The Political Impact of the Boskin Report
Davie L. Wilson
Justice, First Texas Court of Appeals
presented to
The Raleigh Tavern Philosophical Society
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The birthmark of the Republic of Texas was a mark drawn with a sabre on the floor of the Alamo. But, what could Colonel William Barrett Travis' famous line-in-the-sand remotely have in common with anything as arcane as a paper officially titled, "Final Report to the Senate Finance Committee from the Advisory Commission To Study The Consumer Price Index?"

We remember that famous scene in the Alamo because the picture we so easily see in our minds brings with it a feeling of dread for the starkness of the choice the first American Texans faced. We remember because the mental image triggers strong dormant feelings and nudges our understanding a bit closer to the selfless reality of their particular answer.

What Travis, Crockett, Bowie & Bonham, and those with them gave us at the cost of their lives was Texas for the United States, and the line-in-the-sand forever as an American symbol of a basic and grave choice between certain results. It represents to us taking a stand on high principle, albeit not in every instance involving life and death, but including a certain type of choice as abhorrant and threatening to a career politician as sunlight to Dracula, one involving real and fundamental consequences for every American.

Do the commission's findings, informally known as the "Boskin Report," present such a fundamental choice to our political leadership? Could something as lifeless-sounding as a decision on adjusting the consumer price index be so threatening?

Since Franklin Roosevelt came to office following the onset of the Great Depression, the country has been governed in a meandering center-left direction, regardless of the identity and philosophy of the political party controlling the White House. The President leads, but the real battles are fought on the floor of the Congress, and its control remains primary in fundamentally changing the general direction of the nation.

If political war breaks out over an adjustment for inflation, will the ferocity of the debate signal that the enactment of the recommendations presented by the Boskin report is so basic a decision as to swing the political direction of America from center-left to center-right with all the attendant consequences? Or will the final decision hardly garner a whisper of protest from the dominant left wing of the Democratic party thereby displaying the weakness of the political left in America, and finally ushering in the realignment in controlling political forces long sought, prayed for, and predicted by conservatives? Does the Boskin report present a line-in-the-sand to our country?

Certainly if an amount of money by itself could qualify, the financial consequences of the decision are staggering. Newsweek Magazine recently reported that adopting the recommendations of the Boskin report would "save" the government 1 trillion dollars over 12 years.

The Consumer Price Index and Its Significance

The CPI is a calculation based on prices of a reasonably certain "market basket" of goods and services purchased by individuals and families in maintaining a standard of living. The Commission defined the CPI in the report as follows:

The Commission also summarized the importance and usefulness of the CPI in the first paragraph of its introduction to the report.

Reporter Christina Duff's article in the Wall Street Journal of January 16, 1997, explained the significance of the index. "The stakes are high: The CPI is used to adjust what goes in and comes out of American pocketbooks, everything from Social Security benefits to income taxes. CPI fluctuations affect our understanding of whether living standards are rising or falling, and they spur the Federal Reserve to boost or cut interest rates."

The CPI becomes even more important to those Americans living on fixed incomes. This inability to increase incomes makes this group more vulnerable to the adverse consequences of inflation and at the same time, leaves them more at the mercy of governmental policy. Inflation particularly hits hard those that rely solely on their Social Security checks, using that income for little more than buying the basic necessities of modern life. Each year, the CPI adjusts upward the amount of money these seniors receive thereby preventing cost increases of basic necessities from devaluing their social security income and the corresponding standard of living they maintain. These vulnerable people make up the hard-core constituency of what is called the "third rail" of contemporary American politics; touch it and you die.

There remains little value in untested virtue, but the impact on even the totally dependent social security recipient still seems modest given the gravity of the deficit dilemma. If checks issued this year were based on the correction to the CPI recommended by the Boskin Commission, payments would increase by $13 per month rather than the $21 now forecasted. The result would be a check of $737 per month rather than $745. This decrease has to be factored against a system that for decades has overpayed to a substantial multiple of their individual contributions (including fair interest returns) those recipients living average life spans.

The Commission addressed the breadth of the impact of the CPI on the American people.

The Bureau of Labor Statistics (BLS), charged with the task of compiling the index, bases the market basket of goods and services on the following weighted components:

  1. Housing 41.3%
  2. Food & Drinks 17.3%
  3. Transportation 17.0%
  4. Medical Care 7.4%
  5. Apparel and upkeep 5.5%
  6. Entertainment 4.4%
  7. Other 7.1%

Approximately 300 Bureau of Labor Statistics employees gather the information that is the raw material for the monthly calculation known as the CPI. These individuals include those that travel in various regions of the country, checking and rechecking prices of certain items within the "market basket." "Each month, some 90,000 prices are shipped to Washington, plugged into a computer, scrutinized, aggregated, adjusted for seasonal ups or downs and then spit out as the monthly CPI report."

