[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



OVERSIGHT OF THE BUREAU OF LABOR STATISTICS: FIXING THE CONSUMER PRICE 
                                 INDEX

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                        COMMITTEE ON GOVERNMENT
                          REFORM AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 30, 1997

                               __________

                           Serial No. 105-28

                               __________

Printed for the use of the Committee on Government Reform and Oversight

42-460              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 1997
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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico            EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida             DENNIS J. KUCINICH, Ohio
JOHN B. SHADEGG, Arizona             ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South     JOHN F. TIERNEY, Massachusetts
    Carolina                         JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire        THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas                 HAROLD E. FORD, Jr., Tennessee
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                    Subcommittee on Human Resources

                CHRISTOPHER SHAYS, Connecticut, Chairman
VINCE SNOWBARGER, Kansas             EDOLPHUS TOWNS, New York
BENJAMIN A. GILMAN, New York         DENNIS J. KUCINICH, Ohio
DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
MARK E. SOUDER, Indiana              TOM LANTOS, California
MICHAEL PAPPAS, New Jersey           BERNARD SANDERS, Vermont (Ind.)
STEVEN SCHIFF, New Mexico            THOMAS M. BARRETT, Wisconsin

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
             Christopher Allred, Professional Staff Member
                Robert Newman, Professional Staff Member
                       R. Jared Carpenter, Clerk
            Ron Stroman, Minority Professional Staff Member
          Karen Lightfoot, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 30, 1997...................................     1
Statement of:
    Abraham, Katharine G., Commissioner of Labor Statistics, 
      Department of Labor, accompanied by William Barron, Deputy 
      Commissioner of Labor Statistics...........................     9
    Hulten, Charles R., professor of economics, University of 
      Maryland; Kurt E. Karl, executive vice president, U.S. 
      Macroeconomic Services, WEFA; Dean Baker, economist, 
      Economic Policy Institute; and Matthew D. Shapiro, 
      professor of economics, University of Michigan.............    91
Letters, statements, etc., submitted for the record by:
    Abraham, Katharine G., Commissioner of Labor Statistics, 
      Department of Labor:
        Information concerning expenditure weights...............    55
        Information concerning trends in earnings................    36
        Prepared statement of....................................    11
    Baker, Dean, economist, Economic Policy Institute, prepared 
      statement of...............................................   124
    Hulten, Charles R., professor of economics, University of 
      Maryland, prepared statement of............................    94
    Karl, Kurt E., executive vice president, U.S. Macroeconomic 
      Services, WEFA, prepared statement of......................   109
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     8
    Shapiro, Matthew D., professor of economics, University of 
      Michigan, prepared statement of............................   135
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut, prepared statement of............     3

 
OVERSIGHT OF THE BUREAU OF LABOR STATISTICS: FIXING THE CONSUMER PRICE 
                                 INDEX

                              ----------                              


                       WEDNESDAY, APRIL 30, 1997

                  House of Representatives,
                   Subcommittee on Human Resources,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2203, Rayburn House Office Building, Hon. Vincent 
Snowbarger (vice chairman of the subcommittee) presiding.
    Present: Representatives Shays, Snowbarger, Towns, Barrett, 
and Sanders.
    Ex officio present: Representative Waxman.
    Staff present: Lawrence J. Halloran, staff director and 
counsel; Christopher Allred, and Robert Newman, professional 
staff members; R. Jared Carpenter, clerk; and Ronald Stroman 
and Karen Lightfoot, minority professional staff members.
    Mr. Snowbarger. We are going to call the committee to 
order. Chairman Shays is not able to be with us, at least for 
the first part of the hearing, so I will be chairing until his 
arrival.
    The purpose of this hearing is to examine how the Bureau of 
Labor Statistics maintains the accuracy of the Consumer Price 
Index. The subcommittee will consider how the CPI should be 
made more accurate. The hearing will also discuss the avoidable 
and unavoidable biases in the CPI.
    I am a strong supporter of indexing benefits, and 
especially taxes, for inflation. Ordinary Americans should be 
guaranteed that the taxes they are required to pay are based 
upon fair and accurate statistics, and that the benefits that 
they receive are accurately calculated to address their needs. 
I look forward to hearing from the panelists today as they 
discuss these important issues.
    Let me be clear, I understand and believe that the 
calculation of the CPI is the responsibility of the Bureau of 
Labor Statistics. It is not the job of Congress to be involved 
in the calculation of the CPI, nor should it be. This would 
raise the danger of politicizing economic statistics, such as 
what happened in the Soviet Union. Also, if changes had to be 
made legislatively, the opposition party would demagog the 
issue, as some White House officials were prepared to do in the 
past election.
    Congress does have the oversight responsibility to ensure 
that BLS is calculating the CPI accurately, as current economic 
methodology and technology allow. The CPI is one of the most 
important economic statistics calculated by the Federal 
Government. Its calculation is critical in determining how the 
Government will make benefit adjustments to offset the effects 
of inflation. Cost of living adjustments to Social Security, 
SSI, the Civil Service Retirement System, the Federal Employees 
Retirement System, veteran's pensions, child nutrition, and 
food stamps are directly affected by the CPI. In addition to 
benefit adjustments, income tax rates are also indexed based on 
the CPI, so as to lessen bracket creep.
    In 1961, the Stigler Committee identified several problems 
associated with the calculation of the CPI. In fact, some of 
the concerns raised in today's Boskin report were recognized by 
the Stigler Committee 35 years ago. I am troubled to see that 
these problems persist, and I am eager to hear what the BLS is 
doing to address these concerns.
    According to CBO estimates, starting in 1996, a 0.5 percent 
annual reduction in the CPI growth would have reduced the 
Federal budget deficit by $209 billion between fiscal year 1996 
and fiscal year 2000. These numbers stress the need for this 
committee to address the questions raised by the Boskin 
Commission, and the Boskin Commission's assertion that the CPI 
is overestimated by 1.1 percent annually. If the Boskin report 
is accurate in its assessment that the CPI is overstated by 1.1 
percent annually, then Government would overcompensate for 
inflation in the years fiscal year 1996 to fiscal year 2000 
about $400 billion more than the actual increase in the cost of 
living.
    The loss here is not to the Federal Government; the loss is 
to the American taxpayer, who is required to pay more to 
perpetuate this inefficiency. If taxpayers are to be spared 
this undue burden, then BLS must eliminate the bias in the CPI. 
Since so many decisions, both in the Government and the private 
sector, are based on the CPI, any inaccuracies in the CPI have 
a ripple effect that causes even greater distortions in our 
economy. The question of CPI accuracy is a multibillion-dollar 
question, and finding the answer is critical to the work we are 
undertaking to make Government more efficient and less 
burdensome. I do not necessarily want the CPI lowered or 
raised; I just want it to be an accurate reflection of the true 
economic conditions and as accurate as possible.
    Again, I would like to thank the chairman for holding this 
hearing. I look forward to the witnesses' testimony and 
questions.
    I want to indicate one of the statements in the chairman's 
statement that I want to make sure everyone understands, in 
terms of the presumptions that we have going into this hearing. 
``It now appears that there is not going to be any externally 
imposed CPI fix as a part of the 1998 Federal budget.'' That's 
as it should be. ``The rendering of national economic 
statistics should be based on sound principles and valid data. 
The CPI should be immune to political manipulation, both 
external and internal.''
    So, because of those presumptions, we're very interested in 
finding out how we can get to as accurate a CPI as possible.
    With that, Mr. Waxman.
    [The prepared statement of Hon. Christopher Shays follows:]

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    [GRAPHIC] [TIFF OMITTED] T2460.002
    
    Mr. Waxman. Thank you very much, Mr. Chairman. I want to 
thank you for holding this hearing, and I want to express my 
concurrence with your statement.
    The CPI involves many complex issues, and any change in 
that index is going to affect millions of people. I believe 
that any revision to the CPI should be made by the expert 
statisticians and economists at the Bureau of Labor Statistics.
    Revising the CPI should not and must not be a political 
decision. During the last several weeks of budget negotiations 
there has been much speculation over whether an adjustment to 
the CPI should be part of the budget package. In fact, today's 
newspapers report that, in behind-the-scenes talks, negotiators 
are discussing adopting ``experimental inflation indexes.''
    According to the reports, the cost of living measure would 
not be expressly changed, but an assumption to make those 
changes would be built into the budget deal. The formula 
mentioned could cut the CPI by as much as one-half of a 
percentage point.
    I strongly oppose any change in the CPI that is motivated 
solely by budget-balancing expediencies. CPI savings should not 
be used as some last-minute filler for a hole in the budget, 
particularly for a budget that contains deep cuts in Medicaid, 
the health care program for the very poor, and, in my view, 
unjustifiable tax cuts for the wealthy.
    It is essential that a CPI fix not result in a budget that 
achieves balance by irresponsibly sacrificing the interests of 
Social Security recipients, veterans, and other hard-working 
Americans, so that the money they have earned is redistributed 
to the wealthiest in our country.
    Let's keep politics out of the CPI. We should all support 
additional funds to continue the work of BLS as a first-rate 
agency and fully support the professional decisions that its 
experts make based on the facts. I don't want to see this 
budget build in some assumption that will exert pressure on the 
Bureau to live up to that expectation. I think it is completely 
inappropriate to do that.
    When the President presented his budget, he made certain 
assumptions based on the BLS expectations of what the CPI would 
be. We ought to stand with that and not change it for any 
political reasons, in order to deal with lack of sufficient 
revenues or cuts to bring the budget in any kind of balance.
    I think this is a hearing well worth having. It is 
important for us to look at these questions, and I thank you 
very much, Mr. Chairman, for holding it.
    Mr. Snowbarger. Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    I concur with Mr. Waxman. These are important hearings, and 
I'm glad that we are holding them.
    I find it curious that there is so much attention being 
paid, in the last year, to the CPI. Having been involved in 
politics for a little while, I have the feeling that that 
interest is not just because of intellectual curiosity on the 
part of Members of Congress but, as Mr. Waxman indicated, has 
something to do, perhaps, with the budget process.
    What I fear very much is that there are some people in 
Congress, or maybe in the White House, who would like to use a 
change in the CPI to balance the budget in a way that I 
consider to be very, very unfair.
    Mr. Snowbarger, you mentioned earlier about the Soviet 
Union. Remember, in the days of the Soviet Union, when they 
didn't reach their quotas, all they would do is change the 
quota. So I fear very much now, instead of changing the economy 
to protect our elderly or our working people, what we are going 
to do is change the statistics and tell them, ``Hey, you didn't 
know it, but things are really much better than you thought. 
You thought you were working longer hours for low wages, but we 
have new statistics to tell you you've never had it so good.''
    Elderly people in my State can't afford their prescription 
drugs. They can't afford to heat their homes. And I think, I 
fear very much that there are some people who would like to 
tell those folks, ``You're wrong. Things are really good. Look 
at the statistics.''
    I would say, Mr. Chairman, not having done an exhaustive 
study on the issue, but based on my own personal observations 
and reading a little bit about it, that for senior citizens, at 
least in some parts of this country, not only is the CPI not 
too high, it probably underestimates the increased costs that 
they incur in a given year.
    Perhaps Ms. Abraham will discuss that later, but I can tell 
you that, in my State, a lot of our senior citizens spend a lot 
of their money on health care, health care needs, prescription 
drugs. My understanding is that the cost of health care is 
going up considerably higher than the cost of inflation, in 
general.
    In my State, where the weather gets 20 below zero, people 
spend a lot of money on home heating fuel. The cost of home 
heating fuel is going way up. Now, I understand that computers 
are going down, but most of the senior citizens in my State, 
who are trying to get by on $7,000 or $8,000 a year, are not 
investing many thousands of dollars in computers.
    So I would argue that, based at least on what I see, for 
security who are on Social Security, probably the CPI 
underestimates the increased costs that they deal with every 
year. I would very strongly oppose any effort to cut the CPI as 
a back-door way of balancing the budget.
    What I fear very much is the politics of this whole issue, 
because I can see that it would be very easy for politicians to 
get up there and say, ``We're not cutting Social Security; 
we're just readjusting the CPI. And we're sorry, the senior 
citizen who is trying to get by on $7,000 a year, you're going 
to get $100 less. But that's not a cut; that's just a 
readjustment.'' I hope that this Government does not stoop to 
that level.
    Thank you very much, Mr. Chairman.
    Mr. Snowbarger. Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Thank you for holding this important and timely hearing. 
While most Americans have no idea how the Bureau of Labor 
Statistics calculates the Consumer Price Index, all of us are 
greatly affected by the calculations. The CPI affects 
everything from interest rates to taxes, to Social Security 
payments. In a very fundamental way, the CPI plays an important 
role in the quality of life for the citizens of our country, 
especially our senior citizens.
    For years, some economists have argued that the Consumer 
Price Index significantly overstates inflation. Other 
economists have argued that the CPI is a reasonably good 
measure of inflation, needing only modest adjustments.
    Reaching a consensus between these divergent points of view 
will be difficult and extremely complex. However, with Congress 
and the administration seeking the least painful way to balance 
the Federal budget, the CPI debate has suddenly become a 
significant factor in the budget negotiations. That is wrong.
    Our need to balance the budget should not drive a decision 
about whether to change the Consumer Price Index. Economists at 
the Bureau of Labor Statistics should make these decisions, not 
the Congress. These decisions should be made by the experts.
    We need to examine how any recommended changes will affect 
the working men and women of our country, our senior citizens, 
and our Nation's poor. We must be careful not to balance the 
budget on the backs of those who can least afford it.
    I would like to join my colleague, Congressman Bernard 
Sanders, in saying that we need to be very sensitive to the 
needs of our senior citizens and people that have to pay a 
tremendous amount of their money, in terms of health care, and 
providing services for the poor. We need to be very sensitive 
to those kinds of issues.
    Mr. Chairman, I would like to welcome all of our witnesses 
today, and I look forward to working with you on this issue. 
But I want to say right up front, I have some deep concerns 
when I think about Members of Congress getting involved in this 
process, when I think it should be left totally up to the 
experts.
    Thank you.
    Mr. Snowbarger. Mr. Barrett, do you have an opening 
statement?
    Mr. Barrett. No.
    Mr. Snowbarger. All right.
    I think, with that, we are ready for our first panel today, 
and that is Ms. Katharine Abraham, who is the Commissioner of 
Labor Statistics at the Department of Labor.
    Ms. Abraham, I would ask if you would stand, please. This 
is something we put everyone through that comes before the 
committee.
    [Witness sworn.]
    Mr. Snowbarger. With that, welcome to the committee, and we 
look forward to your testimony.
    Before you go on, let me get a few housekeeping things out 
of the way. First of all, I would ask unanimous consent that 
all members of the subcommittee be permitted to submit an 
opening statement for the record, and that the record remain 
open for 3 days for that purpose. Without objection, so 
ordered.
    I ask, further, unanimous consent that all witnesses be 
permitted to include their written statements in the record, 
and that the record remain open for 3 days for that purpose. 
And without objection, so ordered.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]
[GRAPHIC] [TIFF OMITTED] T2460.003

    Mr. Snowbarger. Ms. Abraham.

   STATEMENT OF KATHARINE G. ABRAHAM, COMMISSIONER OF LABOR 
STATISTICS, DEPARTMENT OF LABOR, ACCOMPANIED BY WILLIAM BARRON, 
            DEPUTY COMMISSIONER OF LABOR STATISTICS

    Ms. Abraham. Thank you very much, Mr. Chairman.
    I do have a written statement that I would like to submit 
for the record. In light of the specific questions that I 
understood the subcommittee was to focus on, however, my 
remarks this morning are oriented toward talking about the 
actions that the Bureau of Labor Statistics has taken and is 
considering taking to make the CPI the best possible measure it 
can be.
    I would be happy, of course, to answer any questions that 
you or other Members might have about my submitted testimony, 
which examines some of the difficult conceptual and operational 
issues that have been raised about the use of the CPI as a 
proxy for change in the cost of living, including such things 
as the appropriate treatment of substitutions made by consumers 
in their purchasing decisions in response to changes in 
relative prices, changes in the quality of goods and services, 
and the increased availability of new goods and services in the 
marketplace.
    As you well know, interest in CPI measurement issues has 
heightened dramatically in the last few years, particularly in 
light of the impact of the index on Federal expenditures and 
receipts. Many, if not most, of the issues under discussion 
originated with research produced by the Bureau of Labor 
Statistics staff.
    I am proud to be able to say that the BLS has a long 
tradition of being in the forefront of price measurement 
research and operational innovation. A list of the many 
improvements the BLS has made to the CPI over the years is 
attached to my formal statement.
    I would like, if I could, to draw the subcommittee's 
attention, in particular, to the series of improvements in the 
index the BLS has made in the last 2 years alone. These 
improvements include the identification and solution of the so-
called ``formula bias'' problem, and the introduction earlier 
this year of a new approach to the measurement of prices for 
hospital services. We previously have estimated that the 
various improvements made during 1995 and 1996 have probably 
had the net effect of reducing the rate of growth of the CPI by 
about 0.2 percentage point per year. Some of the changes made 
it grow slower. There was one change, in particular, that 
probably led to an index that grew slightly faster.
    In addition, earlier this month we commenced publication of 
a new experimental measure that, under certain conditions and 
assumptions, may better reflect consumer substitution within 
CPI item categories than the existing measures. Evaluation of 
the geometric mean formula underlying the new measure likely 
will lead to its partial adoption in the official CPI, which 
would address, in the terms of the Boskin Commission's report, 
the lower level substitution bias.
    We will make a decision by the end of this year as to which 
CPI categories should employ this geometric mean formula, and 
we will introduce these modifications into the official index, 
most likely with the release of data for January 1999. Our 
estimate is that this will reduce the rate of CPI growth by 
somewhere between zero and a quarter of 1 percent per year, 
depending on how many and which CPI categories are modified to 
use the geometric mean approach.
    I also would like to report that the critical activities 
associated with the periodic CPI revision, for which we first 
requested and received funding from the Congress in 1995, 
remain on course. The CPI for the month of January 1998 will 
include new expenditure weights, updated from the 1982 to 1984 
weights currently in use to weight based on data for the 1993 
to 1995 period. The Congressional Budget Office has estimated 
that this change will reduce the annual rate of increase in the 
CPI by 0.2 percentage point per year.
    Further, I am pleased that the BLS has been able to propose 
a series of steps to strengthen the statistical and 
methodological infrastructure of the current CPI program. In 
addition to the funds to continue the CPI revision, as 
previously described, our 1998 budget seeks about $2 million in 
new funding that will make it possible for us to begin the work 
needed to ensure that future CPI revisions can be conducted 
more rapidly.
    The same proposal includes funding to support enhancements 
to our methods for dealing with the changes in the quality of 
items consumers purchase, which, again, referring to the Boskin 
Commission report, was one of the big issues that they focused 
on, and also the emergence of new goods in the marketplace, 
another important issue.
    Finally, the funds we have requested also would allow us to 
produce supplemental measures that account for substitution 
across item categories, the so-called ``upper-level 
substitution bias,'' in a way that is not possible in the 
official CPI.
    I have tried to be brief in identifying the actions that we 
have underway to improve the CPI. I would, of course, be happy 
to describe any of these in greater detail or, indeed, to 
respond to any questions you might wish to ask.
    Thank you.
    [The prepared statement of Ms. Abraham follows:]

