Congressional Record, Volume 143 Issue 13 (Wednesday, February 5, 1997)

[Congressional Record Volume 143, Number 13 (Wednesday, February 5, 1997)]
[Senate]
[Pages S1034-S1035]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

SENATE RESOLUTION 50--RELATIVE TO COST-OF-LIVING ADJUSTMENTS

Mr. ROTH (for himself and Mr. Moynihan) submitted the following
resolution; which was referred to the Committee on Finance:

S.Res. 50

Whereas the final report of the Senate Finance Committee's
Advisory Commission to Study the Consumer Price Index,
chaired by Professor Michael Boskin, has concluded that the
Consumer Price Index overstates the cost of living in the
United States by 1.1 percentage points;
Whereas Dr. Alan Greenspan, Chairman of the Board of
Governors of the Federal Reserve System, has testified before
the Senate Finance Committee that ``the best available
evidence suggests that there is virtually no chance that the
CPI as currently published understates'' the cost of living
and that there is ``a very high probability that the upward
bias ranges between \1/2\ percentage point per year and 1\1/
2\ percentage point per year'';
Whereas the overstatement of the cost of living by the
Consumer Price Index has been recognized by economists since
at least 1961, when a report noting the existence of the
overstatement was issued by a National Bureau of Economic
Research Committee, chaired by Professor George J. Stigler;
Whereas Congress and the President, through the indexing of
Federal tax brackets, Social Security benefits, and other
Federal program benefits, have undertaken to protect
taxpayers and beneficiaries of such programs from the erosion
of purchasing power due to inflation;
Whereas Congress and the President intended the indexing of
Federal tax brackets, Social Security benefits, and other
Federal program benefits to accurately reflect changes in the
cost of living; and
Whereas the overstatement of the cost of living increases
the deficit and undermines the equitable administration of
Federal benefits and tax policies: Now, therefore, be it
Resolved, That it is the sense of the Senate that all cost-
of-living adjustments required by statute should accurately
reflect the best available estimate of changes in the cost of
living.

Mr. ROTH. Mr. President, today, my friend Pat Moynihan and I are
submitting a sense-of-the-Senate resolution regarding the accuracy of
the Consumer Price Index. Last week the Finance Committee kicked off
our first hearings of the 105th Congress with a very distinguished
panel of experts in the field of economics and Dr. Alan Greenspan,
Chairman of the Board of Governors of the Federal Reserve System.
Mr. President, probably the most significant issue that faces
Congress this year is the accuracy of the Consumer Price Index, and I
believe that Congress and the President need to seriously address the
economic ramifications of an accurate CPI.
One of the roles in government is to protect American families from
inflation. In doing so, it is important that we are able to precisely
measure inflation.
I cannot emphasize too greatly--that is what these discussions are
all about--the accurate measurement of inflation. If the index is too
high, it overcompensates retirees and others and undertaxes many
taxpayers. If it is too low, it undercompensates retirees and overtaxes
the taxpayer. What we want in fairness to all is as accurate an index
as possible.
Obviously, this is a very sensitive issue, affecting retirees and
taxpayers directly as well as wage earners and others.
In the spring of 1995, the Senate Finance Committee appointed a blue
ribbon commission, headed by Dr. Michael Boskin, to study the
methodology used to compute our current measure of inflation, the CPI.
The panel also included leading experts in the field of price indexes,
they include:
Dr. Dale Jorgenson, Harvard University; Dr. Ellen Dulberger, IBM
Personal Computer Company; Dr. Zvi Griliches, Harvard University; and
Dr. Robert Gordon, Northwestern University.
In their interim report, released in September 1995, the Boskin
Commission concluded that the upward bias using changes in the Consumer
Price Index to estimate changes in the true cost of living is about 1
percentage point per year.
Dr. Boskin and the other four commission members have now completed
their final report and have concluded that this critical government
statistic is not as accurate as possible. Since this report suggests
that the Consumer Price Index has an annual upward bias of about 1.1
percent, clearly this is a significant finding and should be taken
seriously.
Dr. Boskin and his colleagues have also suggested to the Finance
Committee that a new measure of the true cost of living may be needed.
Inaccurate government statistics--particularly one as important as
the CPI--are unacceptable. Steps should be taken to change the
procedures so that the measure of the CPI is as accurate as possible.
I want to stress that any action we take on this report must be
broadly and deeply bipartisan.
We must also have the full cooperation of and leadership by the
Clinton administration. I hope the President will not miss an
opportunity to address this issue in his fiscal year 1998 budget he
submits to the Congress this week. Clearly this reform will not be
successful without the President's leadership.
Mr. MOYNIHAN. Mr. President, might I first take the opportunity to
congratulate the chairman for this initiative. It is characteristic of
his leadership of the Finance Committee, which is bipartisan whenever
that is possible, which is factual, which seeks evidence and answers.
This sense-of-the-Senate resolution recognizes the mounting evidence
that, contrary to the intent of the Congress and the President, Federal
tax provisions, Social Security benefits, and other Federal program
benefits are being overadjusted for inflation.
The resolution expresses the sense of the Senate that:

* * * all cost-of-living adjustments required by statute
should accurately reflect the best available estimate of
changes in the cost of living.

In its final report issued on December 4, 1996, the Advisory
Commission to Study the Consumer Price Index--the Boskin Commission
concluded that:

While the CPI is the best measure currently available it is
not a true cost of living index. . ..

The Boskin Commission concluded that the CPI overstates the cost of
living in the United States by 1.1 percentage points.