Duff also explains how the employees do the basic work that ends up as the CPI "Choosing what to price—for example, the regular or fancy baby parakeet—can seem arbitrary. After consulting surveys that track consumer buying habits, the labor statistics bureau selects popular stores and item categories—say, a woman's top. The price-taker then asks a store employee to help zero in on an item of the price-taker's choosing. They narrow to the size of the top, its style (short sleeve, long sleeve, tank or turtleneck), and so on; items that generate the most revenue in a category have the best chance of getting picked."

Problems With The CPI

Difficulties with the accuracy of the CPI have been known long before the Boskin Commission was formed to bring the data into a coherent overview of the problem. The Commission quoted the Congressional Budget Office (CBO) from 1994.

In its executive summary of the report, the commission related the potential macro results of an overly generous CPI.

Problems with the accuracy of the CPI in the micro sense arise both in the field where the prices are gathered and in Washington where the results of the surveys are examined, plugged into formulas and the index finally calculated. Critics look at every stage of the process and point to where bias may creep into the CPI.

Duff examines some of the problems in Washington in constructing an accurate measure of inflation. "After the facts reach Washington, analysts struggle to determine how much a price increase reflects quality changes and how much it reflects real inflation. (If a TV set doubles in price but also is twice as good, economists say the true price hasn't risen at all.) Likely an analyst will declare the two sets "noncomparable" and tell Mrs. Ward (the field worker) to wait another month to start price-comparing again---this time with the newer set as the base."

Critics attack this as inaccurate. They point out that the increase in quality of the set may make the real "economic" price decline. A product that doubles in price but is three times better in quality should make the CPI go down, not up.

Duff points out that part of the methodology used can contribute to the CPI being overstated. The market basket contains 207 sub-categories of goods which are changed for the most part only once every 10 years. New products, or services, like cellular phones, "Wonder Bras", and "Tickle-Me Elmos" are not counted, and will not be until 1998 when the categories receive their 10-year update.

The Commission discussed some of the problems with the CPI in its executive summary of the report.

Consistent errors in the CPI can have even wider implications for economic policy. For example, when reviewing the recent economic history of the United States, if inflation has been consistently lower than we thought, then growth in the real income of Americans must be higher.

The Commission's Work Product

The task put before the Boskin commission by the Senate Finance Committee was stated in clear terms. They were to examine the Consumer Price Index to determine its accuracy measuring the impact of inflation on the cost of living.

The commission's final report released December 4, 1996, declares that all of its numerous recommendations are aimed toward a single goal, the development of an accurate cost-of-living index. After relating the technical matters found in error in making the calculation, the commission offers short, intermediate and long-term remedies directed at improving the quality of the methodology used in measuring the impact of inflation on incomes of the American citizen. But in the report's final series of recommendations titled, Suggestions for Congress, no. 16 and last recommendation finds the bottom line.

Just what are those "many other issues" the commission is mentioning?

The Consequences

At ground zero of the debate is a central undeniable fact. No American citizen has been promised by any politician or party an incorrect adjustment for the impact of inflation on his government check. No one will be able to argue without distorting language that the current inflation correction represents a sacred contract between the government and the people that reaches the same magnitude as Social Security itself, although it will be tried. Where will the arguments that we will surely hear against adopting an accurate CPI find their foundation?

If there is such a thing as a "New Democrat" in American politics as distinguished from a traditional or old Democrat, it is entirely possible that a clear fault line between the two, leading to the next nomination struggle, may appear in the argument over the adoption of the recommendations of the Boskin report. Although Democrats presented a united front in their "Medi-scare" campaign that successfully re-elected President Clinton and closed the gap in the Congress, the desire to repeat the same arguments in the CPI context is tempered by President Clinton's desire for a historical accomplishment during his second term.

The President has announced that his number one goal is balancing the budget and the huge savings made available by adopting the Boskin recommendations may be just what is needed to bridge the gap with the Republicans and accomplish the objective. The losers would be the liberal wing of his own party. Clinton knows there are no votes on the left to balance the budget. The left will always add rhetorical support for the effort, but will always find an excuse to vote otherwise.

An added benefit to the President's side in the argument with his fellow Democrats is that a victory for him would set the stage for the ascendancy of the "New Democrat" philosophy and point the way to a new center orientated governing coalition. The next race for the Democratic nomination for President may feature Al Gore, the "new Democrat" supporting some recommendations of the Boskin report for the practical reasons that a "cut" in Social Security can be successfully supported with the Boskin report's suggested error correction as a shield from the standard criticisms of the usual suspects. His likely opponent for the nomination, Richard Gephardt, a labor Democrat and leader of the old coalition, notwithstanding his current luke-warm reaction to the Boskin report will in the end reject correcting the inflation adjustment downward to any degree saying it is yet another example of "balancing the budget on the backs of the poor."