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    Mr. Snowbarger. We don't want you to be spooked by the 
light. If you have more to offer, we would be happy to give you 
the time.
    Ms. Abraham. No, that was perfect timing.
    Mr. Snowbarger. All right.
    I would like to start off with a question that really kind 
of goes to the heart of, I guess, why this seems to be in 
controversy, and that is that we, as a Congress, have 
determined that whether it's tax brackets, or whether it's 
benefits of all kinds, these should somehow be adjusted for 
cost of living. Could you explain for the committee the 
difference between a Consumer Price Index and a cost of living 
index?
    Ms. Abraham. The main conceptual difference between a cost 
of living index and a Consumer Price Index is that, ideally, a 
cost of living index would take into account the fact that, 
when prices of some things go up, prices of other things go up, 
at least in relative terms; that consumers can change their 
buying patterns in such a way that they don't need as much more 
money to achieve the same level of well-being as they would if 
they just kept buying what they were buying to begin with.
    The cost of living measure would take that into account. 
The Consumer Price Index, which is based on tracking the cost 
of a fixed market basket of goods and services, historically 
has not.
    There are a whole set of other issues related to trying to 
track the cost of living, which have to do with how you take 
into account changes in the quality of goods and services. 
That's all very difficult. But, in principle, what you would 
want to do for a cost of living measure would be the same as 
what you want to do with putting together the Consumer Price 
Index.
    Maybe one other comment: When we talk about the Consumer 
Price Index, we describe it as an upper-bound approximation to 
a cost of living index; a particular cost of living index. It's 
the cost of purchasing the things that people buy out-of-
pocket, assuming that nothing is changing in the environment, 
that taxes are not changing, that the quality and quantity of 
public services provided is not changing. So it's an 
approximation to one particular cost of living measure.
    Mr. Snowbarger. Would it be fair to say that a number of 
the criticisms that came out of the Boskin report are basically 
criticizing CPI for not being a cost of living index, as it 
should be, or as they would envision it to be?
    Ms. Abraham. The discussion of substitution bias is really 
that.
    Mr. Snowbarger. Well, substitution bias, but also trying to 
figure out these decisions, how people both substitute outlets 
and goods in their buying patterns.
    Ms. Abraham. Yes. All of these issues relate to things 
that, in the commission's view, would need to be addressed to 
make the index more closely approximate the cost of living.
    Mr. Snowbarger. One of the concerns that I have is how long 
all this seems to take. I mentioned in my opening statement the 
Stigler Committee report back in 1961, and then I also think I 
read last night, in perhaps testimony that you gave to another 
committee, maybe it was the Budget Committee, that there are 
certain things that your office has had under consideration for 
as many as 10 years.
    Can you explain? I will try to locate the statement for 
you, but that maybe you have been looking at the substitution 
question for that period of time.
    Ms. Abraham. It may not be 10 years, but I understand the 
thrust of your broader question.
    Mr. Snowbarger. The broader question is--well, let's take 
the Stigler Committee report. Can you tell us what BLS has, 
indeed, addressed in changing things over the last--well, I 
guess that would be over 30 years.
    Ms. Abraham. Thirty-five years.
    Mr. Snowbarger. Thirty-five years. In trying to address 
that committee's concerns, and then, like I said, it seems like 
there has been some anticipation of problems that the Boskin 
report brought out for a long period of time, whether it's a 
decade or not. Maybe just address the timeframe.
    Ms. Abraham. Let me try to do that. As I read the Stigler 
Committee report, the main issue with which it was concerned 
was the representativeness of the set of items that were being 
priced for the Consumer Price Index at that time.
    At that time, as most countries still do, the United States 
put the Consumer Price Index together by drawing up a list of 
specifications of items to price, and then sending people out 
to collect prices for those things. There is a concern, if you 
do that, that what you end up pricing isn't going to be 
representative of what people actually purchase, and the 
Stigler Committee report was very concerned with that.
    In response to that report, the Bureau of Labor Statistics 
went through a period of research and, in 1978, implemented a 
fundamental change in the way we put together our Consumer 
Price Index, which involves going out and doing surveys to find 
out where people shop, going into those stores and taking steps 
to ensure that the items that are priced are representative of 
what people are actually buying in those stores.
    So there was really a fundamental rethinking of how we put 
the index together that, in my view, is very important to the 
quality of the index. I think, in that respect, what we do is 
ahead of, better than what any other country I'm aware of does.
    Mr. Snowbarger. Right. And I guess--not to interrupt--well, 
I am interrupting. Sorry about that.
    Ms. Abraham. That's OK.
    Mr. Snowbarger. My concern is that we have a 1961 committee 
report, and here we say that in 1978 we made dramatic changes. 
That's 17 years.
    Ms. Abraham. Right. These are very complicated programs.
    Mr. Snowbarger. I guess that's what I need to have 
explained to me. Why does it take so long to make the 
adjustments once these potential inaccuracies or biases are 
pointed out?
    Ms. Abraham. I wasn't here. I was in elementary school in 
1961. So I can't speak to all that was going on over that 
period of time.
    Mr. Snowbarger. I understand.
    Ms. Abraham. But I do know, again, from looking at the 
report, that although it contained ideas about issues that 
needed to be addressed, it didn't have a blueprint for how to 
go about doing that. There was an awful lot of thinking that 
had to go on between the time this issue about 
representativeness of the items being priced was raised, and 
that got thought through, and procedures that it would be 
possible to put in place were developed, funding for 
implementing those procedures was received, and so on.
    It seems like a long time. I'm not sure, given what was 
involved, that it could have been a lot shorter. There are 
issues that probably are more pertinent to the current 
discussion, though, and maybe I could speak to those.
    Mr. Snowbarger. I've really run out of time. I will take 
the chairman's prerogative to allow you to answer my question, 
then we will go to Mr. Towns. Go ahead, if you want to talk 
about the more current issues.
    Ms. Abraham. Other issues that were raised, and have been 
around for a long time, have to do with substitution bias and 
the quality of goods and services that are purchased, as well 
as new goods that come on the market.
    With respect to the substitution bias, the Bureau, in the 
context of the 1978 CPI revision, took some steps that 
subsequently have led to our being able to estimate the 
magnitude of substitution bias. The surveys that collect the 
data that have allowed us do that got put in place in 1982, and 
over some subsequent period of time, we have been able to 
analyze those data.
    You need a long time series to figure a lot of that out. So 
that's part of the answer on just generating the information as 
to how important that effect was. It has been well known that 
the CPI, because it tracks the price of a fixed market basket 
of goods and services, didn't take that into account.
    The Stigler Committee report talked about quality in new 
goods. Other people have talked about quality in new goods and 
how you adjust for those. This really is a case where 
recognizing there is an issue and having ideas that let you do 
something about the issue are quite different things. I would 
say, at this point, that we do not have, from the economics 
profession, from other experts who might be able to advise us, 
from our own work, tools and techniques that would let us 
address the issues that have been raised.
    Mr. Snowbarger. Thank you.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Is there evidence that some groups in our society, such as 
the elderly, face a higher rate of inflation? If so, how does 
the Bureau of Labor Statistics adjust for this higher 
inflation?
    Ms. Abraham. That is something that we know, I would say, 
relatively little about. The CPI, as you know, is an average 
measure that covers the whole population, the whole urban 
population. Some years ago at the request of the Congress, we 
began producing an experimental Consumer Price Index for the 
elderly. We did that by taking data that we had collected for 
the regular CPI and just reweighting it in accord with the 
pattern of expenditures of elderly consumers.
    That index has, over the period for which we have produced 
it, tended to go up a little bit more rapidly than the overall 
index, maybe three-tenths of a percentage point per year, 
largely because of the higher share of medical expenses in 
elderly consumers' budgets.
    But there are some real caveats to interpreting that 
measure. We didn't go out and do special surveys to find out 
just where elderly consumers shop, so the stores we go to are 
the stores where everyone shops. And when we went into those 
stores, we didn't collect data on the items that elderly 
consumers were buying. So I think that there are some real 
caveats as to how accurate this measure is.
    There is also an issue in that we know that it's very 
difficult, to adjust appropriately for the changes in the 
quality of medical care that have occurred over time in 
tracking the cost of medical care. The bigger share of medical 
care expenses is the main reason why the experimental index for 
the elderly has gone up more rapidly than the overall index.
    Mr. Towns. So then would you agree that we should get more 
information before we move forward?
    Ms. Abraham. I would not presume to give you advice as to 
what the right policy course might be. I can describe for you 
the information we have, but I wouldn't presume to advise you 
as to what you ought to do with it.
    Mr. Towns. I think the point I'm making is, it seems to be 
somewhat incomplete. That's the point I'm making. I mean, even 
with the information that we have.
    Ms. Abraham. Yes. We put together the best measure we could 
construct, given the information we had and absent extra 
resources to go out and construct a whole new index. There are 
some caveats attached to it.
    Mr. Sanders. Would the gentleman yield for a second on 
that?
    Mr. Towns. I would be glad to yield.
    Mr. Sanders. I think Mr. Towns raises, to me, what is 
perhaps the most important point, and I'm a little bit 
surprised by your answer. How many people are on Social 
Security in America? What do we have, 40 million; 35 million 
people? Many of them are struggling just to survive on $7,000 
or $8,000 a year. Mr. Towns suggests, and I would tend to agree 
with him, that perhaps the current CPI underestimates their 
increased costs.
    Then when he asked you if you've looked at that, you say we 
know very little about it. Gee whiz, I mean, a lot of people in 
Vermont are barely getting by. I would hope that we would know 
a lot about it and you would be able to tell us, yeah, the CPI 
for seniors is X or Y. How come we know very little about this 
very important issue?
    Ms. Abraham. This is an issue in which the Congress has 
been interested. We do, as I indicated, produce an experimental 
measure. To go out and collect the data that would be required 
to produce a measure that didn't have these caveats would mean 
increasing the number of elderly people that we interview to 
find out where they shop; when we go into stores, trying to 
figure out which items they are purchasing; and separately 
tracking the prices of those items.
    You would really be talking about, in essence, duplicating 
the whole program of data collection that we have in place to 
produce the Consumer Price Index.
    Mr. Towns. Well, I think, in a growing population, we need 
to take another look at this. But anyway, I'm going to move on.
    Would you agree with Dean Baker, who is a well-known 
economist at the Economic Policy Institute, who is going to be 
here--he's in the room now--on our next panel, that if the CPI 
has been significantly overstating inflation, we would need to 
throw out much of the economic research carried out over the 
past 40 years? Do you agree with that?
    Ms. Abraham. Clearly, if the CPI is dramatically 
overstated, then a lot of what we think we know about the rate 
of growth of real wages, and so on, needs to be modified.
    Mr. Towns. I'm happy to hear you say that. Let me just ask 
one other question. I know my time is up.
    Mr. Snowbarger. Go ahead.
    Mr. Towns. Go ahead? OK. Thank you.
    Let me just say, you argue persuasively that the Bureau of 
Labor Statistics has made adjustments to the CPI to reduce much 
of the formula bias problems. You make a strong argument, but 
how do you account for the fact that many of your colleagues 
disagree with you, including the advisory commission? Why do 
you think they disagree?
    Ms. Abraham. Different people can look at the same evidence 
and end up reaching different conclusions about it.
    Mr. Towns. That further points out what Mr. Sanders said. 
That part sort of frightens me.
    Ms. Abraham. Let me try to be clear on that. There are some 
pieces of what has been looked at that I think there is general 
agreement about. The CPI is tracking the cost of a fixed market 
basket of goods and services, and we know that that's going to 
tend to mean, because it doesn't take substitution behavior 
into account, it's going to tend to overstate what's happening 
to the cost of living. We can agree about that.
    We also can agree about how to measure that effect. I don't 
have numbers at this point. By the end of the year, when we've 
made our decisions about the use of the geometric mean formula 
in the index, we will have an estimate of both upper level and 
lower level substitution bias. I think, at that point, we will 
not only be able to agree there's an issue, we will be able to 
agree on the magnitude of the associated bias.
    It's when you get into talking about things like quality 
change, new goods, new kinds of outlets that different people 
looking at the evidence can end up in a different place. From 
my point of view, the evidence is quite sparse, and it's hard 
to draw firm conclusions.
    Mr. Towns. Let me go to my real question, and then I am 
going to yield.
    Ms. Abraham. These were just warm-ups?
    Mr. Towns. As we talk, right as we speak, the leadership of 
our Nation are currently considering legislative changes to the 
CPI. As a way to reduce the Federal budget deficit, what would 
you recommend to these negotiators?
    Ms. Abraham. I would have no recommendation. My role, as I 
see it, is to try to describe, as accurately as I can, what 
kind of a measure the Consumer Price Index is, if that's 
something people are interested in. It would not be appropriate 
for me to get involved in discussions about how that measure 
was going to be used.
    Mr. Towns. Let me try one other thing. Let me try one other 
way, Mr. Chairman.
    Mr. Snowbarger. Good luck.
    Mr. Towns. Thank you.
    What would a downward adjustment of the CPI of 1.1 
percentage points per year, as recommended by the advisory 
commission, mean for middle-income families, senior citizens, 
and the poor?
    Ms. Abraham. That's not something we've done any 
calculations on. The Congressional Budget Office might have 
done such calculations or the Council of Economic Advisers. You 
would have to go to someone else. We don't have that sort of 
information. That gets into the use of the index, and that's 
not something we're really involved in.
    Mr. Towns. Mr. Chairman, I yield back.
    Mr. Snowbarger. Thank you, Mr. Towns.
    I would announce to the committee that we are going to go 
with 10 minutes worth of questioning. I think I overstepped my 
time limit, so we will grant that to everyone else. And with 
Chairman Shays' approval, I think we will go on down the line.
    Mr. Waxman, would you care to question?
    Mr. Waxman. Thank you very much.
    Today's newspapers report that, in the budget negotiations, 
there is talk about building in an assumption about what the 
CPI adjustment may be, based on your recommendations yet to be 
determined.
    Ms. Abraham. So I read in the paper.
    Mr. Waxman. And there has even been talk about a 0.5 
reduction. Do you know what professional judgment went into the 
conclusion by some people in these negotiations that there 
ought to be a 0.5 reduction?
    Ms. Abraham. No, I don't.
    Mr. Waxman. Were you consulted on this number?
    Ms. Abraham. I certainly have had conversations with other 
officials in the executive branch and on the Hill concerning 
things we have planned, what the potential impact of things we 
have planned on the index might be, things that we are unlikely 
to be able to correct in the monthly index, and what the bias 
associated with those things might be. I'm thinking of the 
upper level substitution bias, in particular.
    I don't know what the basis for someone thinking that 
things we would do would slow the rate of growth of the index 
by half a percent per year might be.
    Mr. Waxman. Well, it seems unusual to me that the people 
who are the technical experts are now being consulted but not 
listened to. And it appears it's a political judgment that may 
be made in these negotiations.
    You indicated, if there is no change in the law that 
mandates a different adjustment, you may be coming up with an 
update of the CPI including use of a geometric mean index, and 
this may reduce the CPI, if at all, up to a quarter percentage 
point. Is that correct?
    Ms. Abraham. Probably not that much. I say that for the 
reason that it's unlikely that we would adopt the geometric 
mean formula across the board. It would be slowing the index by 
a quarter percent per year if we did adopt it across the board.
    Mr. Waxman. So that would be the maximum we might possibly 
see.
    Ms. Abraham. Based on the evidence we have as to the effect 
of doing that, that's right.
    Mr. Waxman. And then would this change be incorporated into 
the CPI?
    Ms. Abraham. Yes, it would.
    Mr. Waxman. Could you walk me through the timing of that? 
You indicated you are going to make some announcement in 
January 1998.
    Ms. Abraham. We hope by the end of this year, this calendar 
year, so December 1997 or January 1998, to be able to make an 
announcement as to the change we have decided upon. We would, 
at that point, be able to provide an estimate, based on 
historical experience, of the likely impact of what we're 
proposing to do on the growth rate of the index.
    Our historical practice is to give users of the data 
substantial advance notice of changes we're going to make in 
the CPI, to consult with our business and labor research 
advisory committees. It has also been our historical practice 
to make changes effective with data for January, so that it's 
at the start of a calendar year. Following that precedent, I 
would think the most likely date for making a change would be 
January 1999.
    Mr. Waxman. If you made that change in January 1999, would 
it be fair to say that the earliest savings would be 
incorporated in the year 2000, or later?
    Ms. Abraham. I have, to be honest, only a limited 
understanding of how all of these indexation formulas work. 
Based on what I know, that sounds correct.
    Mr. Waxman. So we see no budget savings to be realized as a 
result of any adjustment in 1998 or 1999, and therefore any 
budget agreement that contains budget savings of 0.4 or 0.5 
percent reductions in CPI in 1998 and 1999, would result not 
from a BLS decision but from a political decision by the budget 
negotiators.
    Ms. Abraham. I can't think of anything that we are likely 
to do that would have any immediate impact on the rate of 
growth of the CPI, other than introducing the new, updated 
market basket in January 1998, which we announced a long time 
ago, and which I think is already well taken into account in 
people's thinking about the budget.
    Mr. Waxman. So would you agree that, if there is to be 
savings in a CPI adjustment, it would have to be through 
legislation that mandates it, not through BLS?
    Ms. Abraham. As I said, there is nothing that we have 
planned between now and January 1999, that I would anticipate 
would have an impact on the rate of growth of the index.
    Mr. Waxman. Thank you very much.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
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    Mr. Snowbarger. Mr. Shays.
    Mr. Shays. Mr. Chairman, I got here late because I was 
testifying before some other committees. I'm really happy to 
have my colleagues ask questions. I would suggest this is such 
important testimony that Members may want to have a second 
round. So I'm not asking to get the last word, but I will let 
my colleagues go ahead of me.
    Mr. Snowbarger. OK.
    Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    Let me restate a concern that I have. I think that it is 
not an accident that there is such a preoccupation with the 
CPI. I frankly believe, as others have implied, that this is a 
back-door way to balance the budget. I think it's a cheap way. 
I think it's a vulgar way. And I think it's going to come down 
on the backs of the elderly and the poor, rather than look at 
corporate welfare, military spending, tax breaks for the rich.
    There are some people who think they can save a few bucks 
by telling a senior citizen in Vermont, who is trying to 
survive on $7,000 a year, ``We can take away $100 from you.'' 
And I think that stinks.
    No. 2, I wrote to Bob Reich a while ago, because this whole 
issue of how you develop statistics is so very important. We 
hear a whole lot of statistics floating out there. And what 
we've been hearing for the last year, every time you read the 
newspaper, is, the economy is booming. Right? The economy is 
doing great.
    Yesterday we learned that the CEOs of major corporations 
saw a 54 percent increase in their compensation. So I'm sure 
the economy is doing very well for them. And yet I read today, 
on page A-22 of the Washington Post, about the Employment Cost 
Index. Now, that is, as I understand it, the cost that an 
employer incurs in terms of wages and benefits.
    Now, what it says in the Washington Post, and the 
information comes from the Labor Department, is that for the 12 
months ending in March, the ECI was up 2.9 percent, the same as 
for the year ended in December, 2.9 percent. That tells me that 
for workers, in fact, their total wages and benefits went below 
the cost of inflation.
    What was inflation last year, over 3 percent?
    Ms. Abraham. I don't have those figures here.
    Mr. Sanders. I thought it was 3, 3.5 percent. Anyone have 
that?
    Ms. Abraham. No, it was not 3.5 percent; it was 3.3 
percent.
    Mr. Sanders. OK. So, in fact--and here's the point, 
colleagues on the committee. When we hear so much about there's 
a booming economy, what these statistics tell us is that, for 
workers, their wages and benefits, in fact, did not even match 
inflation.
    And if you take another step and understand that that's a 
mix of upper income employees, the CEOs, and your $20,000 or 
$15,000 a year employees who do worse, what you can probably 
argue is that, for low-wage employees, their standard of living 
has continued to decline precipitously.
    Ms. Abraham. The CEOs probably aren't in there, but I don't 
think that changes your basic point.
    Mr. Sanders. At what level would you go? Is the basic point 
that I'm making correct?
    Ms. Abraham. The basic point that the Employment Cost Index 
is an average across all wage and salary workers is correct.
    Mr. Sanders. OK. And if he makes $100,000 a year as a 
middle level manager, and I make $15,000 a year, you're going 
to average those two in. Statistics would indicate that the 
people who are making $100,000, even if they are not CEOs, are 
doing pretty well. Would it be fair to say that, based on these 
statistics, the average worker, say, making $25,000 a year or 
less, his or her compensation has not matched inflation?
    Ms. Abraham. There is some information in the Employment 
Cost Index on what's happening to the hourly costs of labor, 
for, for example, production workers, administrative workers. 
It's broken out by occupation. The rates of growth for the 
different occupation groups haven't looked terribly different.
    Mr. Sanders. All right. But based on these statistics, 
which say that overall it's a hair below inflation, combining 
everybody, everything that I have read indicates that the 
higher paid people are doing better than the lower paid people. 
Is my assumption correct that for, say, lower-paid workers, 
$25,000 a year or less, they are continuing to fall below the 
growth rate of inflation?
    Ms. Abraham. I'd want to take a look at the data, but you 
certainly are correct that over the period since the late 
1970's, there have been increases in the inequality of 
earnings.
    Mr. Sanders. Well, the point that I'm trying to make is 
that every day we hear about how the economy is booming, and it 
seems to me, reading the statistics, what we're finding out is 
that perhaps for the majority of workers, their revenue, their 
compensation falls below the rate of inflation.
    I would strongly urge, and I had urged this of Bob Reich, 
is that I think the one statistic--and I know your job is a 
very difficult job, it really is. I mean, having to balance 
southern California and northern Vermont, those are two 
different worlds, and you've got to come up with some match, 
and it's hard, I know that. And you probably get criticized no 
matter what you come up with.
    But I would think that really what we need in this country 
is one statistic which tells us how the average working person 
is doing, and get that statistic out. Because I think there is 
a lot of confusion in matching the incomes of upper income 
people with the incomes of the vast majority of the people. You 
add them together, and you divide by half, you know. If I'm 
making $1 million a year and he's making $10,000 a year, on 
average, we're making a half million dollars a year, but our 
reality is a little bit different.
    I think, if you did that, the statistics would show that 
the economy, despite what the President is saying, and despite 
what other people are saying, is not booming, but that the 
middle class and the working class of this country are hurting 
and hurting very badly.
    I would hope very much you would work on that statistic. 
What is life like now? How is the average working person in 
this country doing, comparing compensation, what's coming in, 
and what they are paying for. I would hope that we can get that 
statistic.
    The second point, picking up on a point that--and maybe we 
can talk about that at some other point.
    Ms. Abraham. I was going to say, we do have data that you 
might find of interest, and I would be happy to sit down to 
discuss it.
    Mr. Sanders. Are you advertising that data? Does it get 
into the newspapers much?
    Ms. Abraham. We have very little control over what gets 
into the newspapers, sir.
    Mr. Sanders. Well, what I hear is that the economy is 
booming, and I would perhaps like some statistics to suggest 
that, for the working class of this country, the economy is not 
booming.
    Ms. Abraham. I don't know what the statistics suggest 
precisely, but we do have information that you might find of 
interest on earnings by decile of the earnings distribution, 
and so on.
    Mr. Sanders. I will give you a ring, and perhaps we can 
discuss that.
    Ms. Abraham. Good.
    Mr. Sanders. OK. Now, my third point again, picking up on 
the point Mr. Towns made a while back, if we just look at the 
issue of Social Security and 35 million Americans who receive 
Social Security, many of them are heavily dependent upon that 
Social Security check. And it would seem to me to be incumbent 
upon the Bureau to come up with some good statistics for those 
folks. And if it requires some money to do that type of study, 
then I think we should invest that money.
    I think, as Mr. Towns and many people have pointed out, 
there is at least some evidence to suggest that because seniors 
are more dependent upon health care, seniors need warmer homes, 
for example--you know, when you get old, you need to keep your 
house a little bit warmer--that what seniors depend upon may be 
going up faster than the general cost of inflation.
    Given that we have 35 million people on Social Security, I 
think that that is an area that we can focus on. Can we expect 
