UNITED STATES-ECONOMY: Inflation Debate Sparks Fears of Cuts

By Farhan Haq Reprint | | Print |

NEW YORK, May 5 1997 (IPS) - In the United States, one politician’s “small technical adjustment in data collection” easily can turn into the loss of hundreds of dollars in benefits for some other citizen.

That is the clearest lesson of a months-long battle waged in Washington, between economists and federal bureaucrats, to determine whether the current process to determine the inflation rate is statistically accurate. The fight only ended Friday, when President Bill Clinton decided to drop the inflation debate, for the time being, saying that necessary adjustments would be made over the course of the year.

To some, the battle might seem impossible arcane: whether the current Consumer Price Index (CPI) accurately monitors the rise in prices of basic goods, or whether the inflation rate is overstated by perhaps four-tenths of one percent each year. But for most U.S. workers or the elderly, haggling over four-tenths of one percent is a struggle over whether most of the country’s people can keep up with the rising cost of living.

Some economic see any tinkering with the CPI data as a behind-the- scenes way of lowering many workers’ pay raises, and the Social Security benefits that go to the elderly.

“If you adjust the CPI downward, working people don’t get the cost- of- living increase, which is the only raise many people get,” says Robert Borosage, co-director of the Campaign for America’s Priorities, a Washington-based think tank.”The government would save billions of dollars (from the revision), which is why people are interested in it, but the savings are out of the backs of the elderly and working people.”

Traditionally, the president or Congress could lower Social Security payments or cost-of-living adjustments by passing the appropriate laws – although any politician attempting to do so would likely face public anger. But for the past few months, economic advisers to Clinton and much of the Republican leadership of Congress warmed to the idea of instead revising the way the federal Bureau of Labour Statistics (BLS) calculates the rate of inflation. Such a revision could still lower cost-of-living adjustments, without any politician having to legislate it.

The revision, the government said, could potentially save tens of billions of dollars over the next five years.

“It looked like a great gimmick,” says Don Baker, an economist at the Economic Policy Institute in Washington. “It was obviously a crude effort to politicise the data-gathering process.”

A blue-ribbon panel of economists appointed by Clinton last year asserted that the BLS estimates of inflation are too high, because they fail to take into account all the qualitative improvements of goods as well as any increase in their prices. The BLS denied the charge, and said it would investigate its data-collection process on its own to see whether it could be improved. But the bureaucrats’ track was too slow for some politicians, who tried to include a revision in the cost-of-living adjustment in a budget deal being worked out between Clinton and the Republican-led Congress.

That effort flopped, however, when Clinton decided Friday to drop the plan after some groups began to criticise the real costs of the revision.”My guess is that they figured it was more trouble than it was worth,” says Doug Henwood, editor of ‘The Left Business Observer’. “It became a political hot potato… Some people were willing to put up a fight on it.”

The reason, Baker says, is that, behind the bland “technical adjustment” rationale, the economic consequences for people depending on government benefits would be severe.

“For someone on Social Security, the five-year loss (by the revision) would come to more than 600 dollars,” he says. “So for the average couple on Social Security, the loss would come to 1,200 dollars.”

The American Association of Retired Persons – a coalition of more than 33 million elderly people – attatcked suggestions of any change on Social Security provisions, as well as budget-related revisions in medical benefits. “This is income redistribution in reverse,” John Rother, chief lobbyist for the Association, told reporters in Washington. “It makes us more unequal as a society.”

More to the point, there is still no consensus among economists over whether the inflation rate was overstated in the first place. Henwood has found many examples to suggest that the inflation rate may even be understated – although he trusts that the BLS makes its calculations by an honest and rigorous process. “The ruling class wants honest statistics,” he says.

Borosage notes there are many examples that “the elderly, in terms of their cost of living, suffer the highest rate of inflation, because of medical expenses.” Medication is one of the fields where prices rise most dramatically – which penalises the old in ways that the Consumer Price Index may not easily detect. For now, at least, there will be no dramatic effort to revamp U.S. statistics to the benefit of budget-cutters.

Baker says that “a lot of people involved (in the current debate) fell burned,” with little to show for their statistical tinkering. Henwood, on the other hand, doubts that those U.S. officials seeking to cut state expenditure will throw in the towel so easily.

“If the economy doesn’t deliver the revenue they’re expecting, I wouldn’t doubt that political expediency would bring it up again in the future,” he says.