[[Page S1035]]

The Commission's findings are very much in line with the prevailing
professional judgment of economists as to the size of the upward bias
in the CPI. In October 1994, in a memorandum to the President entitled
``Big Choices'', then-OMB Director Alice Rivlin stated that the ``CPI
may be overstated by 0.4 percent to 1.5 percent.'' And in testimony at
a joint hearing of the Senate and House Budget Committees in January
1995--and reinforced in testimony last week before the Senate Committee
on Finance--Alan Greenspan, Chairman of the Board of Governors of the
Federal Reserve System, estimated the range of plausible values at 0.5
to 1.5 percentage points.
The standard objection to correcting the Consumer Price Index has
been, to cite one such statement, ``The right way to adjust the CPI is
to allow the experts at the BLS to continue doing their jobs and keep
politics out of it.''
We now have the definitive response from Alan Greenspan, Chairman of
the Board of Governors of the Federal Reserve System. In testimony last
week before the Finance Committee, he reported that the Federal Reserve
Board had made its own study of this issue and had come to roughly the
same conclusions as those of the Boskin Commission. He recommended a
two-track procedure. First, let the BLS improve the CPI by as much as
can be done and as quickly as it can be done. And second, establish an
independent national commission to correct for the remaining upward
bias. He then said:

There has been considerable objection that such a second
track procedure would be a political fix. To the contrary,
assuming zero for the remaining bias is the political fix. On
this issue, we should let evidence, not politics, drive
policy.

To say again, to do nothing in the face of overwhelming evidence
would be a political decision. Wrong-headed and shortsighted, with
large long-term implications
And to do nothing until we have a more precise estimate of the bias--
as if estimating changes in the cost of living is equivalent to
measuring atomic weights--recalls the wise admonition of Lord John
Maynard Keynes who said:

It is better to be approximately right than precisely
wrong.

There is some history here.
It happens that this Senator's association with the statistical
system in the executive branch began over three decades ago. I was
Assistant Secretary of Labor for Policy and Planning in the
administration of President John F. Kennedy. This was a new position in
which I was nominally responsible for, inter alia, the Bureau of Labor
Statistics. I say nominally out of respect for the independence of that
venerable institution, which as I noted earlier long predated the
Department of Labor itself. The then-Commissioner of the BLS, Ewan
Clague, could not have been more friendly and supportive. And so were
the statisticians, who undertook to teach me to the extent I was
teachable. They even shared professional confidences. And so it was
that I came to have some familiarity with the field.

Upon our arrival in Washington with the new administration in 1961,
we had waiting for us a report on price indexes from a committee led by
George J. Stigler, who later won a Nobel Prize in economics. The
committee noted that:

If a poll were taken of professional economists and
statisticians, in all probability they would designate (and
by a wide majority) the failure of the price indexes to take
full account of quality changes as the most important defect
in these indexes. And by almost as large a majority, they
would believe that this failure introduces a systematic
upward bias in the price indexes--that quality changes have
on average been quality improvements.

Through indexation of Federal tax brackets, Social Security, and
other Federal programs, Congress and the President have undertaken to
protect taxpayers and beneficiaries from the erosion of purchasing
power due to inflation.
Based on over 35 years of mounting evidence, it is clear that the
current formulas for indexation overstate the true cost of living. Over
12 years the upward bias increases outlays and reduces revenues, for
programs tied to the CPI, by a cumulative $1.07 trillion.
The actuaries of the Social Security system estimate that a 1.1
percentage point correction would eliminate about two-thirds of the
long-run deficit in the Social Security Program. The trust fund
exhaustion date would be extended by more than 20 years, from 2029 to
2052.
Somewhat more than one-half of the 1.1 percentage bias can be
eliminated rather quickly if the BLS would develop a cost-of-living
index [COLI] and factor into their calculations research on quality
improvements. Members of the Boskin Commission think it can be done
within a year. Over time, some of the remainder of the bias could be
reduced by further research on measuring quality improvements. Any
residual can be dealt with by an independent national commission, as
suggested by the Boskin Commission and by Federal Reserve Chairman
Greenspan.
The computational procedures that would be used by BLS for a new cost
of living index [COLI] are now used by the Bureau of Economic Analysis
[BEA] in the calculations of GDP and its components--consumption,
investment, and so on. BEA uses a Personal Consumption Expenditures
[PCE] deflator to estimate changes in real consumption. For the 12
months ended November 1996, the CPI increased by 3.3 percent. Yet over
roughly the same period, the PCE deflator increased by only 2.5
percent. BEA's use, in the PCE deflator, of more up-to-date consumption
patterns and of adjustments for quality, lowers the reported inflation
rate by 0.8 of a percentage point relative to the CPI. And this is
consistent with what you would get if BLS developed a COLI with
adjustments for quality improvements; that is, it is close to the 1.1
percentage point estimate of the bias.
I hope we will have broad support for this resolution on both sides
of the aisle, and that we will do the Republic some good today. Mr.
President, thank you for your courtesy. I yield the floor.
Mr. ROTH. Mr. President, let me thank the Senator from New York for
his continuing leadership in this matter. I would like to underscore
two things that he said.
One is that all we seek to do is to make the measurement of inflation
as accurate as possible. That is just good government.
Second, we are anxious to have the support of our colleagues on both
sides of the aisle and we will be sending a letter to our colleagues,
signed by the two of us, urging them to join us in this good government
venture.
Mr. MOYNIHAN. Good government venture.
Mr. ROTH. I thank very much the distinguished Senator for his able
leadership.

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