some work in that area of devoting money and energy to come up 
with a good statistic for seniors?
    Ms. Abraham. That's certainly something we could go back 
and take another look at. This was discussed, it is my 
understanding, at the time that Congress first expressed an 
interest in a CPI for the elderly. I don't know the ins and 
outs of why it was not decided to go forward with a separate 
index. As I did indicate, it would have amounted to essentially 
duplicating our entire program of producing the CPI. For 
whatever reason, we didn't end up doing that.
    Mr. Sanders. Let me ask you a question: When you come up 
with the CPI, which impacts on Social Security, correct?
    Ms. Abraham. Mm-hmm.
    Mr. Sanders. How many seniors do you get information from?
    Ms. Abraham. Our samples of people who are surveyed for the 
consumer expenditure surveys are a rolling panel of about 5,000 
households, and seniors would be represented in those samples 
in proportion to their share of the urban population.
    Mr. Sanders. Which is? This is urban, which is roughly 
what?
    Ms. Abraham. It's the urban population, which is about 80 
percent of the total population. But I should add to that, when 
I said that they would be represented; we then take expenditure 
weights from that overall survey and use them to construct the 
CPI.
    We actually have two CPIs. We have a CPI for all urban 
consumers, and we have a CPI for urban wage earners and 
clerical workers.
    Older people's expenditures, older urban consumers' 
expenditures, are represented in proportion to their share of 
total expenditures in the CPI-U, which is used, for example, to 
adjust tax brackets.
    Mr. Shays. Excuse me. I'm sorry to interrupt. Could someone 
just shut the door.
    Ms. Abraham. We also have a separate CPI for urban wage 
earners and clerical workers, which includes essentially no 
elderly individuals. For reasons of historical accident, that's 
the index that gets used to adjust Social Security. So older 
people are not represented at all in that index.
    Mr. Sanders. I would think--I mean, unless I'm missing 
something here--that given, again, the fact that we have 35 
million seniors, I think that they deserve to have an 
independent assessment of their particular needs, which I 
happen to think will show that the CPI underestimates their 
needs.
    I would hope very much that that's something that we can 
move toward. And if it requires extra money--I know some of us 
have talked about that--we're prepared to vote for that money 
for the studies that you may need. But I think that we do need 
an independent look at the needs of our seniors.
    With that, I yield back. Thank you, Mr. Chairman.
    Mr. Snowbarger. Mr. Barrett.
    Mr. Barrett. Thank you. Thank you for holding this hearing.
    One of the things that surprised me was your comment that, 
if you were going to do a separate study for seniors, you would 
have to duplicate the entire survey. It strikes me as though 
there is a core element of products or of living costs that are 
going to be consistent regardless of your age, and that you 
would make some additions and some subtractions, based on a 
person's age.
    Ms. Abraham. It may be, if we really got into it, that we 
could find some overlap of that sort. What I had in mind when I 
said that was that we would have to greatly expand our consumer 
expenditure survey to get a better fix on how elderly 
individuals spend their money. We would have to do a separate 
or at least much augmented survey to find out where they shop. 
When we went into stores, we might find ourselves in many of 
the same stores, but we might find ourselves in different 
stores. It might be that, when we went into the stores that 
overlap, we would find elderly consumers buying the same 
things; it might be that we wouldn't.
    So you are right that there might be some overlap in the 
end in what we ended up tracking, but we would have to do 
separately a lot of the work that would be involved.
    Mr. Barrett. I'm going to show my ignorance about the 
Consumer Price Index. For example, housing, what are the 
factors? Is it mortgage rates or rents?
    Ms. Abraham. No. This may be something I should have 
mentioned when Mr. Snowbarger was asking earlier about how we 
responded to the Stigler Committee report. We used to track 
housing costs by tracking the kinds of things you are referring 
to, looking at actual outlays on housing, if you will.
    But that proved to be unsatisfactory, for a variety of 
reasons, and a decision was made in the late 1970's, and then 
implemented in the early 1980's, to move to a so-called 
``rental equivalence'' approach to tracking housing costs. This 
essentially means that, for people who own their own homes, we 
try to match those housing units up with rental units, and 
track what's happening to the cost of the rental units. What 
we're saying, in effect, is that the cost of living in their 
own home is the amount of rent that they are giving up by not 
renting it out.
    In the long run, if mortgage rates went up, that presumably 
would affect the rents that get charged in the housing market 
and then would show up in our measure. But it's not a one-for-
one thing. We don't track interest rates directly, for example.
    Mr. Barrett. That confuses me even more. You can see why 
I'm not a statistician.
    Ms. Abraham. It's very complicated.
    Mr. Barrett. So if you're in an area where there is a 
rapidly increasing housing market, how is that reflected then?
    Ms. Abraham. Where prices of homes are going up?
    Mr. Barrett. Right.
    Ms. Abraham. That would be reflected, indirectly, to the 
extent that it showed up in higher rents being charged for 
rented housing units in that area.
    Mr. Barrett. OK.
    Ms. Abraham. If it didn't show up in rents, it wouldn't be 
reflected in our measure.
    Mr. Barrett. OK. Again--and excuse me for trying to 
understand this, which may be dangerous--if you live in the 
area--I represent, part of Milwaukee, and we have suburban 
areas where the price of housing is going up. We have elderly 
who don't live in those units, primarily. They will live in 
areas where the price of housing is stagnant or even dropping. 
What type of bias will that create?
    Ms. Abraham. For the measurement of housing costs for the 
elderly?
    Mr. Barrett. For the measurement, yes.
    Ms. Abraham. Well, the CPI is really an average measure. So 
it would track the average, what was happening to rents on 
average, but it isn't necessarily going to give you a very good 
reflection of what's happening to rents for particular groups.
    Mr. Barrett. OK.
    Ms. Abraham. Which is true, in general, about the CPI. It's 
an average. It doesn't necessarily reflect the experience of 
particular groups.
    Mr. Barrett. You mentioned, or I thought I heard you 
mention, that the substitution factor index would overstate.
    Ms. Abraham. Because the CPI doesn't take into account 
consumers' ability to substitute.
    Mr. Barrett. Give me an example, please.
    Ms. Abraham. Perhaps a small example, if consumers are 
purchasing two kinds of lettuce, they are purchasing Romaine 
lettuce and red leaf lettuce. And if, for some reason, the 
relative price of Romaine lettuce goes up, they would buy less 
Romaine lettuce and more red leaf lettuce.
    What that would mean is that, in order to get lettuce that 
gave them the same value, if you will, they wouldn't have to 
spend as much in total lettuce as they would have if they had 
just kept buying the same amounts of Romaine and red leaf 
lettuce as they bought to begin with.
    Mr. Barrett. So does your original index just use generic 
lettuce?
    Ms. Abraham. No, we price specific items. So we might be 
tracking the cost of, you know, a pound of Romaine lettuce. 
That might be one of the specific items in the index. So we 
wouldn't take that kind of substitution into account in our 
index.
    That's the reason why we're looking at possibly adopting a 
new formula, the geometric mean formula for constructing the 
subindexes in the CPI. At least under certain assumptions, it 
would give us a better approximation as to what consumers were 
actually doing at that level.
    Mr. Barrett. I also heard, when Mr. Waxman was asking 
questions about your timetable and the analysis that you have 
done, I thought I heard you mention the figure a quarter of a 
percent. Is that accurate?
    Ms. Abraham. That's correct.
    Mr. Barrett. And you were referring there to what?
    Ms. Abraham. I was referring there to the upper bound on 
the potential impact on the rate of growth of the index of our 
switching over to using this new geometric mean formula in 
putting together the subindexes. If we did it in all parts of 
the index, our research indicates that the rate of growth of 
the index would slow by about a quarter percent per year.
    We are unlikely to adopt it in all parts of the index. 
There are some components where it seems appropriate. If 
relative prices of Romaine and red leaf lettuce change, people 
will substitute. For prescription drugs, it's probably not 
appropriate. If the price of ulcer medication goes down and the 
price of heart medication goes up, the fact that ulcer 
medication costs less doesn't help me much if I'm a heart 
patient.
    Mr. Barrett. OK. But you're saying overall the change will 
be a quarter percent?
    Ms. Abraham. Overall, the change will be something less 
than a quarter percent per year, because we won't make the 
change across the board, most likely.
    Mr. Barrett. OK. And, again, now shifting gears to the 
political world, the article that referred to a 0.4 or 0.5 
change, is one of the articles that I saw. Is it accurate to 
say, then, that any change--and we will use a quarter of a 
percent, or 0.25 percent--beyond that would be more of an 
arbitrary decision?
    Ms. Abraham. Not necessarily. There isn't anything that we 
are likely to do in the CPI itself that would take effect right 
away or that would have as large an effect as--I don't know 
where this 0.4 number is coming from.
    It is, however, well agreed, and I would agree, that the 
CPI tends to be an upper bound on what's happening to the cost 
of living, because it doesn't take substitution behavior into 
account. We will have an estimate by the end of the year of how 
big we think the lower-level substitution bias is, although it 
will take us some time to implement the change we think is 
appropriate in the index.
    We have now an estimate of how big the upper-level 
substitution bias is. That's substitution bias associated with 
shifts in consumption across item categories, in response to 
relative price change. That, for reasons you may or may not 
want to get into, is really not possible for us to deal with in 
the context of producing a monthly index. But we could give you 
an estimate, if you wished, of how big that is.
    So there are some things, I think, where we can agree. We 
can even quantify what the bias in the CPI is. Going beyond 
that, I think, there is more dispersion of opinion.
    Mr. Barrett. You also mentioned that you're going to have a 
new market basket in January 1998. Can you tell me what the 
major changes are in the market basket?
    Ms. Abraham. Gosh, it's been a while since I looked at 
that. It's an updating of the expenditure shares from 1982 to 
1984, to 1993 to 1995.
    We've seen some increase in the share of consumer 
electronics, and related items, over that period. Personal 
computers, for example, weren't particularly important in 1982 
to 1984, and they will be somewhat more important in the new 
market basket. Medical care, perhaps surprisingly, is a smaller 
share of out-of-pocket expenditures than it was in 1982 to 
1984.
    I can give you, for the record, if you would like, a more 
complete breakdown of how it's changed.
    Mr. Barrett. I would appreciate that.
    I would yield back my time.
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    Mr. Snowbarger. Thank you, Mr. Barrett.
    Mr. Shays.
    Mr. Shays. Thank you, Ms. Abraham. It's very nice to have 
you here. I was thinking, in some ways, you have an 
extraordinarily powerful position. I would just like to 
understand a few things about your office. And I just want to 
say, I have no hidden agenda in my questions. I do in some 
cases, but not as you coming before us.
    Ms. Abraham. Good. I'm glad to hear that.
    Mr. Shays. I start with the premise that whatever a 
senior's cost of living, that's what it should be. It shouldn't 
be less, or it shouldn't be more. And then I would say to my 
colleague from Vermont that, if, in fact, we should be 
providing more, then that's something we should do 
legislatively, if we feel that it's not enough, that it has to 
be something more than the cost of living. And I would also 
agree with my colleague from Vermont, if the cost of living is 
not truly representing their true costs, then it should be 
adjusted.
    I just want to first understand your office. And I don't 
mean this in disrespect, because I happen to like politics, but 
I make an assumption that the Commissioner's position is an 
appointed position.
    Ms. Abraham. It is.
    Mr. Shays. But I also make the assumption that you 
basically have a fairly large staff that assists you in doing 
your tasks. And your task isn't just doing CPI; it's a lot of 
other things. I'd like you just to give me an idea of what some 
of the other responsibilities are.
    Ms. Abraham. Certainly. I should clarify, perhaps. I am 
appointed to my position for a fixed term, a 4-year term.
    Mr. Shays. Which is how long?
    Ms. Abraham. A 4-year term.
    Mr. Shays. And is it a reappointed position or is it one 
time?
    Ms. Abraham. The historical precedent has been that 
Commissioners of Labor Statistics are reappointed. The agency 
has been around for more than 110 years, and I'm the 11th 
Commissioner.
    Mr. Shays. And regardless of party, in other words?
    Ms. Abraham. Right.
    Mr. Sanders. You like that tradition, right?
    Ms. Abraham. I think that's the appropriate tradition. Even 
aside from my personal interest, I think that's the appropriate 
tradition.
    Mr. Shays. But the bottom line is, a Republican President 
might appoint a Democrat, a previous appointee, or vice-versa.
    Ms. Abraham. The prior Commissioner was Janet Norwood, who 
was appointed by President Carter and reappointed twice by 
President Reagan.
    You asked about the other things that the Bureau does. We 
have responsibility for, in addition to price statistics, which 
includes the Consumer Price Index, the Producer Price Index, 
and export and import prices indexes. We are responsible for 
employment and unemployment statistics; the payroll employment 
numbers and the unemployment rate that will be coming out on 
Friday are produced by us.
    We are responsible for information on wages and working 
conditions. That includes the Employment Cost Index we were 
discussing earlier. We produce the Government's official 
productivity statistics, and we also have a program that 
produces employment outlook projections.
    Mr. Shays. I have always been curious, because in some 
cases, with the CPI, whatever statistic you come with costs 
potentially the taxpayers billions of dollars, or it reduces 
their costs, or when you come up with labor statistics, it has 
a significant impact on, say, the market, the stock market. It 
obviously has an impact on a lot of other decisions.
    Statistics you do with, for instance, the Consumer Price 
Index, we have legislation that says ``plus the CPI,'' or ``the 
CPI minus,'' so I'm interested to know what ethical process or 
protocol you have to just protect the American people from 
abuse. In other words, would some people love to get what your 
employment statistic is a little ahead of the market?
    Ms. Abraham. I'm sure they would.
    Mr. Shays. Well, what's the process?
    Ms. Abraham. There are many things that we do to ensure our 
independence.
    Mr. Shays. The process to ensure the integrity that the 
statistics aren't known to the general public until--I mean, 
not to individuals until they are generally known to everyone.
    Ms. Abraham. Right. We have a process for all of our 
sensitive economic indicators, and there are a number. The only 
people who see the information before it's published are people 
who are working on it directly and have a need to know what the 
data are showing in connection with their work.
    The data are not shared with anyone outside of the Bureau 
of Labor Statistics until our press release has been drawn up. 
We send the information over to the Council of Economic 
Advisers, to share with the President, late in the afternoon 
before the data are released.
    At 8 o'clock on the morning of the release, press are 
allowed to come into a locked room to look at the data so that 
they can work up their stories, and the data are then released 
at 8:30 a.m.
    Mr. Shays. How many people see the statistics or are aware 
of the statistics, say, before the White House is aware of it?
    Ms. Abraham. Only staff at the Bureau of Labor Statistics.
    Mr. Shays. How many would that be?
    Ms. Abraham. I'd be taking a guess, and it would vary, 
depending on the particular thing we're talking about. Twenty, 
maybe. I don't know. If you really wanted to know, I could get 
numbers for you.
    Mr. Shays. Well, I would like to know.
    Ms. Abraham. OK.
    Mr. Shays. But that will be a followup question.
    Ms. Abraham. I may be off in my guess, and it may also vary 
by which statistics we're talking about.
    Mr. Shays. Has there been any case that's either been 
public or not been made public where someone has these 
statistics and has provided them to someone else outside?
    Ms. Abraham. To my knowledge, there have been no incidents 
where anyone in the market has gotten any of these data ahead 
of time.
    We did have one incident, which we took steps to address 
immediately, in which some of our Producer Price Index data 
were put up on the Internet overnight, and they were up there 
for a few hours in the night, and we then yanked them back. 
There were two people overseas, researchers as best we could 
tell, who ended up downloading PPI data during that period. We 
don't know whether they saw the prerelease data.
    Other than that incident, I know of no premature releases, 
and I know of no cases in which people in the market received 
access to data before release.
    Mr. Shays. Just say Bernard Sanders would not want me to 
have undue influence over you, or any influence over you, 
frankly, nor would I want him to, based on our perspective. 
What we require you to do is not really outlined significantly 
in statute. It's almost common law. It has just evolved over 
time; is that correct?
    Ms. Abraham. That is correct. I think it would be very hard 
to write down in statute what you want us to do, in that we 
learn new things on an ongoing basis about how to improve our 
measures.
    Mr. Shays. So a lot of the power that you have is over 
time, it's tradition, it's practice.
    Ms. Abraham. Yes. That is right. I think that that's been a 
very effective way of ensuring.
    Mr. Shays. No, no. I'm not asking you to pass judgment. I'm 
just trying to understand.
    Ms. Abraham. Right.
    Mr. Shays. Because it gets into this whole issue of, 
ultimately, what can the White House do, or what can Congress 
do to influence it. Because I've heard statistics of 4.5 
percent, as well.
    There is a group of Members of Congress who say that it 
overinflates the cost and that the Bureau of Labor Statistics 
is not inclined to change it; therefore, you do need statutory 
oversight to change that, because they are not going to do it 
internally.
    There is another group in Congress that says--and Senator 
Moynihan, frankly--I know this sometimes tends to be Republican 
and Democrat, but 2 years ago I was on an airplane with Mr. 
Moynihan, and he had solved the world's problems by solving 
this issue of the CPI. So it's not a Republican or Democrat 
thing. He really believes that it overstates, and he's a highly 
respected Member of the Senate.
    The issue I'm getting to is that there's also another group 
in Congress that believes that you could and should be re-
evaluating how you determine the cost of living, and you need 
to act more quickly. And they believe that that ranges from 0.2 
to 0.5 of a percent.
    What I want to do now is get to what Mr. Waxman was asking, 
and that was, isn't it true that if you move the--is this my 
first 5 or my second 5?
    Mr. Towns. Third 5.
    Mr. Shays. I've done 10. I can go around the next round.
    Mr. Snowbarger. Why don't you go first in this round.
    Mr. Shays. Yes, and then if we could go around, I'll take 
another 5.
    Isn't it true that if you moved more quickly on what you 
are considering, there would be a potential reduction in the 
CPI of somewhere between 0.2 and 0.5 percent? Isn't there 
something in that range?
    Ms. Abraham. We have a number of things in the works that I 
described in my opening remarks. The only thing that we are 
considering to which I can attach even a range, in terms of its 
likely impact, beyond updating the market basket next January, 
is the possible adoption of the geometric mean formula in some 
components of the index.
    We need some time to think about what it makes sense to do. 
We need to do an evaluation. I think speeding up the timetable 
for making those decisions would be extremely difficult. I 
don't know how we would do that. I think it's important, as 
well, that we proceed at a deliberate pace to make changes. Our 
past practice has always been to give people substantial 
advance notice of changes that we were making, and I think it 
would be a grave mistake to depart substantially from that.
    Mr. Shays. I need to understand, because I do have sympathy 
with Mr. Snowbarger's comment. I'm not sure, in this day and 
age, that we can wait years and years and years. The 
marketplace changes very quickly and I don't know if Government 
can be so slow.
    I will voice a concern. I feel you are an expert for 
instance, on the issue of breadbasket. I would think, unless I 
just have a totally distorted view of what the breadbasket is, 
that you would be able to almost say without notes exactly what 
constitutes the breadbasket--market basket, I'm sorry, when you 
were asked that question, just before I was given the floor.
    I guess what I'm saying to you is, I need to be convinced 
that so much time is necessary. Tell me why. There's all this 
data. We don't have to reinvent the data; it's out there.
    Ms. Abraham. I'm not quite sure exactly what it is you 
think is taking too much time. Maybe I can give you a better 
answer if I'm clearer on that.
    Mr. Shays. Well, you're talking about readjusting how you 
determine the CPI.
    Ms. Abraham. Using the geometric mean formula in the index.
    Mr. Shays. Right. Now, is this something that you just 
started thinking about this year?
    Ms. Abraham. No, we've been thinking about this for a 
couple of years.
    Mr. Shays. I want to pin you down a little bit.
    Ms. Abraham. In December 1993, we first published an 
article that was authored by Brent Moulton, who is here, that 
took a look at the use of the geometric formula as opposed to 
what we currently do now.
    It turns out that our understanding of what that formula 
does and how we ought to think about it really has evolved over 
that time. So we are still working on understanding exactly 
what it does and thinking through under exactly what 
circumstances it might be more appropriate than the formula 
we're using now.
    That was research. It wasn't a step directly toward making 
changes in the official index. We just published, in March of 
this year----
    Mr. Shays. With all due respect, even publishing in 1993, 
December 1993.
    Ms. Abraham. It was a research paper.
    Mr. Shays. Right. So you were thinking about it before 
December 1993.
    Ms. Abraham. We could ask Brent when he started working on 
the paper. We could ask Brent, who is here, when he started 
working on the paper. It wasn't a great long time, is my sense.
    Mr. Shays. It almost sounds like a facetious answer. I 
think you get the sense that 1993, or let's say the beginning 
of 1994, and we're now into 1997. I just don't think we have 
the luxury to wait that long.
    What I'm going to do is, I'm going to come back. I'm going 
to let other Members ask questions.
    Ms. Abraham. Could I respond?
    Mr. Shays. Sure.
    Ms. Abraham. If we were just talking about knowing what 
needed to be done and doing it, I would agree, we would want to 
move fast.
    We realized, after publication of Brent's paper, as we 
started thinking more about his findings, we began to figure 
out that there was this ``formula bias'' problem that was 
related to the findings he was getting.
    His paper was published in December 1993. In January 1995, 
just over a year later, we took steps to substantially correct 
that problem. We then figured out that we hadn't got the whole 
job done, and last summer we made the remaining changes that 
were necessary to fix that problem.
    So when it was a matter of realizing that there was a 
problem, figuring out that we could do something to fix the 
problem and doing it, we have moved very quickly. I don't think 
that these other things that we've been talking about are in 
the category. I don't think we really have thought through 
where this geometric mean formula makes sense and where it 
doesn't. And it's far from a trivial matter to really work that 
through.
    Research and development, in the private sector, often can 
take a very long time, and what we're talking about here is 
much more akin to that than just accelerating production 
cycles.
    Mr. Shays. Let me take the second round--I mean, wait till 
my colleagues have asked some more questions. I guess the term 
``fast,'' I just don't want us to act slowly. I just feel we 
need to be a little more timely. Maybe some of it requires us 
to give you some more resources. I just think the implications 
of this--and I know you know this--are just extraordinary.
    Just as Mr. Sanders can tell you about what it's like for 
seniors, I'd like to tell you what I think it's like for kids, 
and what I think it's going to be like for kids when they have 
to pay the bills, if, in fact, we are overstating the inflation 
rate.
    I have some other questions, but let me just come back 
after other Members have had some time to ask some more 
questions.
    Mr. Snowbarger. Mr. Towns.
    Mr. Towns. I will pass.
    Mr. Snowbarger. Mr. Sanders.
    Mr. Sanders. Let me just make a few points and maybe 
comment on what Chris Shays said.
    No. 1, it seems to me what I've learned today, mostly, Ms. 
Abraham, it is terribly important that you remain independent 
and not be swayed by political pressure. I think Mr. Shays 
suggested that I am concerned about senior citizens. I am, but 
that's not your job. Your job is just to come up with the 
information. It is, in fact, our job to make the legislation to 
deal with it as we want. And I agree with Mr. Shays on that.
    But the caveat of that, the other side of that is that 
because politicians want to balance the budget in a certain 
way, they may be leaning on you to say that the CPI is lower 
than it is, and therefore we can cut benefits.
    I would hope very much that you and your colleagues would 
have the professional integrity to say you're not politicians, 
you don't make legislation, but you are going to come up with 
the best, statistically honest information that you can, and 
resist any effort to force you to go one way or the other. 
Because we can't run a government unless we get honest 
information. I'm sure Mr. Shays would agree with that.
    We have to, then, take your information and do with it as, 
you know, we will argue about. But we need independence from 
you, and I would hope that whether its right-wing Republicans 
or--well, there aren't any left-wing Democrats--but whoever it 
might be, to resist that and just maintain your intellectual 
integrity on that.
    Do you agree with that?
    Ms. Abraham. Absolutely. And I am very happy to be able to 
say that the Bureau of Labor Statistics has a long, long 
tradition of proceeding independently, based on the best 
technical judgment of the staff.
    Mr. Sanders. That's right. OK. And I think we can all 
recognize what a terribly difficult job it is. I'm trying to 
sit here and think that I have a 25-year-old, affluent young 
man, say, from Los Angeles, and he has spending habits; right? 
And you have an 80-year-old, low-income person in Newport, VT, 
who has spending habits.
    They are living in different worlds. And how you balance 
that, that is what your job is about. It's a tough one, because 
they are living in very different worlds, in terms of what they 
purchase and what their needs are. I would again reiterate, my 
hope that, to deal with that problem, you would put more focus 
on the needs of senior citizens, in particular, especially as 
it relates to Social Security.
    I am not an economist, and I don't know all that much about 
substitution theory, so maybe help me out here. If we have, 
theoretically, somebody who loves to eat steak and hates 
