The Mises Institute monthly, free with membership
February 1996
Volume 14, Number 2
People made fun of Gerald Ford's buttons that said "WIN," meaning "Whip Inflation Now."
The
buttons and the accompanying propaganda campaign implied that consumers' bad vibes were the
cause of inflation. Ha, Ha.
Now, the White House, members of both parties, and their court economists have done Gerry
one
better. Lacking any strategy for getting rid of inflation, they intend to redefine it. Their new
formula will show prices going up more slowly. This will help the government, but for anyone
trying to keep tabs on unceasing monetary destructionism, it's a terrible, even dangerous, idea.
Redefining the Consumer Price Index will have large and immediate repercussions. Thanks
to a
Nixon-era change, Social Security benefits are increased automatically by inflation. The higher
prices go, the larger the checks. A deliberate dumbing down of the CPI is a way of saving
money.
That--supposedly--is why Republicans support it.
Cutting spending in times of $1.7 trillion budgets is, of course, a moral obligation. But there
are
better ways. Why not cut or eliminate cost-of-living adjustments themselves? It turns out that the
American Association of Retired Persons opposes this direct route, but won't oppose changing
the inflation rate.
A seedier side to this scheme has to do with taxes, and Republicans are hushmouthed about
it. If
government statistics reveal less inflation, the tax brackets won't adjust to price movements. The
difference between actual and official inflation will net billions for the government. And here we
see a secret purpose: to extract more wealth from the American people in ways they won't detect.
From the taxpayer's point of view, then, the proposed change means higher taxes, better
disguised, although the Republican supporters of the plan won't tell you that.
To drum up support, backers are quick to reassure us that all good economists say the current
CPI
understates the real inflation rate. But if economists could know the real
inflation rate, there
would be no need for a CPI. We'd only need to consult the financial fortune tellers.
In the old days, only Austrian School economists criticized government economic data. They
refuted the idea that economic activity can be accurately quantified and debunked
the gizmos
economists use to pretend it can.
But nowadays, there's a raging debate on the CPI. Every theory is shot down by someone
else,
and on seemingly solid grounds. There are hundreds of formulas and strategies for determining
the direction and range of price movements. There's the "geometrical" formula, the "harmonic
average" formula, and the "arithmetic" formula currently in use. Moreover, everyone has an idea
of what should and shouldn't be in there and how much it should count.
Why so much debate? Because every attempt to discover an inflation rate is necessarily
flawed.
We can't just measure inflation the way we measure the height of a tree. Prices reflect too many
variables. We can't be sure what accounts for changes. It makes no sense to lump together price
changes for incomparable goods.
Nor is there a "price level" in the sense that there's a sea level, and the desire to make it
stable
(monetarism was the most elaborate) is a futile exercise. Let's say: liver transplants are going up
in price, computers are going down in price, and milk remains the same. What can we conclude
about movements in the overall price level? Honestly speaking, nothing.
There is no "average" price for goods and services because there are no "average" buyers of
goods and services. There are only specific consumers who purchase specific products and
services. People who buy college tuition for five children experience a different "inflation rate"
than twentysomething techno-hermits.
Neither is there a definite "inflation rate" waiting to be unveiled. Even when the government
is
goosing the money supply, inflation affects different goods and sectors at different times and to
varying degrees.
All that said, we do need some way to gauge the effects of monetary policy on prices. The
index
number, for all its faults, is about the best we can do. The CPI, like all index numbers, is
generated by comparing the data from one "basket" of goods in period A with the data from the
same basket in period B, and formulating the change.
The results will be fraught with errors. To retain some modicum of honesty, we must adhere
to
two rules. The formula must be inclusive of many goods, sectors, regions, etc., and it must be
consistent. The best and practically only way to render an index number utterly useless is to
change its definition in mid-course.
That, of course, is precisely what the politicians are planning to do, and not because the
current
CPI is wildly inaccurate. The problem, if anything, is that it is revealing the wrong thing: that
prices keep going up. What the government wants is a measure--any measure--that shows less
inflation.
The Federal Reserve always promises that it's working to bring down inflation, but, as
Murray N.
Rothbard shows in The Case Against the Fed, it never does. Since the Fed came into
being, the
dollar's value has plummeted to less than a penny, and even at a 3% inflation rate, prices will
tend to double every 25 years.
Now we can tell why the Fed supports the CPI change. It wants to cover its crimes by
appearing
more successful at "battling inflation." What the Fed doesn't want to talk about is the real cause
of inflation: not greedy consumers, avaricious workers, or price-gouging corporations, but the
central bank itself, and its power and practice of creating money out of thin air.
If the government and the Fed really want to lower inflation, there's an easy way to do it.
Stop the
printing presses with a gold standard. With no artificial increases in the money supply and a
growing economy, prices would tend to fall over the long run. The norm in the computer
industry
would become economy wide under sound money.
A truly inflation-free economy would spur savings and growth, be free of business cycles,
restrict
government power, and restore living standards. To reduce inflation by defining it away, on the
other hand, is like eliminating debased coinage by readjusting the scales. It's something only
government would do.
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Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute
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