Let's take another example. Imagine you live in an apartment in Manhattan. Sure, it isn't cheap, but you are in one of the world’s most desirable, vibrant cities, filled with museums, restaurants, culture, theater -- and you might be able to walk to work. It’s great, until prices rise. Eventually, the cost becomes too much and you move to Brooklyn. At the same price for housing, you now have to ride the subway to work; many of the same appealing features of big city living are there, but not all of them. A few years go by and you get priced out of Brooklyn, and move to Hoboken, New Jersey. The same rent you used to pay now has you on the other side of the Hudson River, with a much longer commute to work, and a very different quality of life (no offense Hoboken, really).
According to substitution, nothing has truly changed, as you merely swapped one housing option for another (and again for another). In reality, your living standard has declined even if your housing costs are little changed. This, in fact, is the very definition of inflation, but if you subscribe to theory of substitution there is no effective price increase.
Note that this stands in stark contradiction to the other major Boskin Commission concept: hedonic adjustments for quality improvements. Rising product quality, the commission said, causes inflation to be overstated. At the same price, new computers are faster, smaller and better than old ones; new cars are safer, more efficient and have more features than the comparably priced cars they replace. Better for the same price is somehow not a reflection of the human technological progress, but rather, falling prices.
This lack of symmetry is intellectually dishonest. Note that hedonic adjustment only seems to go one way. Let's face it, if you switch to hamburger from steak or from Manhattan to Hoboken -- and you're still paying the same price for either -- shouldn't a hedonic adjustment be made to reflect declining quality and thus rising inflation?
The obvious answer is yes. That’s how you know the Boskin Commission was a politically motivated attempt to provide cover to lower Social Security payments. Adopting chained CPI would be the set-up to reduce future Social Security payments without having any sort of honest debate about it.
When both the deception and motivations are this obvious, it is incumbent upon us to call out those who seek to mislead the public. The reality is, adopting chained CPI would entail both future tax increases and lower benefits for Social Security recipients down the road in order to pay for a tax cut today.
This column was provided by Bloomberg News.