chicken, OK; the cost of steak goes off the wall, the price of 
chicken goes down. So this guy says, ``Boy, I hate to eat 
chicken, but that's what I'm going to eat, 5 days a week.'' OK.
    Now, the cost that this person is now spending for dinner 
let's say has even gone down, spending less money. But he is 
being deprived, she is being deprived of what he or she enjoys; 
right? The quality of life, if you would like. I'm being a 
little bit jocular here.
    How do you measure that? You can come up with a statistic 
that says Mr. Jones is now spending less for food; however, Mr. 
Jones is not getting what he really wants. His quality of life, 
in a sense, has gone down. As an economist, how do you deal 
with that?
    Ms. Abraham. We deal with that only in an indirect way, I 
guess. The way that we come up with measures of substitution 
bias in the Consumer Price Index is by looking at what's 
happening to the relative prices of different kinds of items, 
different categories of items, and then looking at what happens 
to the relative share of aggregate expenditures devoted to each 
of those different categories of items.
    And we, in effect, draw an inference from what's happening 
to the pattern of consumption expenditures about the 
substitutions that people have made.
    Mr. Sanders. I think I understand it, but I think there's 
another point. And it's tough stuff, so I'm not being critical 
here.
    Ms. Abraham. I should say there is a theory that underlies 
precisely how we do this, but that's the intuition. When 
relative prices change, we look at how people's actual behavior 
changes.
    Mr. Sanders. But help me out here. If you were just to look 
at the price of steak, which went up, and people were not 
purchasing it, then people would correctly say you're 
overestimating what people are spending. Right? The price of 
steak went up, but they are not buying steak. Wouldn't that be 
fair? Am I wrong on that?
    If that's what you did, if you did not look at what people 
were purchasing, you just looked at the price of the product, 
and no one was buying it, your statistic would be irrelevant.
    Ms. Abraham. Right.
    Mr. Sanders. OK. So, you know, if the price of steak 
doubled but nobody was buying it, we have to take into 
consideration nobody is buying it. OK. But on the other hand, 
the fact that somebody is now buying chicken, which has gone 
down and people gravitate toward that, how do you measure it? 
And maybe you don't, because you're an economist.
    But in terms of quality of life, I can buy substitute 
products, but my quality of life, in a sense, has gone down. I 
would like to get steak. So you could argue, gee, the cost of 
food has gone down, but how do you take into consideration that 
people are not purchasing what they would like to purchase? How 
does that equate?
    Ms. Abraham. The only information that we really have to 
work with is what people reveal about their preferences, based 
on what they actually buy.
    I would like to make a distinction here with respect to 
this substitution bias thing. If all that happens is the price 
of steak goes up, then, clearly, people are worse off; the cost 
of living has gone up. This doesn't change that. All we're 
really saying with this theory, this method of measuring, is 
that if the price of steak goes up, the cost of living doesn't 
go up as much as it would if you assume they kept buying 
exactly what they were buying to begin with. There are some 
substitutions that they can make to partially offset the 
increase in the price of steak.
    Mr. Sanders. I agree. I agree with you, absolutely. But 
what I'm asking is, and maybe, as an economist, you can't do 
this, how do you throw into the equation the fact that somebody 
is--their quality of life, in a sense, has gone down? I mean, 
steak and chicken is a poor example of that. You can get a 
cheaper product, a substitute product, but maybe it's not the 
product that you wanted. Has your standard of living gone down, 
even if it can't be measured in monetary terms?
    Ms. Abraham. We don't try to talk to people about that 
directly.
    Mr. Sanders. OK. I think that might be a little bit of a 
weakness in the substitution theory. Would you agree?
    Ms. Abraham. Well, this theory is based on a certain set of 
assumptions about people's preferences, and what they look 
like, and how they respond when relative prices change. I would 
note, though, that the CPI itself is also based on much the 
same sort of assumptions. In constructing this kind of measure, 
you really can't get away from making some stylized 
assumptions, I think, and it's going inevitably to leave out 
how individual people feel about some of this, and so on.
    Mr. Towns. Would the gentleman yield?
    Mr. Sanders. Yes.
    Mr. Towns. On that point, as he is raising these questions, 
it sort of opens up another area which points out, in terms of 
my concern, that now we're getting, in some areas of the 
country, these big outlets where people can go and purchase. 
And sometimes, of course, the price comes down. But senior 
citizens that might not be able to drive can't get to those 
outlets, you know. These are factors that I think that one 
would need to consider. Do you look at all of these things, as 
well?
    Ms. Abraham. No. I'm not sure all of what you have in mind, 
but I'm sure we don't.
    Mr. Towns. Well, what I have in mind is this, I come from 
New York, and they have now these big outlet stores. In many 
instances, the prices actually go down, because you're talking 
about bulk buying, in terms of purchasing. But at the same 
time, it does not help seniors, in many instances, that can't 
get to these outlets. So, therefore, they will not go out and 
make these purchases and will not be able to substitute.
    Ms. Abraham. Let me try to respond on that point, 
specifically. We do have discount outlets represented in the 
CPI, with some lag, in proportion to the share of expenditures 
that occurs at such outlets. An issue that has been raised is 
the fact that we don't attempt to compare the prices in older, 
traditional stores directly to the prices in the outlet stores. 
It has been suggested that we should.
    There are a variety of reasons why that might not be 
appropriate. You are suggesting a reason why, if we were to do 
that, which we don't, we might get an answer that wouldn't be 
accurate for senior citizens.
    Mr. Towns. Let me give him his time back. The point I'm 
really making is, isn't it true that the poor pay more?
    Ms. Abraham. I don't know.
    Mr. Sanders. Let me pick up, because that's just what I was 
going to say. The truth is, it's very expensive to be poor, 
very expensive. No question about it.
    No, I think you're absolutely right. When you are rich, you 
have a good bank to bank in; when you are poor, you go cashing 
your check, what do you pay when you cash your check, in your 
neighborhoods there?
    Mr. Towns. There you go.
    Mr. Sanders. They rip you off right and left, OK.
    Mr. Towns. Four dollars right away, right up front, $5.
    Mr. Sanders. What happens if you don't have an automobile 
and you can't go? The same situation exists in my State. There 
are new outlet stores that I suspect are cheaper. But you know 
what? Poor people don't have automobiles, and they can't get to 
those places. They go shopping in local mom-and-pop stores 
where the prices are often a lot more expensive.
    We can go on and on. Again, I think your job is a very 
difficult job, weighing all of these factors. But I think the 
evidence is quite overwhelming that it is very expensive to be 
poor. When you bounce a check, if you don't have money, then 
you've got to pay $15 to the bank, or $20 to the bank.
    But, I mean, is there a prejudice that discriminates, in a 
sense, against the poor who don't have the freedom of mobility 
to purchase certain types of products?
    Ms. Abraham. We're attempting to track not--maybe I can 
clarify this point. We're not trying to track the level of the 
expenditures that people have to make. We're tracking the 
change in those expenditures. So I can't tell you whether 
things cost poor people more than rich people.
    Mr. Sanders. But if there are changes because these large 
discount stores are selling products cheaper, and you're going 
to track that.
    Ms. Abraham. We don't pick that up directly. If it's true 
that an older store is selling something and a discount store 
comes in and sells it for less, the way the index is currently 
constructed that would not show up.
    Mr. Sanders. OK. Thank you. Let me just conclude by saying, 
most importantly, you've got to maintain your intellectual 
independence from all political pressure, in my judgment, and I 
hope that you will do that.
    Mr. Snowbarger. Let me just followup on that comment. I 
want to reiterate what I said my initial remarks, and that was, 
I don't think anybody is asking for this process to be 
politicized. What we are trying to do, since we incorporate 
your product in what we do, we need to have a sense that we are 
using an accurate projection, that we are using the proper 
test, when we adopt policy.
    I think that's really the reason for the questions that 
I've had, at least, particularly about the delays and the R&D 
that's involved in this.
    Go ahead.
    Ms. Abraham. On that point, I certainly agree. Our 
objective is very much to produce the most accurate statistics 
possible. And I can assure you that, since I have been at the 
Bureau, I expect before that but certainly since I have been 
there and at the present time, we are working aggressively 
toward that end.
    I also would like to say that we can address some of these 
issues that have been raised and we are working toward 
addressing them. In the budget proposal that we currently have 
pending before the Congress, we have laid out all of the steps 
that we think we know how to take, at this point, to produce 
the best measure possible.
    Having said that, I think it's also important to be clear 
that there are some things that have been raised as issues that 
I just don't think we know how to address at this point. So I 
don't want to give the misleading sense that it is possible for 
us, or that anyone knows how, to produce a perfect, true, cost 
of living measure.
    I can elaborate if you would like. This point is discussed 
a bit in my formal statement. There are things that I think the 
state of knowledge in the economics and statistics professions 
is such that we just don't know how to address.
    Mr. Snowbarger. OK. Let me go back to an earlier line of 
questioning. Mr. Shays picked up on it a little bit. I had 
indicated, in my initial questioning, I was concerned about--
well, first, with the Stigler Committee report, that we had a 
17-year lag before we at least had major changes in how we did 
things. Then I had mentioned a decade, and you weren't sure 
where that came from.
    As it turns out, it came from an April 11, 1997, Wall 
Street Journal article where--well, the headline is, ``Labor 
Bureau Unveils Experimental CPI.'' I presume that's this 
geometric mean that you were talking about.
    Ms. Abraham. Right.
    Mr. Snowbarger. And one of the comments was, ``BLS 
officials stressed yesterday that the change has been under 
consideration for more than a decade.'' That's the kind of 
statement that concerns me. I understand the lead time on a 
weapons development system. I'm not sure I understand that kind 
of lead time on a statistical measure.
    Ms. Abraham. The person who presented that press briefing 
is here.
    Is that accurate?
    There was a misunderstanding. The quotation gives a 
misleading impression.
    Mr. Snowbarger. Well, I know the chart that they have in 
here shows from 1991 projected out to 1997.
    Ms. Abraham. Right. We went back to 1991 and constructed 
the data.
    Mr. Snowbarger. You reconstructed the data.
    Ms. Abraham. Yes.
    Mr. Snowbarger. OK. Well, that's a different line of 
questioning altogether. But I am concerned that it takes us as 
long as it appears to, to get these changes in place.
    Ms. Abraham. I'm concerned, too. As I have indicated, 
certainly in my time at the Bureau, we have been working very 
aggressively to make those improvements that we could identify 
as being possible to make in the CPI.
    I've only been at the BLS for getting on 4 years now. My 
Deputy Commissioner, Bill Barron, has been at the Bureau for 
more than 25 years, and he tells me that the budget proposal 
that we currently have pending before the Congress is the first 
proposal in which we have had the opportunity to ask for 
resources to speed up our work.
    So I think there may be issues with respect to a sense of 
urgency at points in the distant historical past that people on 
the staff may or may not have had, and I just can't speak to 
that. Certainly, at this point, we have a sense of urgency. But 
I think that there are also issues with respect to how 
interested the Congress, for example, might or might not have 
been in funding improvements that, in another context, could 
have been perceived as simply esoteric.
    Mr. Snowbarger. Understand.
    Mr. Shays. Would the gentleman yield?
    Mr. Snowbarger. Yes, I would yield.
    Mr. Shays. I just really want to be clear on the concept of 
``ask.'' I don't want to split hairs here, but I blame Congress 
when Congress is asked and doesn't step forward, or I blame 
Congress when Congress should have the knowledge and should 
step forward. I blame any department that doesn't ask for it. 
And so Congress can't prevent you from asking for something.
    So I don't understand the concept of ``ask.'' Are you 
saying the administration didn't allow you to ask for it?
    Ms. Abraham. Since I have been at the Bureau, I feel like 
we have been moving forward aggressively, and that's the only 
period of time to which I can speak directly.
    Mr. Shays. OK. But you put on the record, and it is on the 
record, that this is the first time you've been able to ask for 
it. I do not understand that. I want you to explain that to me.
    Ms. Abraham. This is information that was given to me by my 
Deputy. Could I ask him to come forward?
    Mr. Shays. Sure. We need to swear your Deputy in, though, 
when he comes.
    Would you swear in the Deputy?
    Ms. Abraham. He really is in a better position to provide 
historical context than I am.
    Mr. Shays. No, I don't mind. Let me just say something, if 
I could, Mr. Chairman.
    We're trying to understand something. If there's any other 
person--we're not trying to put you on the line here, if others 
can share information. So if you have anyone else you would 
like to come up and have us swear in, I think we should do it, 
and then we could have more dialog.
    Ms. Abraham. I think, in terms of the history of the BLS 
budget, Mr. Barron is the best person.
    Mr. Snowbarger. Sure.
    [Witness sworn.]
    Mr. Shays. I thank the gentleman.
    Mr. Snowbarger. I guess the question is before you now, of 
Mr. Shays. Please identify yourself for the record.
    Mr. Barron. My name is William Barron. I'm the Deputy 
Commissioner of the Bureau of Labor Statistics.
    Mr. Shays. One of the things that I would like to just be 
clear on is that I do come with this bias. First, I don't come 
with a bias that we should use the CPI to balance the budget. 
In fact, I recommended to my own leadership that we should not 
even include the CPI, and any dividend should be a dividend. In 
other words, if there's a change in the CPI and there's a 
savings to the taxpayers, that should just be a plus. So I just 
want to say that to you.
    But what I do come with a bias on is that we should move 
more quickly. I'd like to know what kind of resources you have 
available and what kind of resources you think you need. And I 
can forget the other question about the ``ask'' issue, because 
I think I know the answer, and I think it won't get us much. So 
tell me what kind of resources you have and what kind you need.
    Mr. Barron. The ongoing budget for the Consumer Price Index 
is about $41 million a year. That's an estimate for fiscal year 
1997. That excludes the cost of the expenditure survey, the 
continuing consumer expenditure survey, which we put in place 
in the late 1970's. That was really the first time we had the 
opportunity to get the funding to do that. So it became 
operational in probably 1979, 1980. That would be another $18 
million or so.
    I'd like the opportunity to provide some of these numbers 
for the record, because I'm doing this from memory.
    Mr. Shays. Sure.
    Mr. Barron. The research budget in the price program is, I 
would say, approximately a million, million and a half dollars. 
It's very small. At any rate, I agree with you, Congressman, 
that the agencies have a responsibility to ask for things.
    So I would put it this way: I think our 1998 budget 
proposal enhancement level represents the most aggressive 
thinking that we have had the opportunity to make, and it 
represents the most aggressive set of proposals we know how to 
make, at this time, to speed up this process.
    Mr. Shays. The second part of the question is the one I 
care about, not that you've been able to ask. But are you 
asking, in your 1998 budget, what you need to move as quickly 
as conceivable?
    Mr. Barron. As we know how to do. ``Conceivable'' is a 
tough one, Congressman.
    Mr. Shays. As you know how to do.
    Mr. Barron. Yes, sir.
    Mr. Shays. OK.
    Mr. Barron. Could I add one more thing? In the past, you 
know, there are a lot of constraints. I don't want you to feel 
that anybody from the BLS has blamed the Congress for things. 
There are a lot of budget constraints we operate under before 
we are able to present things to our appropriations staff, 
which has been very supportive when we've had the opportunity 
to present things. I'm going back in time, prior to the tenure 
of the current Commissioner.
    Mr. Shays. I'm not just focusing on this administration. 
We're talking different administrations.
    Mr. Barron. Right.
    Mr. Shays. But are you saying that--have you asked for more 
in your research side of the budget and been turned down by--
who would you report to? I don't know.
    Ms. Abraham. The Secretary of Labor.
    Mr. Barron. Secretary of Labor.
    Mr. Shays. And then he has to--or ``she,'' in many 
instances--reports to OMB?
    Mr. Barron. The Office of Management and Budget. Sometimes, 
over my career, we've had sort of a bifurcated process.
    Mr. Shays. What I want to know is, in the last 4 years, 
have you requested--is this the first time you have made a 
request to your Secretary to increase the research part of your 
budget?
    Mr. Barron. I could answer that--let me answer that the way 
that gives you the answer that's most appropriate for your 
question. You used 4 years, and that covers that time when I 
was Acting Commissioner. During that time, we did ask for money 
to revise the Consumer Price Index, and that money did not make 
it--that request did not make it to the Congress.
    Mr. Shays. And I accept your point, Ms. Abraham, that 
Congress could have been focused on this 4 years ago, as well. 
So I accept that.
    Mr. Snowbarger. If I could, I've got three questions here, 
real quickly.
    The first one really kind of goes to this budget request 
and a question that I have about how we go about this process. 
Just for instance, on your web site, you list 12 other 
statistical Federal agencies that compile economic data. Are 
we, in the Federal Government, getting the most for our money 
out of those 12 different data collection agencies? Do you 
share information? Do you collect the same kinds of 
information? Can you share information?
    Ms. Abraham. There currently are constraints on our ability 
to share information with the other statistical agencies. 
That's something that I think it would be desirable to address.
    Mr. Snowbarger. What prohibits you from doing that?
    Ms. Abraham. There are statutory barriers to sharing 
information. The Census Bureau, for example, is covered by a 
law that says that when they collect information, either from 
businesses or from individuals, that they can't share those 
individual records with anyone else, and that includes the 
other statistical agencies. I think it would be desirable, for 
a variety of reasons, for us to be allowed to share that 
information, for carefully specified purposes, in a constrained 
kind of way.
    Having said that, it is not my sense that there is much 
duplication in the activities of the statistical agencies. The 
only real example I can think of is that, because of 
legislative constraints on sharing data, the Census Bureau 
maintains a list of establishments that they use for 
constructing samples for surveys, and we maintain a separate 
list.
    Beyond that, I know of no real examples of duplication of 
effort. I think that there would be things that we could do 
that would let us improve our statistics, if we were able to 
share information, and maybe around the margin, some 
efficiencies.
    Mr. Snowbarger. Well, going back to some of the questions 
that were asked earlier about specific segments of the 
population, whether its the poor, whether its the elderly, 
however we're going to divide up the population, don't you have 
access to census data that would at least give you some 
educated intuitive approach to defining those things, and about 
buying patterns, things of that nature?
    Ms. Abraham. We have information from our consumer 
expenditure survey on what older individuals buy.
    Mr. Snowbarger. That would be more accurate?
    Ms. Abraham. I think our consumer expenditure survey gives 
us the best, as far as I know, really the only, available 
information on that. The problem isn't that the information is 
not accurate; the problem is that the sample is small, so there 
is noise in the data, which constrains our ability to construct 
measures that are precise.
    Mr. Snowbarger. Well, I would appreciate it if you could 
let the committee know what barriers there are in statute to 
sharing this information, so that we might take a look at doing 
that.
    Ms. Abraham. I would be very happy to do that. I would say 
though, that I don't think that the information sharing is 
really going to be directly helpful in addressing the issues 
we've been discussing today.
    Mr. Snowbarger. I yield to the chairman.
    Mr. Shays. Mr. Towns, I just have one more question. Do you 
have any questions?
    Mr. Towns. No. I just want to find out why. I don't 
understand, if you can use census data, why it wouldn't be 
helpful. I don't quite understand that. Could you just sort of 
spend a moment educating me?
    Ms. Abraham. Why the statistical agencies being able to 
share information wouldn't be helpful?
    Mr. Towns. No, no, no. If you have the information that is 
collected, that it would not be helpful to you. The census 
information, we're talking about.
    Ms. Abraham. I had understood the subject we were 
discussing here to be, specifically, assessing the expenditure 
patterns of older individuals. Census really doesn't collect 
much in the way of--I don't know that it collects any 
information on those expenditure patterns, and certainly not at 
the level of detail that would be helpful to us in producing 
the Consumer Price Index.
    For producing the Consumer Price Index, we need to have 
very detailed information on expenditures in each of 200-plus 
categories of items in order to appropriately weigh the index. 
And Census just doesn't collect anything like that.
    Mr. Towns. OK.
    Mr. Snowbarger. Mr. Shays.
    Mr. Shays. Just as Mr. Sanders was talking about, and we on 
the committee were talking about the differences in cost of 
living for, say, a senior versus a young family, there 
obviously are regional differences. I just need to have a 
sense. My brother-in-law has bought a home in Georgia, three 
and one-half baths, almost 4,500 square feet, for $215,000. In 
my district, that would cost between $600,000 and $1 million.
    Are elderly--in concentrated areas, would I make 
assumptions that cost-of-living in Florida would be lower than 
cost-of-living in New York, or would it parallel?
    Ms. Abraham. There are really two different things, I 
think, embedded in your question. One is, what's the level of 
the cost of living?
    Mr. Shays. Right.
    Ms. Abraham. That's not what the CPI is trying to measure. 
We have been working, on an experimental basis, on trying to 
put together measures that are informative as to differences in 
cost levels across geographic areas, but that's not the CPI. 
The CPI is just tracking how the prices that consumers pay for 
the things they purchase are changing. It may well be that 
there are differences in that across geographic areas, too.
    Mr. Shays. You are saying the base is lower to start with, 
but the cost of living may go up about proportional?
    Ms. Abraham. Right.
    Mr. Shays. OK.
    Ms. Abraham. But we do produce, as a by-product to what we 
collect or produce, the national index, regional indexes. So 
that's something that one can take a look at.
    Mr. Shays. Let me just nail this down a little bit more. So 
even though I see wide disparities of prices, would it be your 
testimony that cost of living tends to go up pretty much--you 
don't see the wide differences, in terms of cost increases?
    Ms. Abraham. I would want to go and look at the data, 
specifically, but it is not my sense that we've seen dramatic 
differences across geographic areas in the rates of growth of 
consumer prices. I would like to provide the data for the 
record, if I could.
    Mr. Shays. Sure. Thank you. I appreciate the committee's 
indulgence.
    Mr. Snowbarger. If I can finish up with one final question. 
As you've talked today, and we've been talking about process 
and the methodology that you use, you indicated that there is a 
certain methodology that you have instituted already that has 
made a downward adjustment of about two-tenths of a percent, I 
think is what I remember you saying.
    Ms. Abraham. Right. On net, over the past couple years.
    Mr. Snowbarger. Right. And then the possible shift to a 
geometric mean might mean an upper limit of a quarter of a 
percent, but that would be a downward adjustment.
    Ms. Abraham. It would slow the rate of growth of the index 
also.
    Mr. Snowbarger. OK. And I guess the overall question, then, 
based on two things, is that thus far, as you've tried to 
determine how methodology ought to be changed, all of those 
would seem, at this point in time, to indicate that the 
Consumer Price Index, as we have been calculating it in the 
past, has been overstated?
    Ms. Abraham. Well, we've made a number of changes over the 
past few years. On net, those changes have led to a slowing in 
the rate of growth of the index. There was a piece of the way 
we were putting together the housing measure that we changed 
that worked in the opposite direction.
    Mr. Snowbarger. But the net.
    Ms. Abraham. The net effect has been to slow the rate of 
growth of the index.
    Mr. Snowbarger. Again, getting back to the point that, at 
least from your research thus far, changes that you feel are 
legitimate and need to be made would indicate that we have been 
overstating, in the past, and we need to adjust it so that 
the--I forget what you said--that the rate of growth is not as 
fast?
    Ms. Abraham. The changes we have made, and the one change 
that we are looking at making, that I can give you any 
quantified information about, have worked and will work, on 
net, to slow the rate of growth of the index.
    Mr. Snowbarger. Thank you.
    Are there other questions at all?
    Mr. Towns. No. Thank you very much.
    Mr. Snowbarger. Thank you very much, Ms. Abraham. We 
appreciate your being here.
    Ms. Abraham. Thank you.
    Mr. Snowbarger. We will make some adjustments real quickly 
here to get our second panel moving.
    [Witnesses sworn.]
    Mr. Snowbarger. Our second panel, I might just introduce 
you all real quickly before we get started. Our second panel 
consists of Mr. Charles Hulten, professor of economics, 
University of Maryland; Dr. Kurt Karl, senior vice president of 
U.S. Macro Group, WEFA, W-E-F-A, which I presume you will 
explain when we get there; Mr. Dean Baker, who is an economist 
at the Economic Policy Institute; and Mr. Matthew Shapiro, 
professor of economics, University of Michigan.
    Mr. Hulten, we will begin with you.
    Mr. Shays. Mr. Chairman, I wonder if I could interrupt and 
just make a suggestion, with your permission, to our panelists.
    You have been gracious enough to sit here and listen to the 
questions already asked, and you have been gracious enough to 
listen to the testimony, as well. If you are so inclined not to 
read your testimony but want to just jump into those issues and 
make comments--in other words, if you want to read your 
testimony, but if you also want to summarize and respond to 
some of the questions, I think the committee would appreciate 
it. We certainly appreciate the fact that you listened to the 
others.
    Mr. Snowbarger. I might also remind the witnesses that we 
have allowed for your full statements to be put into the record 
in their entirety. So keep that in mind.
    Mr. Shays. You've got lots of options.

