December 1, 1996

Panel Likely to Recommend New Price Index, to Better Reflect Actual Buying

By ROBERT D. HERSHEY Jr.

ASHINGTON -- A panel appointed by Congress is expected to recommend next week that the government create a new price gauge that would more accurately reflect inflation -- a move that would result in less generous increases in Social Security payments and other benefits but would also help lower the deficit, officials said.

One high-ranking official with knowledge of the panel's report said Friday that the proposed new index would better reflect what consumers actually buy each year.

It would largely, perhaps entirely, supplant the Consumer Price Index as the gauge used to calculate cost-of-living increases and adjust segments of the tax system for the effects of higher prices, the official said. A commission member also said the proposed remedy includes an alternate index.

It could not be learned, however, how often it would be calculated or whether the price index would still be used in conjunction with it. Dr. Michael Boskin, a Stanford economics professor who heads the five-member commission appointed by the Senate Finance Committee, would say only that the final report would include updated estimates of how much the price index overstates inflation and offer a recommendations for overcoming the problem.

The new index, like the price index, would be based on prices for a market basket of goods purchased by consumers. But it would be adjusted as frequently as once a year to reflect changes in consumer behavior, like the embrace of newly available products or a switch to substitutes when something gets too expensive.

The commission's report, scheduled to be released on Wednesday, comes as momentum is building for some politically defensible way to cut the Federal budget deficit further and to solve the longer-term problem of financing Social Security when the baby boom generation starts to retire in about 15 years.

The concept has bipartisan support, although neither Democrats nor Republicans are eager to take the lead on making the change, given the political sensitivity of tinkering with federal benefits. The commission's recommendation would need to be translated into legislation before it can be put into effect. The issue is almost certain to come before Congress next year.

Most economists, including the five-member Boskin panel, say they believe that the price index substantially overstates inflation and that the government thus pays billions of dollars more a year to beneficiaries of federal programs than necessary to keep them even with inflation.

In an interim report in September 1995, largely confirmed by its subsequent work, the Boskin group estimated the overstatement at 1.5 percentage points in recent years, somewhat more than half the rise calculated by the price index on which benefits have been based.

Critics of the price index say it fails to reflect adequately the improvements in the quality of goods and services people buy as well as the types of stores they use. Most important, the critics say, the price index was devised to capture the price of a fixed basket of items and does not reflect the fact that consumers frequently change their buying patterns in response to rising, or tumbling, prices.

Therefore, it is not a true measure of consumer cost of living and, they say, should not be the gauge used to adjust to it.

For example, if the price of hard-cover books rises too high, more people turn to paperbacks or use the library. The price index would register an increase in this case while a consumer, assuming roughly equal satisfaction, would have spent less.

Various members of Congress are thought likely to seize on the commission's findings to press for adoption of a new gauge. Among them are Sen. Daniel Patrick Moynihan of New York, the ranking Democratic member of the Senate Finance Committee, who was instrumental in creating the advisory panel.

Others on the record as favoring the idea include Sen. John Chafee of Rhode Island, Reps. John Kasich of Ohio, both influential Republicans, and Rep. Charles Stenholm of Texas and John Spratt of South Carolina, both Democrats.

Another powerful advocate of finding a better gauge is Federal Reserve Chairman Alan Greenspan, formerly chief economic adviser to President Gerald R. Ford. Boskin was chief economic adviser to President George Bush.

At a congressional hearing last year, Greenspan said of the consumer price index, "We do not take the CPI literally" in making monetary policy.

The Clinton administration is thought to be inclined to support adoption of a better adjustment gauge but is unwilling to do so publicly without the backing of a wider group of economists and other financial experts and members of both political parties.

In an interview Saturday, Treasury Secretary Robert Rubin responded cautiously when asked about using a new gauge to help solve the problems of budgetary and entitlement-program imbalance at a cost of reduced benefits to millions of citizens. "Whatever happens with respect to the CPI," Rubin said, "really depends on what technical and scientific people broadly agree to in this area."

A spokesman for the Office of Management and Budget said this week that the Boskin group's findings would be "an important statement but not the end of the process" and ruled out incorporating any recommendations in the 1998 budget the administration is developing. "The timing just doesn't seem to work," said the spokesman, Larry Haas.

About 30 percent of total federal spending is indexed to changes in consumer prices, most of it involving Social Security payments and military pensions. Revenues are linked to the price index by individual income-tax brackets and personal exemptions.

The new inflation gauge being urged by the commission would, in effect, transform an index of pure prices into an index that reflects the reality of a world in which technology brings a proliferation of new and improved products and consumers, for price and other reasons, constantly shift their buying patterns.

To capture such change, the commission is believed to be recommending that the consumer market basket be updated every year instead of roughly every decade, as at present, the next one set for 1998.

The Bureau of Labor Statistics, which has long suffered from the widespread assumption that a price index is the same as a cost-of-living index, is already well along in developing a mechanism for capturing product substitution by consumers. After a delay due to last winter's government shutdown, the bureau now expects to introduce this within the first three months of 1997.

Although Katharine Abraham, the commissioner of labor statistics, is said to fear that pressure resulting from the Boskin commission will cause hasty, wholesale adoption of such a fix, she declined to comment on any aspect of the panel's report.

And no matter how sophisticated the analysis and proposed remedy, specialists say, no system is ever likely to produce a perfect mirror of living costs.

"The state of the art in the area of price index construction," Ms. Abraham told last year's congressional hearing, "has not advanced to the point where anyone knows how to construct true cost of living measures."

Indeed, there is a substantial minority of economists and price specialists who deny that the price index overstates inflation at all, or who say that if it does so in general that there are specific groups, like the elderly, it disadvantages. None, however, seems to be among the 19 members of the Federal Reserve open market committee, which largely determines short-term interest rates.

"As best I can judge," Greenspan told Congress, "everyone has got a positive adjustment and it is only a matter of degree of what that adjustment basically is."