Saturday, April 13, 2013

Nothing to Lose but your Chained CPI

The Obama Administration's proposed budget contains a provision to change the way Social Security Benefit changes are calculated so that they use the "Chained Consumer Price Index" (Chained CPI) instead of the CPI. The purpose is to reduce cost of living adjustments (COLAs) to Social Security benefits and save money. We will be told that the result will be just a small sacrifice and it will not have a significant effect on how well retirees live. We will be told that everyone will have to sacrifice a little bit in order to move toward a balanced budget.

The Chained CPI works like this. Instead of using the same product to calculate price rises as one would expect, a product is thought of not by itself, but as one link in a chain of products that can be substituted for one another. For example, U.S. beef is graded with a USDA grading system. The highest grade is Prime, and beef grades down through Choice, Select, Standard, and other grades. Naturally, the price of the top grade of beef is highest and the price goes down as the grading goes down.

Instead of calculating COLAs based on inflation of U.S. Prime beef prices, the Chained CPI calculation assumes that if U.S. Prime costs too much, people instead will purchase U.S. Choice or lower as a substitute. So inflation of beef prices can be calculated by whatever substitute has the lowest rate of inflation. Calculated Social Security increases then can be lower relative to living costs. The very purpose of which is to encourage retirees to eat lower quality beef. They can still afford to eat beef, just not the best beef, and that will reduce Social Security spending.

This seems almost reasonable until we realize that there are many things that can substitute for beef depending on how the government defines "substitution." If the definition for beef substitution is that we eat beef just for the protein, then any food with protein can substitute for beef. The substitution chain used for COLA calculations might also include pork, turkey, chicken, peanut butter, soy products like tofu, or even dog food. However, the point is not that the government wants to make the poor eat dog food in their retirement. The point is that the government can pick any Chained CPI rate it wants by juggling the complex calculations of prices for all the products in the chain.

This already happens up to a point. The current CPI calculation is the result of decades of increasing complexity and is already deceptive. The Chained CPI just adds another layer of complexity to manipulate for political reasons. It is just another political tool.
Some will see the Chained CPI as a political weapon, not just a tool. Partisans always view government policies as a set of clubs with which to punish their opponents, and they will see the Chained CPI as just another club.

Others will worry that the Chained CPI is yet another way in which our society is losing touch with reality. They will see the Chained CPI only as a way for the government to cheat. This group is simply a reflection of the partisans. The partisans strive to get a grip on government power while this group wants to limit government power in case it falls into the wrong hands.

While has more sympathy with this last viewpoint than with the partisan viewpoints, we believe they are all misguided as far as policy is concerned. The real trouble is that the government is pressured by many different economic interests, but it has only one currency through which to take action. We have already commented elsewhere that a single currency is a chain that keeps the poor in place to be whipped by economic uncertainty and further impoverished. With a single currency, the Chained CPI is only one link in the larger chain.

Just as the Greek government impoverished its people to pay the Germans, for example, our government will impoverish us to pay its external debts. Our government has to make its payments to the Chinese and Japanese in the same dollars that we use. The rich must also be paid. To that extent our government is not really ours but represents foreign interests and the rich.

It is actually easier for a government to break its promises to its own poor people than to cheat sovereign nations or the rich. That is what the proposed Chained CPI is all about. It gives the U.S. government a way to cheat poor retirees as needed to pay foreign interests and the rich, and it has the advantage that it gives the government political "cover." All the government has to do is manipulate the cost of living adjustments in plausibly-deniable ways. Sometimes the adjustments will be higher and sometimes they will be lower, but the adjustments will never be made with the interests of the poor primarily at heart.

Please keep in mind that this is not because governments necessarily want to impoverish their own people. All governments want to be able to brag truthfully about how wealthy and happy their people are. It is just that governments find it hard to resist powerful voices. In our current capitalist systems, the poor have to unite to be powerful. When they unite, all it takes is a little money to divide some from the others, and usually the unity falls apart at a very low cost.

We know very little about the Occupy Wall Street movement at, but we suspect that this divide-and-conquer mechanism was used on them. We suspect that some, especially the leaders, were targeted by the rich. For those who cooperated, once their personal economic problems were resolved, they no longer had much motivation to keep the movement going. It takes an utterly desperate level of dedication to turn down what the rich can offer under any circumstances. In the U.S. today, it takes an insane level of dedication and most of us are not insane.

The real issue is that even if governments want to serve their people first, they are as much chained to their single currencies as the poor. When they start having trouble paying their debts, they start inventing deceptive policies like using the Chained CPI so that they can break their promises to their own people and keep their promises to the external rich (which includes foreign sovereigns).

Using multiple exclusive currencies is so far outside the box in which governments think that it seems unlikely that they realize that there is an alternative to policy tools like the Chained CPI. If all a government did was just use one currency for external transactions and another currency for internal transactions, there would be no need for complex, deceptive policies. There could be one simple policy for the external currency and another simple policy for the internal currency.

Governments should unite their poor under themselves and restrict financial access to them using the exclusivity of at least two currencies. This does not guarantee wealth, but it does guarantee that the loyalties of both the government and the people generally will be to one another, not to external influences. At we think this will help stabilize economies and protect the wealth that societies build, avoiding the fate that we saw befall the Greek government and people in recent years.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

 Copyright © 2013 TheOtherSideOfCapitalism

No comments:

Post a Comment