   STATEMENTS OF CHARLES R. HULTEN, PROFESSOR OF ECONOMICS, 
UNIVERSITY OF MARYLAND; KURT E. KARL, EXECUTIVE VICE PRESIDENT, 
   U.S. MACROECONOMIC SERVICES, WEFA; DEAN BAKER, ECONOMIST, 
ECONOMIC POLICY INSTITUTE; AND MATTHEW D. SHAPIRO, PROFESSOR OF 
               ECONOMICS, UNIVERSITY OF MICHIGAN

    Mr. Hulten. I would like to summarize my written statement, 
if I could, because there was so much ground covered earlier 
today that I'm not sure I would know where to start, on a 
piecemeal basis.
    I would like to address my remarks today primarily to the 
issue of quality change in the CPI. Of all the problems that 
beset the CPI, this is undoubtedly the hardest. The redoubtable 
Adam Smith looked at the issue and walked away from it, saying 
that it's such a very disputable matter that he saw the whole 
issue as somewhat uncertain.
    This is echoed, I think, down over the years, and it has 
certainly been repeated by one of my fellow panelists who 
called a quality change the ``house-to-house combat of price 
measurement.'' But just because it's hard doesn't mean we can 
afford to ignore this issue. Mismeasurement of quality 
translates directly into mismeasure-ment of price. And 
according to the Boskin Commission, about half of the 1.1 bias 
that they identified across the board in the CPI is due to the 
quality area.
    Unfortunately, there aren't any quick fixes for these 
problems. To use a current phrase, no low-hanging fruit on the 
quality tree. But there are some things we can do now. The 
first thing is to make a commitment to invest in our 
statistical infrastructure. I have, in my written testimony, 
given some of my ideas, and I would like to give some of the 
reasons why I think these ideas might be worthy of 
consideration.
    Much of my thinking is based on some research done by BLS 
staffers, Brent Moulton and Karin Smedley, who studied the CPI 
process for the year 1995 and observed that, in the items that 
they studied, the total price change was 4.7 percent. But this 
really was not inflation. Instead, the BLS undertook a number 
of adjustments, technical things like the link, and class mean, 
overlap, and direct quality adjustment methods. When the smoke 
settled on this, the actual change in the CPI was only 2.2 
percent. In other words, the BLS is already making adjustments 
to the CPI of more than half of the total observed price 
change, for things that might loosely be called quality.
    And I have, in my examination of the CPI problem, zeroed in 
on some of these methods and come to the conclusion that, at 
least in one case, that is to say the link method, that they 
may be overadjusting for quality, not underadjusting, as is 
commonly believed. On the other hand, there are other areas, 
another method, the direct quality adjustment method, was 
probably biased in the other direction.
    I think that sorting out the various biases and what they 
already do should be a major item on their research agenda. And 
these are not the only things to worry about. Quality and new 
goods come in during this process. We heard described earlier 
sample rotation. About one-fifth of the CPI sample is changed 
every year, and this is an opportunity for new goods to come 
in.
    Unfortunately, the uptake process is rather slow, because 
it's essentially a reactive process rather than a proactive 
process. As a result, we see instances like cellular 
telephones, which were introduced in 1983 and are still not in 
the CPI.
    This lag is only part of the problem, however, because when 
items like cell phones do come in, they are brought in in a way 
that doesn't change the overall level of the index. What 
happens instead is that only subsequent changes in this good 
are allowed to affect the CPI. But surely there is a gain to 
the consumer at the point of entry of the new good. The 
technical term for this is ``consumer surplus,'' and in the 
current BLS procedure is assumed as essentially zero.
    This leads, I think, to a variety of potential 
opportunities to improve the statistical infrastructure. I 
would say, as a first step, that I would like to see the study 
by Moulton and Smedley made a routine part of the BLS study 
program.
    I found it very useful, and I think it would be very useful 
to have this provided every year, and indeed extended in a 
number of ways that I have indicated in my testimony. I think, 
if we are going to embark on a procedure where we urge BLS to 
make changes, we need tools for diagnosing the effects of these 
changes.
    Another set of ideas about the BLS itself, and they are 
somewhat technical, but I will mention them anyway. First, I 
think they should eliminate the use of the link method. This 
will not be possible immediately, but it, I think, should be 
set up as an objective. And this is the predominant way that 
they actually handle quality.
    Second, I think they should accelerate the sample rotation 
period for goods in which the pace of innovation is obviously 
very rapid. I think they are planning to do that, in fact, but 
I think even more proactive methods might be adopted. I'm not 
sure what they are, but I think they should be at least 
considered.
    Finally, I think they should adopt superior valuation for 
the new goods. Instead of assuming that the consumer surplus is 
zero, I think some other assumption might be better.
    I think, taken together, this will move the CPI more toward 
a dynamic cost of living index. But I also want to emphasize 
that the issue is not really one of just ordering the BLS to 
get it right. I think part of the problem arises because they 
had been, historically, pursuing an objective of pricing a 
fixed bundle of goods, and now the objective has shifted, and 
this has introduced a whole host of new problems to be dealt 
with.
    I think that dealing with these problems is going to cost a 
lot of money. It's my reading, anyway. But I do think the 
benefit cost ratio is quite high. The Boskin Commission has 
estimated that their 1.1 bias is adding about $1 trillion to 
the Federal deficit over 12 years. If just a few percentage 
error points in this estimate will amount to billions of 
dollars. So I think spending a few million dollars to try to 
improve these estimates would have a very, very high benefit 
cost ratio.
    The final thing I would like to say relates to something 
that has been mentioned in the earlier proceedings, and that's 
the question about an externally imposed fix and whether it 
will happen or won't.
    I would just say that frustration or delays and technical 
difficulties, combined with the prospect of substantial budget 
savings, might make this look like a good idea, but I 
personally believe that it is emphatically the wrong approach. 
Because I think the uncertainty about the true bias is 
sufficiently large that any number that you are likely to 
select is probably going to be the wrong number, and it's 
probably going to be wrong by quite a large amount.
    And I think it sets a terrible precedent for the American 
statistical system. I would just ask the question: Will 
frustration over the upcoming decennial census lead to more 
external fixes? I really think there is no substitute for 
accurate measurement, and I think you ought to be prepared to 
fund the investments necessary to build up our infrastructure.
    Thank you.
    [The prepared statement of Mr. Hulten follows:]

