[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
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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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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.]
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