The latest attack on the safety net is a CPI variation that extends Greenspan’s “substitution” theory and is called “Chained CPI”. The only real justification for Chained CPI is that the number is lower so safety net benefits tied to the CPI are reduced.  But few realize just how political this is, how bad the theory is, and what whores those economists and statisticians used by Bush at DOL in 2002 to produce and justify “chained CPI” have been.

The Greenspan “innocent innovation” is described as just a way to track the ways real-life consumers compensate as prices rise by buying less, finding a different brand or something different that does the same job or just not buying that item.  Indeed the DOL tracks prices in an enormous “market basket of items” and the fear is the public will change what should be in the basket, and the DOL will not know about the change without “substitution”.  This is a bit of a lie as items have moved in and out of the basket all the time before Greenspan and his “substitution” came along, but that is the justification song the DOL sings these days. BLS analysts in the past would track buying habits to see if folks were buying less, changing brands, or changing any other purchase habit and adjust the basket – but today they see “substitution” as better than those simple market basket adjustments. The political aspect is made obvious by right wing/”libertarian” CATO praising the “accuracy” of Chained CPI that was a “sound and overdue reform” and urging its use for Social Security, while that same CATO saying that the using of Chained CPI to adjust tax brackets is “a very bad idea” – the latter because tax bracket threshold for higher marginal rates would be lower as the current thresholds would rise more slowly relative to inflation than they do now, causing the Treasury to collect about $72 billion more over 10 years,

So for Social Security Chained CPI is a “sound and overdue reform” that just happens to produce a CPI compared to current CPI that is lower by 0.2 to 0.3%, lowering Social Security benefits by nearly 10% after 30 years (average drop of $1,000 by age 85 and $1,400 by 95) for a savings of $112 billion.

But substitution in already in our regular CPI calculation where Greenspan since 1999 has made official his crazy theory that inflation can go down when prices go up, based on changed buying habits within a category of goods – the steak to hamburger lifestyle change can be a decrease to inflation if the hamburger price is decreasing as the price of steak is rising (more likely it is rising more slowly – but still a lower CPI is then calculated).  Again, the decrease in lifestyle within a category of purchases is used to produce a lower CPI.  But now with “Chained CPI” we start tracking changes in lifestyle that cross categories – such as an increase in oil heat and gas for the car forcing your food budget to become rice only.  The goal is to use this lifestyle drop as a way to show a lower CPI.  Chained CPI is not based on a market basket for seniors but instead, it uses the “urban worker” market basket.  But seniors are heavily medical care consumers with cut backs on everything else, and a CPI that adjusts for a “senior market basket” produces a CPI-E for the elderly that runs 0.2 to 0.3% HIGHER than the urban worker CPI. Perhaps urban workers can make a few substitutions as their life style crashes, but the aged don’t have those things in their market basket, and what they do have in their market basket, health care, is “substitution free” as the aged really can’t forgo the heart bypass operation and opt for the cheaper hernia operation.

Rich Aged do exist, but not because of Social Security and not in large numbers – and besides it is not a welfare program – it is an earned benefit paid for via taxes over a lifetime.  Indeed 2/3rds of all retirees get most of their income from Social Security. Rather than chasing a lower CPI for the aged we should be switching over to CPI-E for those 62 and older where the proper weight for medical care has meant that CPI-E rose nearly 7% faster than the standard CPI from 1998 through 2009.

One would think it only fair that if you change the inflation index method for one government program, you should do so for all of them. And the market basket used in the calculation should reflect the group the CPI is being used for. But that is not the GOP plan – or the Obama plan, and not what will happen if Obama ever gets his “grand bargain”.