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    Mr. Snowbarger. Dr. Karl.
    Mr. Karl. Thank you very much.
    You asked about ``WEFA.'' WEFA was originally, in 1963, 
founded by Dr. Lawrence Klein, Nobel laureate, as Wharton 
Econometric Forecasting Associates, hence the acronym. In 1987, 
the University of Pennsylvania was bought out entirely and 
retained its name, ``Wharton,'' about the same time we were 
merged with Chase Econometrics, and Chase Bank kept their name, 
``Chase.'' Hence, we came up with WEFA.
    I would like to just summarize my comments. I will preface 
that by saying that I am no expert on measuring Consumer Price 
Indexes; rather, as an economic consulting and forecasting 
firm, we're experts on the U.S. economy and using the data, 
rather than measuring these things.
    The CPI is a price index which measures the cost of 
purchasing pretty much a fixed basket of goods, rather than a 
cost of living index, which is how it is often used. A cost of 
living index, of course, would attempt to measure what really 
happens to people, as opposed to what happens to the basket of 
goods.
    It is my opinion, since the CPI is often used as a cost of 
living index, by Congress in their legislation, for example, on 
Social Security payments, as well as in private contracts, 
particularly between labor and management on cost of living 
adjustments for wage negotiations, that Congress should direct 
the Bureau of Labor Statistics to actually create an index 
which is the cost of living index, and provide the necessary 
funds to create that index.
    I agree with the widely accepted view that the measurement 
of the CPI, with respect to a cost of living, is biased 
upwards. It overestimates the rate of change of the cost of 
living. It's important to correct for that, not only because 
the cost of living index is used in business and government 
obligations, but also because it would provide a more accurate 
understanding of what's going on in the U.S. economy.
    For example, the CPI is used in producing what we call the 
gross domestic product information, produced by the Department 
of Commerce. That is used to adjust the consumption 
expenditures by consumers and get what is called a ``real'' 
estimate of gross domestic product, after-inflation estimate of 
gross domestic product.
    Understanding how rapidly the economy is growing, 
understanding how rapid inflation is, it's quite important for 
setting Government policy at the congressional level as well as 
at the administrative level, not to mention the Federal Reserve 
Board, with respect to how to adjust interest rates.
    In addition, businesses use the GDP numbers as well as the 
Consumer Price Index numbers to project their product sales. 
Most of our clients are large corporations or State and local 
governments, as well as the Federal Government. They use this 
information to project their sales of refrigerators, or the 
revenues, in the State of Utah, for example, of corporate tax 
revenues, or something like that.
    It's nicer to have unbiased data when you are projecting 
sales of refrigerators, nicer to have unbiased data when you 
are projecting your sales or your revenue.
    The estimate of bias by the advisory commission to study 
the Consumer Price Index, which I will refer to as the CPI 
Advisory Commission, of an upward bias of 1.1 percentage points 
per year, seems large to me. An upward bias of about 0.2 to 0.5 
seems more plausible.
    I do not base this estimate on a rigorous analysis of the 
CPI. Again, I'm not a statistician. I have worked in 
statistical offices, have a great deal of sympathy for them, 
but I base this more on a subjective, intuitive understanding 
of what's going on in the economy, rather than an assessment of 
the precise errors in quality adjustment, substitution, et 
cetera.
    With that, I would concur with the previous speaker, 
Professor Hulten, that we should proceed cautiously with how we 
adjust the CPI.
    I also strongly would like--I think it has been expressed 
widely this morning that we should keep the bias issue of the 
CPI separate from the budget process issue. These are two quite 
separate issues. One deals with measuring something that's 
going on in the economy; the other deals with raising taxes and 
revenue, and spending money appropriately.
    Mr. Shays. Tell me who wants to raise taxes in this group.
    Mr. Karl. The fact of the matter is that we do raise taxes, 
and that's all I meant by that, not up further. I use it in the 
sense of, they are raised.
    Mr. Shays. I'm teasing.
    Mr. Snowbarger. I wasn't here when it was done.
    Mr. Karl. Just to reiterate, a more accurate measure of the 
cost of living is a worthwhile endeavor in itself, that we 
would like to know what the cost of living--how it is growing 
over time. That is something that the BLS provides information 
on, but actually doesn't measure. The CPI was never intended to 
be a cost of living index.
    With that, I will yield.
    [The prepared statement of Mr. Karl follows:]

