An Economy Unbound
Today, Republican William Roth and Democrat Pat Moynihan of the Senate
Finance Committee will unveil a study from a bipartisan commission reporting
that our most important measure of inflation, the Consumer Price Index,
overstates changes in the cost of living by more than one percentage point
a year. The ramifications of this work, responding to widespread criticism
of the CPI, are enormous. About 30% of the federal budget, including many
entitlements, is indexed to the CPI; the report's findings mean that the
country must spend a trillion dollars less than we had counted on in the
coming decade to maintain programs such as Social Security. Closing the
budget gap also becomes possible.
The report is by an eminent group. Its leading author is Michael Boskin,
former chair of the Council of Economic Advisers, and co-authors include
Zvi Griliches and Dale Jorgenson of Harvard. The last such effort at revising
the government's numbers collection techniques was produced in 1961, led
by the late George Stigler of the University of Chicago.
One measure of the report's importance may be found in the political
intensity of the battles that have been fought in the past decade over
"falling incomes" and the like. Proponents of this view of the
economy's performance have in turn used their numbers to posit a class-based
tension between "the wealthy" and everyone else. Setting aside
the unfortunate class-war mind-set of this movement, it has always struck
us as greatly at odds with the observable betterment of economic conditions
in the U.S. The report's revisions account for many of these anomalies.
If, as the Commission reports, many of the "facts" of the
past decade's economic debates are actually closer to myth, then the country
can perhaps move beyond its recent obsession with income distribution tables
and consider policies that would yield economic growth more dramatic than
is visible even in Dr. Boskin's revised picture. Some sample debunking:
Myth 1: The American worker has been losing ground for 20 years.
For polemicists from Robert Reich at Labor to precincts further right,
exhibit A was a line of government numbers showing the hourly earnings
of the average worker to be 13% less in 1995, in constant dollars, than
they were in 1973. This argument was key in last spring's successful campaign
to raise the minimum wage. Organized labor actually based a whole $35 million
campaign on the datum; the theme of its 1996 effort to throw Republicans
out of the House of Representatives was "America Needs a Raise."
The Boskin data don't show a worker dramatically losing ground. They
conclude that the same worker has actually realized a 13% improvement in
his lot, as measured by hourly earnings, since the early 1970s. As for
the constituency the AFL-CIO claimed to be representing, the manufacturing
sector, it did fine as well. (And while the old data showed average hourly
earnings falling from 1981 to 1989 by around 1%, the new numbers show a
10% increase for that period.)
Myth 2: The American family has been stuck in the same place for
20 years. Census Bureau and Commerce Department work showed median
family income stagnating between 1973 and 1996. Under the revised measures
of the Boskin Commission, there is a real increase in money income for
families of 36% for the same period.
This is that rare thing--"good news." Normally that would
elicit large efforts at refutation. But the Boskin Commission's core conclusion
is not very controversial. For years economists across the spectrum have
argued that Washington overestimates inflation. They have noted that the
CPI very often seemed to show more inflation than other measures, such
as the various deflators.
Leonard Nakamura of the Philadelphia Fed has been going around publicly
for many months arguing that the CPI is even more overstated than Mr. Boskin
and his colleagues on the Commission allow. Democratic number crunchers
also have complained about the CPI: Ev Ehrlich, undersecretary at Commerce,
has tangled with his counterparts at Labor by complaining about CPI distortion.
Even the normally cautious IMF has weighed in with a paper; it sniffs that
the CPI overstatement is old news, which "the economic literature
has noted for decades."
While we welcome the Boskin Commission's contribution to economic clarity,
we'd be even happier if it enlightened Washington policy makers, who seem
incapable of seeing the forest for the trees. That is, a basic flaw in
our economic formulations is to become slaves to one or another statistic,
whether the CPI, the trade deficit or even the budget deficit. Measuring
the shape of the economy accurately is an important first step. Lifting
its burdens--taxes, archaic regulations--is the necessary next step in
capitalizing on the Boskin Commission's helpful findings.