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Roy Hamric JAMES GALBRAITH The “Re’ on Social Security The report of the Boskin commission on the Consumer Price Index was recently released This august body, of which I warned in a column one year ago, is headed by Michael Boskin of Stanford University, Chair of the Council of Economic Advisers under President Bush. It was appointed by the Senate Finance Corn mitte4 a Republican-led institution with jurisdiction overyou guessed itthe Social Security System. Boskin has concluded that official measures of inflation have been severely overstated, lo these many years. Policy implication: a new, lower measure of inflation is needed. Fiscal side effect: civil service retirements and social security benefits should be indexed to the new measure. Inevitable result: future social security benefits will decline, relative to current law. The social security “crisis” will disappear. And the budget will be balanced much more easily. This seems tempting, but the difficulties are four-fold. First, there is no need to balance the budget. Second, there is no social security crisis. Third, the Boskin Commission’s arguments, so far as we know them from a preliminary report, are suspiciously one-sided. Fourth, even if Boskin were correct, their case would be a searing indictment of the Federal Reserve and the conduct of monetary policy, not necessarily of the system of indexing Social Security. I’ve written compulsively about the fetish of zero in federal budgeting, so I’ll leave that one alone. And please take my word on the general soundness of Social Security. \(Pertinent fact: Paul Krugman, the prominent MIT economist who recently endorsed an alarmist book on Social Security by the anti-entitlement investment banker Peter Peterson, took a second look at the evidence a few weeks ago and publicly reWhat about the Boskin commission? True, there is upward bias in cost-of-living calculations. These have to do with the need for adjustments as products get better, as new goods are invented, with accounting for goods purchased on sale or discount, with changing patterns of consumption and changing patterns of shopping. Boskin adds these up. He concludes that true inflation has been as much as 1.5 points lower, each year, than officially reported. If inflation has been lower than we thought, then growth in real incomes, output and productivity must have been that much higher. Considered broadly, this argument requires that the entire economic history of the past generation be rewritten. We must believe that real average wages, instead of stagnating since 1973, have actually risen by, say, 20 or 30 percent. Since we must raise our measure of growth, we must believe that the past was poorerthat up to one-half the population lived below today’s poverty line in, say, 1960 \(so economist Dean Baker, Boskin’s most efthat quality improvements in some products have not been matched by declines in others, such as public transport and city parks. Such things could be true. But are they? The Boskin commission, searching only for sources of overstatement in the CPI, has proved nothing of the kind. Still, for the sake of argument, let’s concede that inflation is actually somewhat lower than officially reported. What should this finding mean for policy? Biases in the CPI apply most strongly to well-off Americans. They affect most strongly those who earn the bulk of incomes, buy new products, shop aggressively for discounts, and generally drive the economic life of the country. Indeed, such biases should be higher for higher incomes. Just as it is easier for rich people to avoid taxes, so it is easier for them to negotiate discounts and otherwise to avoid inflation. Therefore, one could read Boskin as providing an argument for changing the indexation of marginal income tax rates, perhaps for ending such indexation altogether. THE TEXAS OBSERVER 17 DECEMBER 20, 1996