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    Mr. Snowbarger. Thank you, Dr. Karl.
    Mr. Baker.
    Mr. Baker. Thank you.
    I will take advantage of the invitation to address some of 
the earlier comments, but I do want to at least summarize some 
of the key points in my written statement.
    The invitation to testify here called on me to make 
assessments of how BLS could more quickly implement changes to 
improve the accuracy of the index. And I think that stems from 
a faulty assumption that the index currently is highly 
inaccurate. I would just present, quickly, three reasons why I 
would take issue with that. First, I would say that the vast 
majority of economists treat it as being accurate in their own 
research. Second, there is a whole range of implications, and 
what I mean here are logical implications, necessary 
implications, of a highly inaccurate CPI, which would lead to 
at least implausible, if not impossible, results in other areas 
of economics. And third, I would point out that, to my 
knowledge, there has not been a political figure in the country 
that has yet embraced the implications of a significantly 
overstated CPI.
    Let me just say a little bit more about each of those. The 
first point, the CPI or related indices gets into just about 
everything we do in economics.
    I have actually run through the journals--in fact, I had a 
research assistant of mine go through the written publications 
of the members of the Boskin Commission, and we found, in 37 
articles where it would have been relevant, in only 6 of them 
did the members of the commission themselves even raise the 
possibility that the CPI significantly overstated inflation. In 
only one of those six, an article authored just last year, did 
they even bother to correct for it.
    So I think you would find, virtually across the board, that 
when economists do their research, they consider the CPI an 
accurate measure. I just would like to point out, economists 
like to say, we're a discipline that looks at what people do, 
not what they say. And what economists do is, they use the CPI 
as though it's an accurate measure.
    The second point I would make is, we're saying two plus two 
equals five. If the CPI is wrong, that affects just about 
everything we do in economics. It affects our measures of rates 
of growth. It affects our measures of relative prices, relative 
demand. Just about everything we've done over the last 40 years 
would have to be re-examined.
    In my written testimony, I gave you one example. If you 
look at deregulation--I took some numbers from Robert Crandall 
at Brookings, probably the leading authority on the impact of 
deregulation--I showed that, if you took his numbers as he has 
calculated them, assuming the CPI is correct, we find that 
deregulation of airfares led to a gain to consumers of around 
35 percent.
    If we assume the Boskin Commission's conclusion was correct 
and apply it backward, that gain falls to about 15 percent, 
which may be entirely offset by deteriorations in quality over 
this period, meaning that the gains from deregulation might 
well have been zero or even negative.
    That could be replicated with other areas of regulation, 
just about every other area of economics. My point here is, it 
leads to lots of things that many of us would find at least 
implausible, if not impossible, a very different view of the 
world.
    The last point, about how we view the political situation, 
public policy, if it's the case the CPI is overstating 
inflation--let's take the estimate of 1.1 percent--it logically 
implies real wages, real incomes are growing 1.1 percent more 
rapidly than we had thought. Going backward--I've done this in 
some of my work--you carry it backward, we would find out that 
most people who are now on Social Security, in their 70's, by 
that implication, were living in poverty as recently as 1960.
    Let's carry it forward. It turns out that, you know, our 
children and our grandchildren, who, of course, we are all 
worried about, they are going to be very, very wealthy. We 
probably don't have to worry about them very much, because 
their incomes are growing 1.1 percent a year, more rapidly than 
we had thought. Come 2020, 2030, the dates we often look at, 
they are going to be quite rich.
    So these are implications that I have yet to see embraced 
by political figures, including many of the people who claim 
the CPI is substantially overstated.
    Now, let me just very quickly address some of the things 
that have been raised before. The concept of an elderly index, 
I know Representative Sanders raised it; other people have 
talked about it. I think there is a big issue here. Even the 
commission acknowledged that we need more research in this 
area. I think Congress would do well to consider appropriating 
the money that would be needed to start a full elderly index so 
we could have an answer to this question, at least if there is 
an interest in knowing how rapidly do costs rise for the 
elderly.
    The second point I would like to make, a lot of the 
examples where BLS, we could recognize, made a mistake, the 
cellular phone example that we all know well, these are often 
goods that are used, at least initially, disproportionately by 
high-income individuals. The implication of that is that we 
might have overstated their rate of inflation; we did not 
overstate the rate of inflation of the vast majority of the 
population that still does not have cellular phones.
    This raises a question about how you construct the CPI. 
Right now, it's an expenditure-weighted index. If I spend $1 
million a year, then my expenditures count 100 times as much as 
the elderly person who spends $10,000 a year. We could, 
instead, have it constructed as a person-weighted index. I 
would suggest that that's something we may want to consider.
    Just to make a couple more points quickly, I often talk 
about the rate of inflation. I'm very hesitant to talk about 
the cost of living, for the simple reason that, if we really 
want to evaluate the cost of living, we have to count all the 
factors that affect the cost of living, such as things like 
crime, pollution. I'm drinking water here. It's probably not 
tap water, if this is DC. These are things that are very hard 
to take account of.
    Economists have very little ability, I think, to really 
take account of that, and I would urge we be a little more 
humble. That's why I think it's more appropriate for us to say, 
we're looking at a price index. We could look at producing a 
better price index. I don't think we really have the ability to 
produce a true cost-of-living index. I think it's really just 
too complicated, on its face.
    I will stop there.
    [The prepared statement of Mr. Baker follows:]

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    Mr. Snowbarger. Mr. Shapiro.
    Mr. Shapiro. Thank you for the invitation to testify this 
morning.
    The role of the CPI for indexing taxes and expenditures, as 
an indicator for monetary policy, and for a source of other 
economic statistics, gives rise to the great public concern 
about its accuracy. In this context, it is worth noting that 
the CPI is one of the best-executed statistical programs in the 
United States.
    BLS personnel have been at the forefront of the effort to 
identify and quantify problems that make the CPI a less than 
ideal measure of the cost of living. Moreover, their research 
has led to a number of improvements over the years. I hope that 
this testimony will assist you in your oversight of the BLS, as 
it continues its efforts to improve the CPI.
    Let me begin by recommending two specific steps, relating 
to issues that have already been discussed this morning, that 
the BLS should take in the near term to improve the accuracy of 
the CPI as a measure of the cost of living.
    First, the CPI neglects that consumers economize by 
changing their buying patterns when prices change. The BLS 
should eliminate the so-called ``high-level substitution bias'' 
by changing the formula used to aggregate prices across goods 
and services.
    Second, the BLS uses a procedure in building up its 
elementary price indexes that causes the index to have an 
upward bias. A change in the way the BLS averages prices, 
moving to geometric means, would greatly reduce or eliminate 
this bias.
    By taking these two steps, the BLS could reduce the CPI's 
overstatement of the change in the cost of living by about one-
half percentage point per year, on average. These two steps are 
the low-hanging fruit of CPI biases.
    The economics and statistical principles underlying them 
are well understood, and the data required to implement them 
are already available. Hence, significant progress can be made 
in the near term to improve the accuracy of the CPI, without 
substantial delay, and without substantial incremental 
resources.
    The timetable that Commissioner Abraham outlined for 
incorporating geometric means into the official index 
represents a reasonably rapid translation of research into 
practice. The BLS should act with similar dispatch in 
addressing the high-level substitution bias.
    Let me explain how they might do that in a feasible way. 
The formula that the BLS currently uses assumes consumers do 
not adjust their purchases of goods and services when prices 
change. To account for the fact that consumers do, indeed, 
economize, the BLS should use a so-called ``superlative index'' 
formula.
    A superlative index combines data on expenditure with data 
on price change to produce an index that is free of this high-
level bias. The data on expenditures required to construct a 
superlative index are available with a lag of about a year, and 
this creates a practical difficulty in producing an index.
    Research that I have undertaken with David Wilcox shows how 
to produce a very good approximation to this superlative index, 
with the same timeliness of the CPI. Our method estimates the 
required expenditure data from observed price changes. This 
technique can eliminate the high-level substitution bias, 
without compromising the timeliness or accuracy of the Consumer 
Price Index.
    If a superlative index is, indeed, the best way to 
construct a price index, you might well wonder why the BLS 
already does not use it. Decades ago, when the CPI program 
began, the desirable properties of superlative indexes were not 
fully understood. Moreover, the necessary expenditure data, 
which are now collected quarterly, were only collected, 
roughly, every 10 years. Given this progress, both in 
methodology and data collection, the BLS is now in a position 
to move forward rapidly.
    The issues I have been discussing concern how the BLS 
should aggregate prices across goods and services. The other 
problem, which we have already discussed today, is how it 
should average prices at the lower level, how it should average 
lettuce of different types. And I would endorse the BLS's plans 
to move ahead rapidly to use the geometric formula. This change 
should take about a quarter percentage point off annual growth 
of the index, when it is introduced.
    These technical changes addressing the high-level bias, 
which the BLS is not yet planning to do, and the low-level 
bias, which they have in the works, are things the BLS can do 
in the short run that would have a measurable effect on 
inflation within the next couple years.
    The longer term challenge is much more difficult. Measuring 
prices in a dynamic economy is inherently problematic. New 
goods replace old ones. Changes in outlets occur, where 
consumers buy their goods and services. The quality of goods 
changes continually. All of these changes make it difficult to 
compare the price of goods and services across time. No simple 
change in the formula will make these comparisons any easier.
    To address the issue of new and improving goods and 
services, there is no substitute for investigating them item by 
item. The BLS should plan to review groups of items in the CPI 
on a rotating basis, to study how best to take into account the 
quality change. A one-time review could address the current 
backlog of problems, but it would not anticipate future changes 
in the marketplace. So this review, therefore, needs to be an 
ongoing part of the CPI program.
    Thank you.
    [The prepared statement of Mr. Shapiro follows:]

