

Once this is understood, the “substitution” argument is transparently ideological. Substitutions that reduce living standards are rarely, in fact, equivalent to previously purchased goods and services. Renting a video and staying confined to the house, instead of a night out, is clearly one case: Boskin should consult his wife on whether a video of the opera is the same as a visit to the San Francisco Opera House.

Substituting fatty hamburger for lean meat; buying canned vegetables instead of fresh; these are signs of downward mobility. The assumption that they are “reasonable alternatives” is actually based on another unstated premise, that declining living standards are acceptable for lower-income wage, salaried and retired workers.

The political-class nature of the suggested “technical adjustment” in the CPI is part of a more general attack. The strategy of the Clinton Presidency and the Republican Congress is to turn the highly political issue of reducing Social Security payments into a “technical” problem to be resolved by an “independent commission” of experts or Labor Department statisticians.

In fact, their conclusions are based on ideological assumptions or political directives. As the New York Times states, “the politicians of both parties want technicians to make it [CPI] a more accurate [sic] barometer of the cost of living so they can avoid blame for trimming benefits and raising taxes.”

The assumption of the politicians is that “accurate” means “lowering.” The second part of the sentence undercuts the first: The intention is to look for a “technical” ideological gloss for moving ahead on the bi-partisan attack on social programs, particularly Social Security. Not surprisingly, Boskin’s doctrine led him to pro<->pose a one-third cut in the rate of adjustment for 1996 (a 1.1 percentage points reduction from 3.3%).

Conclusion: Who Pays?

Substitutionism is really about downward mobility — declining living standards. The issue should be dealt with by adopting an opposite perspective: elaborating policies to increase the CPI. The proposal to reduce the adjustment, on the other hand, leads to a new spiral in which low-income pensioners “substitute” downward, while the Boskins of the world have new opportunities to secure lucrative upwardly-adjusted consulting fees to participate in new commissions that call for new reductions.

That road leads toward elimination of the CPI and ultimately Social Security itself, in which case the aged can substitute the soup kitchens of the Salvation Army, the homeless shelters and the emergency wards.

The larger issue is not a technical, but a political one: passing the costs of meeting corporate economic agendas onto the backs of retirees and workers. In the United States, the reduction of social expenditures has been deeper than in other advanced capitalist countries, in large part because of the atrophy of the trade unions and other social movements and the absence of a political party representing working people’s interests.

Up through the Reagan administration, the Social Security system was thought to be impregnable, an institution that even the most rancid reactionary would desist from attacking for fear of electoral retribution. The fact that this has changed signals an open season on all social programs.

ATC 69, July-August 1997