The Trump administration has resurrected an oldie but a goodie: changing the way inflation is calculated to determine if someone lives under the poverty level. Instead of using the normal measure, they want to use something called chained CPI, which is—well, the details are tedious and uninteresting. Here’s the meat:
Chained CPI grows about a quarter of a percentage point less than the traditional inflation measure, on average, according to the Congressional Budget Office. The impact would be relatively small initially, but would likely affect millions of low-income Americans over time, said Arloc Sherman, senior director at the Center on Budget and Policy Priorities. Had chained CPI been used over the past five years, the federal poverty level in 2018 would have been $12,113 for a single person, rather than the actual threshold of $12,140, according to Douglas Holtz-Eakin, president of the American Action Forum and former official in both Bush administrations.
So is this a good idea? That’s a surprisingly tricky question. Here are the pros and cons:
- In general, experts agree that chained CPI is a more accurate measure of inflation. So if we want to measure things accurately, we should use it.
- However, there’s some evidence that chained CPI isn’t more accurate for the poor. So for poverty thresholds, it might be more accurate to use the current CPI.
- In any case, the difference is small. Changing the poverty line from $12,113 to $12,140 over five years wouldn’t throw very many people off the welfare rolls.
- But of course that’s only five years. The difference would grow more and more every year.
- One pushback against chained CPI has always been basic fairness: if you’re going to change it for poverty thresholds and Social Security payments, shouldn’t you also use it for tax brackets? If tax brackets increase more slowly, it means the rich would pay more in taxes. Republicans have always opposed that.
- But wait! In the 2017 tax bill Republicans did switch to chained CPI for calculating tax brackets.
- So . . . maybe that means it’s now fair to apply chained CPI to everything?
Maybe. But then again, Trump is only proposing to change it for poverty thresholds. He’s not proposing to change it for everything. If he did, it might be a change worth considering. Like I said, it’s a bit of a tricky question, mostly because measuring inflation is inherently tricky. For example, Dean Baker highlights a column in the Wall Street Journal today from Andy Kessler, who says that switching to chained CPI is a drop in the bucket:
I’m convinced that all of the common measures overshoot by at least 2 percentage points, and maybe even 5 or more. That’s because of the flaw in the Bureau of Labor Statistics’ hedonic adjustment, which totally misses the way the cost of technology declines over time. As we noted a year ago, “by the time the BLS puts something new in the CPI basket, it’s already cheap, so it misses the massive human-replacement price decline.” Google Lens on a $35 phone, for example, can now translate and read aloud signs in 14 languages. Does the BLS capture the costs that technology saves compared with the services of human translators?
This is fairly ridiculous because this “hedonic adjustment” problem has already been addressed, as Baker points out:
Because its own research has identified this problem, the Bureau of Labor Statistics (BLS) began to accelerate the rate at which new products are introduced into the index. It reconstructs its basket annually and important new products are likely to enter the index after just a few months….Due to changes in methods, there will not be another product like the cell phone that can achieve mass adoption before getting in the CPI.
Still, hedonic adjustment is both real and—yes—tricky. Take cars. Here is the BLS’s measure of inflation in new vehicles:
Can that really be true? Is the price of new vehicles basically half of what it was in 1980 when you account for inflation? Yes and no.
For starters, there’s been less inflation than you probably think. The best comparison isn’t between a single model of car in 1980 and 2018, since car models can change considerably. Instead, you want to look at, say, the cheapest car available in those two years. For example, a base model Datsun B210 cost about $5,000 in 1980, which equates to $15,000 today. That compares to the Nissan Versa, today’s cheapest car, which costs a little over $13,000. So the price of cars really has gone down a bit.
But not by 50 percent. Where is that coming from? Simple: it’s hedonic adjustment. That is, your car today has a ton of stuff that the car of 1980 didn’t. For example:
- Airbags all over
- Way better crash resistance
- Infotainment and GPS system
- Bigger engine (the Versa makes 109 horsepower vs. 65 for the B210)
- Backup camera
- WiFi
- Air conditioning
- Power mirrors
- ABS brakes
- Etc.
The BLS is basically making the judgment that if it had been possible to buy a Nissan Versa in 1980, it would have cost about $26,000. Today it’s half that. So you may not be literally paying half of what you did in 1980 for a new car, but you’re getting way more for the same money. However, it’s worth noting that although quality improvements get all the attention, sometimes things get worse. Here’s Baker again:
BLS does make major efforts to measure quality improvements, but it undoubtedly misses some. But it also misses deterioration in quality. Most people would probably say the quality of air travel has deteriorated over the last three decades with smaller seats, more crowded planes, and having long waits in security lines. This deterioration has been largely overlooked in the CPI.
Tricky, isn’t it? Measuring inflation is hard, and there’s no single “right” way to do it. Technically, for example, we might want separate measures for the poor, the elderly, the rich, and maybe even for men vs. women. You’d use the first one for poverty programs, the second for Social Security, the third for tax brackets, etc. It’s likely, however, that the complexity of this would outweigh the small improvements in fairness. It’s probably best to pick one and use it for everything. But which one?