Clinton has publicly touched on this theme. In his triumphant speech before the Democratic Leadership Council (DLC), the organizational arm of the "new Democrat" movement, the President stated, "By the stands that we have taken, the battles we've waged, the record that has been built, we've helped to forge a new American vision, a new consensus that can govern our country and move us all forward."

Broder also quotes Mark Penn, a pollster hired by Clinton after the 1994 Congressional disaster, as saying before the same DLC meeting that Clinton's re-election was a "landmark." Broder stated in his column that Penn explained the election as "signaling the end of the old Democratic coalition of blacks, the elderly and the downscale, and the emergence of a new coalition of women, Latinos and especially, middle-class suburban married couples." Penn went on, according to Broder, to predict that Republicans would have little choice but to cooperate because the President had co-opted so many Republican issues such as curbing deficits and balancing the budget. A failure to go-along would lead to charges of obstructionism that worked so well for Democrats in the last election cycle.

Broder further quotes Penn as scolding the Congressional Democrats who didn't follow the new Democrat policy line. Penn stated that the House Democrats, "egged on by the labor unions . . . . invested heavily in wooing the so-called downscale voters, . . . . and failed to join Clinton in demonstrating fiscal moderation. . . . Had the old Democrats moved with the president toward more mainstream positions, they would have retaken the House." What could be more mainstream than having an accurate correction for inflation?

The line-in-the-sand in this political square-off lies between fundamentally different conceptions of the proper role of government in a free society, between Republicans and the left wing of the Democratic party. Those on the left favor redistribution of income from upper to lower income groups as an end in itself. Looking on life as unfair and the acquisition of wealth due in a large measure to luck rather than the hard work and skill of the individual, they are not reluctant to use the power of government to "take from the rich, and give to the poor." We all remember Ann Richards' second most famous joke about George Bush, (or was it Jim Hightower's?). "George Bush was born on third base, and thought he had hit a triple."

Although this fault line is rarely identified as such, it frequently arises in disputes over governmental policy. Recently the Congress considered the repeal of the Fuel Pricing Assistance Program. During the Carter administration, the country faced what was called then, "the Energy Crisis." Severe shortages in supply due to the Arab OPEC embargo of crude oil sent energy prices skyrocketing.

These dramatic shifts in supply correlated with a rough winter, and sent home heating oil prices in the Northeast ever higher to the degree that the Democrats in the White House and Congress felt compelled to act.1 The response was the Fuel Pricing Assistance Program which subsidized prices for lower income groups to the end that they could pay roughly the same price to heat their homes as before the embargo and resulting shock to crude oil prices.

When the program was put on the chopping block of the last Congress, supporters rallied to its defense. Although current fuel oil prices were lower, as corrected by the CPI, than before the oil crisis even began, the program survived notwithstanding that its very purpose for being no longer existed in reality. The fundamental if unspoken reason it survived is because it accomplished a redistributional purpose, in that it transferred money from the relatively rich to the relatively poor. That reason alone was sufficient to justify its continuance by those who see government's essential purpose as egalitarian.

Criticism for the Boskin recommendations has not been long in coming, but to date has lacked "experts" willing to challenge the purely economic findings of the report. One of the Commission's recommendations cleverly spoke to the community of economists realizing that without professional support opponents would be floundering for a rationale to justify opposition. The Commission stated in the last paragraph of its report that,

Predictibly, Senator Kennedy was an early opponent of adjusting the CPI downward. The Associated Press reported on December 12, 1996, in the Houston Chronicle that Senator Edward Kennedy, D-Mass., warned against "an unfair back-door benefit cut that hurts senior citizens and working Americans." The arguments of supporters of the recomendations were equally predictible. The same article quotes Senate Finance Committee Chairman William Roth, R-Del as saying that, "Inaccurate government statistics, particularly one as important as the CPI, are unacceptable." An interesting argument is thus postulated, accuracy (dare with say honesty) in calculation vs. unfairness in consequences.

The article begins by stating that poor and senior Americans would feel the brunt of any change in the CPI, anyone that relys heavily on Social Security or any other adjusted program. An early CBO report with findings consistent with this theme was reported. The budget office stated,

The Associated Press article ends with this roll-call of the likely opponents of the plan.

Stay tuned; this looks like the political fight that will highlight this Congress, if not of the decade. Clinton's famous bridge to the 21st century may be paid for by touching that "third rail" of American politics and surviving. It will be historic, indeed.