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    Mr. Snowbarger. All of you have mentioned something that I 
guess is becoming more and more of great concern to me, and 
that is this distinction between a cost of living index, if we 
want to call it that, and the Consumer Price Index.
    I think all of you were saying that those are two different 
things, or should be two different things, measured in 
different ways, or at least there would need to be adjustments 
to a CPI to get to a cost of living index. And yet, we have 
based a number of Government programs, not only on the spending 
side, but also on the revenue side, that have basically assumed 
that they are the same, or that they are accurate.
    I would appreciate your comments. Have we adopted public 
policy that's based on this inaccurate assumption, and how 
significant is that? Should we be looking to--well, I guess one 
of you suggested--was it Dr. Karl that suggested that we now 
call for a cost of living index, as opposed to a CPI?
    Mr. Hulten.
    Mr. Hulten. Well, I suspect that, when the CPI program was 
first initiated, the fixed market basket approach was probably 
regarded as giving a reasonably accurate approximation to the 
true cost of living. I also suspect that people were not as 
concerned about the rapid pace of technical change then, and 
certainly didn't face the kind of very short product cycles 
that we see today.
    So I think that the paradigm, if you will, that was 
appropriate in the past may be shifting quite a lot in the last 
two or three decades. But, at the same time, this has rendered 
the old concept of the fixed market basket obsolete, and we 
need to make the appropriate modifications to the CPI paradigm 
that are implied by that.
    So I would say that it's not so much an issue of, we have a 
cost of living index on the one side and the CPI on the other, 
but a question of bringing the CPI into line with what we now 
think is the best practice for a cost of living index.
    Mr. Snowbarger. As opposed to two separate concepts, like 
Dr. Karl seems to indicate.
    Mr. Karl. All I was indicating was that you might be 
perfectly happy to continue producing a CPI which is on a 
fixed-weight market basket, and create another index on a cost 
of living basis that attempts directly, which the BLS 
acknowledges that the CPI does not, to estimate the cost of 
living.
    Let me go into a couple of things that I didn't 
particularly cover earlier, in the summary. For example, if you 
want to get a more accurate estimate of the cost of living, 
there are some biases. We widely recognize those, quality, 
substitution, we've heard about those today.
    But for getting quality adjustments, that's very, very 
complex, quite difficult. So you need to adopt some method that 
is systematic, in that regard, of adjusting for quality 
changes. The BLS already adjusts for quality changes. The 
criticism from the CPI advisory commission was that they don't 
go far enough, and this is often the criticism.
    A second kind of thing is, we talked about substitution 
bias. People change their buying habits, depending on movements 
in prices. This could be adjusted through more frequent 
surveying of consum-
ers. The consumer expenditure survey is the method for getting 
this basket of goods.
    Mr. Snowbarger. How often is that done now?
    Mr. Karl. Excellent question. I am not quite sure. It's 
every 5 years, I think.
    Mr. Shapiro. No, it is now done every quarter. And I think 
the point is that, when the BLS started doing the Consumer 
Price Index, in the early 1940's, that survey was done every 
decade. There has also been a lot of conceptual progress in the 
economics profession. I know that you are frustrated that we 
are slow, but it wasn't until the mid-1970's that economists 
figured out how to do a price index that would take into 
account how consumers substitute.
    So we now know how to do the formula correctly.
    Mr. Snowbarger. You've compounded my problem with all this 
process by saying that you finally figured it out in the mid-
1970's. We're in the mid-1990's now, that's 20 years, and we 
haven't implemented what you apparently found out back then.
    I don't understand what takes so long, once we've figured 
out that we've done it in a way that gives us maybe a skewed 
view of things. We now know how to correct for that, and have 
apparently figured it out, 20 years ago, and we're still in a 
process where we think we may implement it down the road.
    Mr. Shapiro. I'm sympathetic with the Commissioner. It 
takes time to go from a highly technical paper in the Journal 
of Econometrics into actual practice. Also, the other 
ingredient was collecting the necessary data, moving the 
consumer expenditure survey from a decade to an ongoing 
quarterly sample, and that happened only in the late 1970's.
    So this is something I think they should move forward 
quickly and can do it within the next few years.
    Mr. Snowbarger. Dr. Karl, we kind of interrupted.
    Mr. Karl. That's OK. In any case, what you want to do, I 
mean, if you just review what Ms. Abraham mentioned, she said 
they are changing the basket of goods. From 1982 to 1984 was 
the old basket; now we've got 1993 to 1995. But we could more 
frequently update that basket of goods to adjust for the 
substitution problem.
    Finally, another way to improve the index would be to, 
every 5 years--they have a 5-year rolling over survey of 
outlets that they use in the BLS construction of the CPI. Well, 
move it up to 3 years, or something, you see. These things can 
be adjusted for.
    I think it's true--I can't recall who said it, or maybe it 
has been said by a number of people--you will never get to the 
true cost of living for the average American. You will get a 
pretty good approximation, and that's what the BLS should be 
directed to do, and funded and supported in that effort.
    Mr. Hulten. If I can amplify my comments on the distinction 
between a pure price index and a cost of living index.
    Mr. Snowbarger. Sure.
    Mr. Hulten. What we're really talking about here, at least 
to my mind, are two different types of price indices: one that 
incorporates item substitution, and one that does not. What I 
was saying is, if we really want to look at a true cost of 
living, the implicit assumption here is that the physical and 
social infrastructure is constant. I think we clearly know that 
it's not. For example, increasing crime that affects people's 
behavior, that might require additional expenditures, burglar 
alarms, whatever it might be, that's a cost of living increase 
for many people. Deterioration in school quality leads many 
people to send their kids to private schools, and that's an 
increase in the cost of living for many people.
    Increased congestion which increases travel time to and 
from work is another example of a real increase in the cost of 
living for people, which is a reason why I am inclined to say 
we don't want the CPI to be a cost of living index. I should 
also point out that in the Boskin Commission report, buried 
somewhere deep in its pages, you find a section which discusses 
some of these issues, and they say, but are these the sort of 
things that belong in a ``price,'' their emphasis, index. And I 
would say they don't, because we can't measure them very well.
    Mr. Snowbarger. Let me ask all of you, or anybody that 
wants to answer, I have a particular product in mind, and I 
don't know how the change in that product figures in, whether 
it's a quality change or what. And it's similar to the cell 
phone.
    I'm thinking of my own experience that, somewhere back in 
the mid-1980's, I decided to go out and buy a computer. And the 
computer I get at that point in time was, what was it, an 8086, 
at the low end, and probably cost $3,000, if you just purchased 
it directly. And there weren't that many places selling an 
8086, so you got an IBM or, you know, a Mac, or something of 
that nature. So there aren't a whole lot of outlets.
    Now, fast forward to today, and I want to enter in and buy 
an entry-level computer for my family, that now costs me maybe 
one-third of what it cost 10 years ago. And not only that, I've 
got a faster processor, I've got larger memory, I have access 
to the Internet, I have software that's loaded on it as it 
comes from the store. Is that a quality change? Where does it 
fit into these categories that we've talked about, I guess is 
my question.
    Anybody.
    Mr. Hulten. Yes, it's definitely a quality change.
    Mr. Snowbarger. OK.
    Mr. Hulten. A dollar you spend on a computer now buys you a 
lot more computing power. It does, for example, buy you access 
to the Internet. The more powerful processors also allow types 
of software that were just not possible 15 years ago. The 
appropriate way of accounting for this quality change is very 
much at the center of the debate about the cost of living.
    Mr. Snowbarger. OK. So this market basket that we're 
talking about, that we use right now, was when?
    Mr. Karl. The current one is 1982 to 1984.
    Mr. Snowbarger. The current one is 1982 to 1984.
    Mr. Karl. It's being changed to January 1993 to 1995.
    Mr. Snowbarger. Which pre-exists even the first computer 
that I purchased. So how in the world do we consider that.
    Mr. Baker. If I can clarify an issue here. I think there's 
some confusion. They set weights for broad categories as of 
1982 to 1984. They rotate items into the survey currently every 
5 years. As I believe Katharine Abraham said, they are going to 
change that to every year, with rapidly changing items like 
computers. So the odds are they might be looking a little bit 
out of date in the computers; they are not looking at 1982-1984 
models.
    Mr. Karl. Yes, that's correct. I don't mean to say that 
they are using the actual weights of what people spent in 1982 
to 1984, but it does create a bias toward the 1982-1984.
    Mr. Snowbarger. Again, the question would be, if we're 
circulating all those things through, what happened to the cell 
phone, which is the example that has been mentioned here, and 
many other kinds of things, whether it's, you know, 
electronics--primarily electronics, I mean, that's what comes 
to my mind anyway.
    Mr. Hulten. Could I also make a comment? The actual CPI 
market basket is considerably more dynamic than the fixed 
market basket intention really suggests, because about 4 
percent of the items in the CPI market basket are discontinued 
every month, and have to be substituted for by a fairly 
elaborate and involved process.
    Over the course of a year, there is a tremendous churning 
within the sample, and on top of this, you get this sample 
rotation process. So, actually, the notion of a fixed market 
basket really is a conceptual notion that really we don't see 
in practice.
    The real question is, in the process of rotation and 
replacement of discontinued items, are we pulling in the new 
goods, like cell phones and VCRs and personal computers, at a 
rate that is appropriate. I think the general answer is that we 
have not been in the past.
    Mr. Snowbarger. I'm looking to my right, and I don't see 
any Democrats to call on, so Mr. Shays, I will turn to you.
    Mr. Shays. I thank you.
    First, Mr. Baker, I found your testimony very compelling, 
but then I wanted to qualify it, because it seemed to sound 
like an all-or-nothing. If we find that the CPI is totally out 
of sync, the implications are, as I went through your three 
points, we would have to rework the last 40 years.
    What happens if it was all right for the first 30, but 
simply isn't all right for this last 10? So I'm just wondering 
if you didn't really kind of overstate it a little bit. My 
sense is that this is a problem that has been presented more in 
recent history than in the last 40 years.
    Mr. Baker. Well, I think not, actually. I've looked very 
carefully at the history of the CPI, and I think what you find 
is a movement toward improving the methodology. And there is 
research that dates back--certainly the Stigler Commission 
compiled much of it--but there is research that has been 
ongoing since then which has indicated, if anything, the extent 
of biases, particularly in the area of quality, has diminished 
through time.
    The leading authority here, I would say, is Robert Gordon, 
who was a member of the Boskin Commission, and in his own work 
he showed a very, very substantial decline in the amount of 
quality bias in the CPI over the period which he looked at, 
which was from the early 1950's to 1983.
    Mr. Shays. But your first point was, basically, that 
economists use the CPI as an accurate measure. And the 
implication there is that it has the support of most 
economists, or they wouldn't use it.
    Mr. Baker. That's correct.
    Mr. Shays. I, basically, accept that argument. I also found 
your second argument, that we have to re-examine everything we 
do, and that it couldn't be out of line as much as some say, 
because the implications would draw us to some absurd 
conclusions, provided you made the assumption that it was a 
problem that existed for 40 years.
    That's the only area where I would want to differ with your 
testimony, which I thought was very interesting. I thought all 
of your testimony is interesting.
    Mr. Baker. Let me just point out, you are correct in saying 
that, but I'm making the conclusion that this existed for 40 
years, if it exists today, based on research that indicates 
that, if anything, the bias would have been larger.
    Mr. Shays. Let me ask all the other three of you. Do you 
think, because we say we have the problem now, that it did 
exist 40 years ago and was a significant factor?
    I would ask you, Mr. Hulten.
    Mr. Hulten. Well, in the quality area, my sense is that 
there has been an acceleration in the underlying rate of 
quality change, but it's certainly true that, if you go back to 
the 1930's and 1940's, a lot of new goods were introduced then, 
as well.
    Mr. Shays. But the fact is that we know, don't we, we can't 
keep up with the change. The change is astounding. It would 
seem to me that change is happening so much more quickly that 
that would be a factor.
    Mr. Baker. If I could give some examples.
    Mr. Shays. I just want to finish.
    Mr. Baker. I'm sorry.
    Mr. Hulten. That's one-half the problem. The other half is: 
what has BLS done about this, and how has that changed over 
time? My sense is that, based on earlier studies that I 
mentioned by Moulton and Smedley, quality adjustment within the 
CPI has also increased.
    Mr. Moulton is sitting over there. He is certainly more an 
expert on that than I am. But my sense is that that's the other 
part of the issue. And it's not just a question of how much 
quality change we observe in the marketplace, it's how much of 
that change do BLS procedures miss.
    There are two targets which are moving: the quality change 
in the marketplace and what BLS is doing to measure the change. 
That adds another layer of complication and it's very hard, at 
least for me, to come up with a summary judgment on that.
    Mr. Karl. If I could, one thing to clarify this, one thing 
I recommend is that we have two indexes. One would be the cost 
of living index which best approximates the cost of living, 
given the research at the time, and comes out on a very timely 
basis, and is not revised. Why not revised? Because contracts 
are written on this, and it becomes quite complicated if you 
revise data and then, oh, well, it's now 1 percent less, and 
give me my wages back, or vice-versa; and another index, which 
takes into account the latest research and is revised over 
history.
    So if you look at the Consumer Price Index, it is an 
unrevised history of what has happened to prices. Yet the BLS, 
every year practically, consistently revises it, incorporates 
new methods of quality adjustments, moves forward on more 
adjustments of introducing the goods that disappear and the new 
goods that come in.
    So it is not an animal that has a consistent bias over 
time, because it is not an animal that has been the same over 
time. And it's nice, for research, to have an animal that is 
the same over time, because then you can, if you are using it 
to explain something or trying to explain it with data that is 
consistent over time, then you can get an accurate measurement 
of those relationships.
    So it's a dynamic thing.
    Mr. Shays. So your bottom line conclusion is? Part of what 
you said went over me a little bit here.
    Mr. Karl. OK. That's fine.
    Mr. Shays. No, not your fault. I'm willing to blame you for 
a lot of things, but not that I can't understand something.
    I want to touch on the third part of Mr. Baker's testimony, 
the third point, and that was, basically, that we couldn't have 
been off all that much, because if we were off as much as, say, 
a point, and we go back 40 years and then go forward with this 
new data, we would come to absurd conclusions that simply 
wouldn't make sense.
    That seems like a powerful argument on the surface, and I'm 
just really trying to get a better handle whether you think 
that some of the problem we see now is something that is more 
recent, in terms of its challenge to us.
    Do you understand my question?
    Mr. Karl. I tend to agree with Mr. Baker that 1.1 percent 
seems to be large. As a consequence, you don't get these kinds 
of counterfactual information of, geez, we're doing so well. 
One thing I use in my talks is that, well, if this is true, 
then the standard of living is rising so rapidly, everybody is 
happy; right?
    Often, in talking to audiences, you don't find that they 
are feeling that their real standard of living is going up so 
rapidly. But the changes, the bias movement over time depends 
on how it was done, at what point in time. For example, Ms. 
Abraham mentioned in her testimony this thing dealing with the 
housing index, and that was considered highly overestimating 
the cost of living for the average person for a period of time, 
and they changed that, the way they measure housing costs over 
to this rental kind of thing.
    So the bias has always been there, and it has gone up and 
down, depending on how they have actually calculated the index. 
How high it is, I'm not an expert to say.
    Mr. Snowbarger. Mr. Shapiro, I want you to comment, as 
well, if you know what my question is.
    I just want to say to you, Mr. Karl, that I came from a 
middle class family, in a town that had upper middle income and 
more wealthy. You know, it was a big deal for my parents to 
take us out on a five-horsepower boat. We would rent this 
little boat, and we would go to a little island. It was five 
horsepower, I mean, this was a big thrill.
    And I think of people today and the boats they have, middle 
and lower middle income, that things that they have that I 
wouldn't even have conceived of being able to enjoy, that they 
have for their kids, and so on. I just have to believe that it 
is a whole different world out here, and I'm just not sure that 
we have captured it right.
    Mr. Shapiro.
    Mr. Shapiro. We know less about the bias as we go further 
back in time, but I think it's fair to say it has probably been 
there for the last 40 years. I would be willing to extrapolate 
back the 1 percent number for 40 years.
    I think it's probably wrong to think that the pace of 
quality improvements sped up dramatically. There has always 
been a lot of quality improvement, especially as bears on 
consumer goods. We think back to the advent of kitchen 
appliances, Teflon, nylon, penicillin, all these innovations 
happened much earlier.
    We tend to focus now on the electronics, because we are 
quite familiar with them and they are changing a lot now, but 
they are not a huge part of the consumer's budget. There has 
been a tremendous increase in the quality of items that 
individuals consume over the last 40 years.
    I would disagree with Dean Baker's conclusion that, if 
there has been this bias, much of economics has to be 
overturned. It's true that, perhaps, we are 30 or 40 percent 
better off in real terms than we would measure using the CPI, 
but that is not an absurd conclusion.
    The remarks you just made about comparing the standard of 
living of individuals when you grew up versus now is in line 
with there having been a big bias. Things are definitely much 
better. There is a huge range of goods available that weren't 
available, color TV instead of black and white TV, for example.
    Part of why people feel that economic times are bad or not 
as good as they have been is that the rate of growth in wages 
has slowed down substantially. In the 1950's and 1960's, it was 
2.5 percent, 3 percent; now it's zero or 1 percent, in a good 
year. The CPI bias wouldn't make that go away. It would 
basically say it was growing even faster before and maybe 
growing a little faster now, but the slowdown would still be 
there.
    Mr. Shays. So the proportions would still be.
    Mr. Baker, you had wanted to make a comment.
    Mr. Baker. I just wanted to point out that, you know, the 
issue isn't just the number of new goods but their importance. 
Just to give you some examples of goods that got incorporated 
late into the CPI: air conditioners, home air conditioning was 
not in the CPI until 1964, when it was a fairly common item; 
air travel was not in the CPI until 1964; home clothes dryers 
were not in the CPI until 1964. You were mentioning boats. I 
would be willing to bet it was at least 1964, and maybe not 
until 1978, that that got incorporated.
    So this idea that we're behind the curve in technology, 
because there has been such a substantial improvement in BLS 
procedures, even if there has been a more rapid rate of 
technological change, I'm willing to bet that we are much 
closer to the curve now than we were 30 years ago.
    Mr. Shays. Yes, Mr. Hulten.
    Do you want to go, and then I will come back?
    Mr. Snowbarger. No, if you are following it through, go 
ahead.
    Mr. Shays. No, no, why don't you go, and then I'll come 
back.
    Mr. Snowbarger. Just a couple questions real quickly. When 
we talk about cost of living, another problem area that we 
haven't talked about is other factors that change our buying 
behavior. I don't know if that's going to be reflected in this 
CES, consumer expenditure survey.
    The example that was given by one of our colleagues early 
on was the price of steak going through the roof, and therefore 
you change to chicken, but your quality of life has gone down. 
When he mentioned that example, I immediately thought, coming 
from a beef-producing State, of the ripple effects that it had 
when dieticians were coming out and saying that beef is 
basically bad for you, red meat is basically bad for you.
    So now we, I presume, have changes in buying patterns that 
aren't based on economics at all; they are based on something 
else. That person's love of beef and having to change over to 
chicken will change his quality of life, as well, but 
apparently he made that decision to do so, and again, made it 
on a noneconomic basis.
    Is there any way to factor out those kinds of factors, when 
you are trying to figure out an economic index?
    Everybody wants to answer this at once, I can tell.
    Mr. Shapiro. I'll take it. That's quite difficult. We 
should not be too ambitious with what we ask the BLS to do. I 
think we should really concentrate on getting the best measure 
of the prices of transactions and the cost of living for 
basically market-oriented purchases.
    To broaden your question somewhat, I would be quite 
resistant to trying to have the environment or crime reflected 
in the Consumer Price Index, or a cost of living index that the 
BLS produces. Similarly, if health concerns cause substitution, 
that's something that probably should be abstracted from, and 
we should just concentrate on prices and quantities, which we 
can measure.
    Mr. Baker. Let me see if I can add a word on this. The 
point you are raising is exactly why it has taken BLS 20 years 
from when the research that Matthew Shapiro was talking about 
was done to try to implement that in the index, because there 
are real debates about how to appropriately implement it, and 
those continue today. So it's not an open and shut question.
    Mr. Shays. Well, it's taken us 20 years to balance the 
budget, or 24.
    Mr. Snowbarger. It's essentially 28, and we haven't 
balanced it yet.
    Mr. Shays. We're throwing stones.
    Mr. Hulten. If I might also add something here. You have 
raised what is really, in many regards, the Achilles heel of 
index number theory, and that is the problem of changing 
tastes. This is known in the literature on index number theory, 
known as the ``index number problem.'' It's also known that it 
is a very, very difficult problem, over and above the question 
of constructing an index for a fixed set of preferences. In 
some cases, there is no one correct solution.
    Mr. Snowbarger. It would seem, though, we've got four of 
you here, that you would all agree that the kind of example 
that I gave, the decision based on something other than 
economics, should not be calculated in this. We came to that 
conclusion in about 30 seconds. Why is taking 20 years?
    I still don't understand. I understand debates go on and 
on, but I still don't understand the length of time that it's 
taking on some of these things. That really doesn't need a 
response. I doubt that you will be able to satisfy my curiosity 
about why it takes so long.
    Mr. Baker, I want to go back to a statement that you made, 
and Mr. Shays, I guess, interpreted it a little bit differently 
than I did. Therefore, I want to give you an opportunity to 
explain what you meant by it.
    I almost got the feeling, when you were talking about the 
current CPI, that you were basically saying everybody uses it, 
therefore it's accurate. And that doesn't make sense to me. 
It's like, you know, if you say it often enough, it's true. I 
don't believe that either.
    Mr. Baker. Well, what I am referring to here is, I consider 
it worthwhile to know what people who are familiar with it 
think about it. So what I'm saying is that there has been some 
effort to say, well, economists all agree. There's even been 
some crude polling done, saying, you know, so many of so many 
economists say they think it's overstated by an average of 1 
percent, 1.1, whatever it might be.
    So I'm just saying, if we value what economists think about 
it, my way of finding out what they think about it is seeing 
what they do in their work.
    Mr. Snowbarger. How many of them, though, go out and re-
examine the CPI before they base their research on the CPI, or 
base their conclusions on it? In other words, how many of you 
go back and say, ``Well, first of all, before I include that in 
my conclusions, I'm going to go back and do my own research on 
CPI. And once I'm convinced it's accurate, then I'll move on.''
    Isn't it the case that you say, ``I've got to start 
somewhere. I'm going to start with that and move on.'' And that 
doesn't necessarily mean that was an accurate measure.
    Mr. Baker. It's standard for economists, when they begin 
their research, to discuss the quality of their data. And if 
there is some reason to believe that their data has some flaw 
in it, to at least note it and, if possible, to make a 
correction for it. If, for example, I was doing work, and I was 
convinced that the CPI overstates inflation by 1.1 percent, I 
would just say, ``We all recognize this. I'm, therefore, making 
this adjustment.'' It's a very simple thing to do.
    Mr. Snowbarger. Of course, that statement came out in 
December of last year? That was the timing of the Boskin 
Commission. Maybe it was out there before that. Is there more 
question now about the accuracy of the CPI than prior to the 
time that report came out? In other words, are more people 
looking into this now that might have just taken it for granted 
earlier?
    Mr. Baker. I think there is more research being done in 
that area, but I think you could still look at the most recent 
journal articles, and you probably will not find a single 
article where the person has done their work assuming that the 
CPI was overstating inflation.
    Mr. Snowbarger. Well, yes, I would suggest the most recent 
journal work was done prior to December, most likely, at least 
the basic work.
    Mr. Baker. That's correct. I should also point out that the 
research on which they were basing this conclusion, for the 
most part, dates back, in many cases, 20 years. So this is not 
new research. This information, for the most part, was widely 
available to economists for a long time. They might have chosen 
to ignore it, but it was available.
    Mr. Snowbarger. Mr. Shapiro.
    Mr. Shapiro. It is important to ask what parts of economic 
research would be affected by this. In many uses of the CPI 
data, even if there were a bias, it would not change the 
conclusion. For example, if one were trying to estimate the 
impact of a change in Federal Reserve policy on the change in 
the rate of inflation, if there is a constant bias, that will 
just go in the constant term, and one can still estimate, 
consistently, what the effect of policy would be on changing 
the rate of inflation.
    Mr. Snowbarger. You are presuming the bias was consistent?
    Mr. Shapiro. I think that would be a reasonable assumption 
for that kind of study.
    Mr. Karl. Speaking, if I could, more from the business 
community, what we're really looking for is accurate data. It's 
recognized, and I think it's widely accepted, that there are 
some problems with the Consumer Price Index. It's widely used 
as a cost of living index. All I'm suggesting is that we get 
more accurate information on that, going forward as well as 
revised backward, clearly, if we have a revised historical 
series on the CPI.
    Mr. Snowbarger. I think we're saying the same thing.
    Mr. Shays. I'd love to pursue that, if I could.
    Mr. Snowbarger. Sure.
    Mr. Shays. I wonder if you're not saying you want it as 
much accurate, but you want consistent data.
    Mr. Karl. Consistent and accurate.
    Mr. Shays. Both, but almost if it's consistently bad, at 
least it's consistent.
    Mr. Karl. That's exactly right. Just as Professor Shapiro 
mentioned, if the bias has been constant over time, it won't 
matter for your estimation results. It's just a constant. It's 
just irrelevant to the study if it's consistently wrong. The 
CPI, as it stands now, is not consistent over time. So 
something consistent is very useful in research, in addition to 
getting accuracy. They are different concepts.
    Mr. Snowbarger. Mr. Hulten.
    Mr. Hulten. I wonder if I would also add that, while the 
spotlight today is on the CPI, there are many other areas of 
our statistical system where people suspect the data is flawed, 
perhaps not with a conviction that it's biased in one way or 
the other. For example, our GDP measures exclude many important 
aspects of economic activity.
    A researcher who wants to try out a new theory by 
confronting it with data is likely just to swallow hard and use 
the data as they stand, realizing that almost all the data are 
problematic to some degree.
    Mr. Shays. Just one area that I'd like to just pursue 
because you both used the same imagery, low-hanging fruit.
    Mr. Hulten, I got the feeling that you were saying there 
isn't any low-hanging fruit, in your testimony. I just want to 
be clear on that. You said, ``There are no quick fixes for the 
quality problem, no low-hanging fruit on the quality tree.'' So 
it just related to the quality issue?
    Mr. Hulten. Yes, I was explicitly referring to the quality 
issue. I think it's different in the area of substitution bias.
    Mr. Shays. OK. I would like that, for the record.
    Mr. Shapiro, you are basically saying, ``By taking these 
two steps, the BLS could reduce the CPI's overstatement of the 
change in the cost of living by about one-half percentage point 
per year, on average. These two steps are the low-hanging fruit 
of CPI bias.'' And those were ``high-level substitution'' and 
``averages individual prices.'' I don't know what the second 
point is.
    Mr. Shapiro. The second point is the move to the geometric 
means.
    Mr. Shays. Can you move the mike a little closer to you. 
I'm sorry.
    Mr. Shapiro. The second point is the move to the geometric 
means, Commissioner Abraham indicated that the BLS is likely to 
make this change, beginning in 1999.
    Mr. Shays. That they are focused on, but not the first 
part.
    Mr. Shapiro. Not the first; right.
    Mr. Shays. And your point is, these areas there is more 
consensus on. It does happen to equal the amount that 
congressional leaders and the White House seem to have been 
reporting in the newspaper of about 0.45 percent. I suspect 
it's in these two areas.
    The question I would then raise is, but how quick would 
this process take to deal with these two areas?
    Mr. Shapiro. I think the timetable that Commissioner 
Abraham discussed for the geometric means, or the second of my 
points, seem quite reasonable.
    Mr. Shays. Which is the beginning of 1998, so effect in 
1999.
    Mr. Shapiro. Yes. It does take time to make sure everything 
is programmed correctly and to let the users know. That 
actually strikes me--they basically figured this out in the 
1992-1993, to get it into the index in 5 years, given that it 
took some time to digest the original result and then figure 
out what the right solution is.
    Mr. Shays. How about the first point, on the substitution?
    Mr. Shapiro. I think they could do that about as quickly, 
but they haven't started, so I think it would take another year 
or two, but not 17 years.
    Mr. Shays. So it would take another year beyond 1999?
    Mr. Shapiro. Yes.
    Mr. Shays. Almost the year 2000. What that says to me is 
that, if a budget agreement includes something higher than a 
0.2 percent, or something beyond that, what I'm hearing you all 
say is that you support, as economists, the position of the 
Bureau of Labor Statistics on this issue. I'm making an 
assumption all of you do.
    Excuse me. I should ask you each, on the timetable. First, 
maybe I need to ask you if you view this as low-hanging fruit, 
Mr. Baker, those two points?
    Mr. Baker. Yes, the low-hanging fruit. I can live with 
that. One qualification I would make, with the case of 
geometric means, is exactly what has been discussed here 
before, that it's not appropriate everywhere. But I think BLS 
is going through it the right way, and introducing it in 1999 
is a reasonable timetable.
    Mr. Shays. And substitution?
    Mr. Baker. Substitution, I think there are some problems 
with adopting the method that Matthew Shapiro suggested. I 
think it's a reasonable proposal, but I don't know if I would 
jump to do it.
    And I would also point out that BLS, in their research on 
this, it actually turns out that the average amount that would 
affect the CPI is 0.14 percent over the last 8 years. In a 
typical year--this is driven a lot by the high inflation around 
1990 and the Persian Gulf war--typical year, it would be just 
one-tenth of 1 percent.
    I just think it's important to realize there is probably a 
little bit less at stake there than we might believe.
    Mr. Shays. Dr. Karl.
    Mr. Karl. I haven't looked into the superlative issue, the 
first one that Professor Shapiro mentioned. I have looked a 
little bit into the geometric mean, and I think the BLS should 
proceed cautiously. And by 1999, that would be about the 
appropriate time.
    Let me just raise why it has to go cautiously, so you 
understand the issue. Let's take myself, as a consumer of tea 
and coffee. I love coffee. Double the price; I spend as much on 
it. I'd double my spending on coffee. And the geometric mean 
would say that I'm going to substitute down and spend less on 
coffee.
    So there are issues between the particular goods and 
choices that the geometric mean is applied to, in the 
calculation of the CPI.
    Mr. Snowbarger. Excuse me. If I could.
    Mr. Shays. Yes.
    Mr. Snowbarger. Isn't that going to be handled in the CES? 
In other words, isn't your buying pattern somehow going to be 
contained in all this?
    Mr. Karl. If you had a more frequent updating of the basket 
that people are actually buying, you could accommodate what the 
geometric mean attempts to do, as I understand it, which is to 
accommodate some of the substitution behavior for price 
changes.
    Mr. Snowbarger. Right. But, again, are we not doing this as 
often as we need to, either the CES or the market basket? Is 
that what we're saying?
    Mr. Baker. There's another issue here, and someone may be 
more familiar with this particular aspect of the CES than I am, 
but in this particular example, my understanding is that the 
CES does not get to that low a level of disaggregation. So I 
believe the category would be noncarbonated beverages, 
something to that effect.
    Mr. Snowbarger. You mean--excuse me.
    Mr. Shays. No, that's all right. It's an interesting 
hearing, actually. I didn't come thinking I would be as 
engaged.
    Mr. Snowbarger. You mean that the CES and this market 
basket of goods are not that closely connected, I mean, in 
terms of the data that they are trying to collect? In other 
words, don't they try to find buying patterns on the same goods 
that they put in the market basket?
    Mr. Shapiro. Could I clarify this?
    Mr. Snowbarger. Yes.
    Mr. Shapiro. The CES is used to get the broad weights of 
fairly narrowly defined goods and services, like carbonated 
beverages. Then there is another BLS survey, called the Point 
of Purchase Survey, which actually tries to figure out what 
specific goods, down to the size of the can and brand and 
store, and that's much more detailed.
    Mr. Snowbarger. That's all within CES, though?
    Mr. Shapiro. No, that's actually another survey called the 
Point of Purchase Survey.
    Mr. Snowbarger. You are the wrong people to answer this 
question, but is that calculated into the CPI measurement?
    Mr. Shapiro. Yes.
    Mr. Snowbarger. It's used as well?
    Mr. Shapiro. They use that to figure out exactly--when they 
are trying to represent the price of carbonated beverages, they 
actually choose this can of Diet Coke.
    Mr. Snowbarger. So the fact that Dr. Karl is a coffeeholic 
is going to show up in this point of purchase, as opposed to 
CES, but it will be taken into account?
    Mr. Shays. You've just ruined his reputation.
    Mr. Snowbarger. Not really. I wasn't putting a value 
judgment on that.
    Mr. Shays. Could I just have you, Mr. Hulten, just respond 
to the issue of the substitution geometric?
    Mr. Hulten. Well, it strikes me that the timetable set by 
the Commissioner is reasonable, although I'm certainly not an 
expert on this phase of the problem. But it may actually have a 
spillover benefit on the quality side, because it's my 
understanding that part of the quality problem is really being 
masked by a formula bias. I think that we would see a different 
quality measurement from BLS, when this switch is implemented. 
This might qualify as some mid-level hanging fruit in the 
quality area.
    Mr. Shays. Do you want to say one thing? And then I'm going 
to wrap this up.
    Mr. Shapiro. I just want to clarify one point about the 
magnitude of the high-level substitution bias. I'm putting a 
table into the record, giving our estimate, and retrospectively 
looking over the period 1988 to 1995. We estimate that it was 
0.32 percentage point per year. Now, that somewhat overstates 
what the effect of fixing the bias would be. Because the BLS is 
going to update the baskets, but our estimates would be closer 
to 0.2 percentage points per year, not the 0.1 that Mr. Baker 
stated.
    Mr. Shays. I might just say, Mr. Chairman, that I came to 
this hearing with, first, no hidden agenda, just a general bias 
that said that somewhere between 0.6 and 1.1 was probably where 
I would come down in this mix, and thinking that we could take 
pretty quick action. In other words, a sense that we should 
move more quickly, because the thought that we would be 
overcompensating, to me, would be very distressing.
    The four of you have basically backed up the BLS, so I'm 
trying to now figure out what your biases are, because you 
don't agree with what my original view was. But you all seem to 
be saying, it seems to me, and I want to make sure I'm clear on 
this, that there are changes that can be made, that the changes 
might have an impact of somewhere between 0.4 and 0.5, in the 
near future, but not as quickly as I would like.
    We're working on balancing the budget by the year 2002. You 
are just saying that we're not going to be able to, from a 
budgetary standpoint, see the benefit in the budget until the 
end of that effort. And you are backing the Bureau of Labor 
Statistics' view that they, at the earliest, 1999, is when 
you're going to start to see the impact of a change. Is that 
pretty fair an analysis?
    OK. I would also, if I could, just state for the record 
that Mr. Moulton, Brent Moulton, who works for the Bureau of 
Labor Statistics, is here, and I appreciate that someone from 
the Bureau stayed to hear your testimony. I think that's 
important, so I appreciate that.
    I found your testimony very interesting and very helpful.
    And I found this hearing very helpful. Thank you, Mr. 
Chairman, for having it.
    Mr. Snowbarger. Well, thank you.
    I want to thank the witnesses for both waiting through the 
first panel, as well as presenting your testimony and answering 
questions.
    I would also like to thank the chairman for the opportunity 
to Chair the committee today. Thank you very much.
    With that, we will be adjourned.
    [Whereupon, at 1:15 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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