Friday, November 6, 2015


Senator Elizabeth Warren (D-MA) has filed a bill that would make CEOs pay for cost of living increases that have been effectively stolen from Social Security and veteran beneficiaries. She's doing this primarily for two reasons.

First, corporate CEOs have seen their wages climb since the market collapsed in 2008, and just saw their salaries jump by another 3.9% this year. As well, Social Security and veteran beneficiaries are not going to see an increase in their checks this year because their increases are indexed to a complex inflation formula that says prices aren't going up, even though everyone knows that the price of health care, food, college tuition, etc. are rising.

Senator Warren is doing the right thing.

Seniors and our veterans have been dealing with paltry cost of living increases for some time now. The reason for reduced cost of living increases is tied to congressional efforts to cut federal spending, which really picked up steam after President Reagan's annual budget deficits spiked our national debt (Reagan's borrow and spend policies effectively tripled our national debt).

Unfortunately, rather than looking at what was driving our nation's spending upward - reckless tax cuts for the rich and increased military spending - our nation's lawmakers decided to punt and let a commission come up with plan to cut spending. And they did.

What's presented below explains what happened, and why Elizabeth Warren's legislation is a good thing.

In a few words, we are no longer measuring inflation realistically. In order to understand why let's go back to the early 1990s when Bill Clinton was in the White House.

With Reagan and Bush era policies raising our national debt Washington's elites were once again concerned about government expenditures. Specifically, they were concerned with a national debt that had quadrupled in 12 years. But instead of focusing on rising defense expenditures and foolish tax cuts for the rich policies, policy makers looked to cut other programs and, once again, looked at anticipated social security costs.

Of course, also Congress ignored on-going social security program surpluses, and paid lip service to the trillions the federal government owed the program (now about $2.7 trillion) after decades of raiding social security surpluses. Instead, the U.S. Senate put together the Boskin Commission.

The Boskin Commission knew what they were doing from the beginning. They knew they couldn't suggest that Congress cut benefits outright. This would be political suicide. In order to chip away at expenditures (i.e. Social Security payouts) they would have to find another path. And they did. They focused on reducing mandated cost-of-living-allowances (COLAs) that are granted annually. These inflation-indexed increases were viewed too costly so the commission said, in effect, "Hey, let's play with how we measure inflation. Maybe we can move it downward without anybody noticing."

In effect, the Boskin Commission was going to move the goal posts.

Let's make this clear. The Boskin Commission's real goal wasn't to find a new mouse trap for measuring inflation. It's goal was to find a way to reduce social security payments. And they needed to do it in a way that would confuse everyone enough so the recipients wouldn't notice (or give up trying to figure it out).

Here's how they did it.

All of us know that home prices doubled in a short period of time before the markets collapsed. Anyone who goes food shopping know what's happened to food prices. Then we have insurance premiums, medical costs, co-pays, education and other service fees that we have to pay, especially as government budgets and services are cut back or privatized.

Yet, over the years, the consumer price index (CPI), which measures our nation's inflation rate, has barely budged over the past 20 years. But we also know that our dollar and hourly wages don't buy as much.

In a few words, if we go by the annual CPI numbers we're told to believe that our household costs have increased by an average of 2-3% per year, and even less over the past 7 years.

Do you believe this is the case? Neither do I, and I have the bills to prove it.

I'm sure you do too.

Here's what's been happening.

In simple term the Boskin Commission recommended that the U.S. government use smoke & mirrors to measure inflation. In economic-speak, they urged the government to begin measuring inflation with "hedonic" adjustments. What are hedonic adjustments, you ask? Good question. Let's use a simple purchase to explain how hedonic adjustments work.

Assume you pay $1,000 for a new computer. You might have paid $1,000 five years ago, but your computer today is 2-3 times faster, and has many more gadgets for you to play with. This is where it gets fun.

According to hedonic adjustments, since your computer is twice as fast as your old one the government concludes that you really paid half as much for it. Huh?

Think of it this way. In the government's eyes, because you have two times the computer power your $1000 computer really only cost you $500. What this means is that you got a bargain because you actually paid less for your computer - at least in the eyes of the government. Because other computer purchasers find themselves making similar purchases we now millions of people paying a cheaper price for their computers.

And just like that we now have downward pressure on overall prices.

That, my friends, is how hedonics works.

So you know, the people who figure out inflation use the same hedonic tools when they figure out how much your car or refrigerator cost.

I was perplexed by this method when I first found out about it. So I called the people in Washington who use the method. They're nice people. Many of them have Ph.D.s in economics, or some other advanced degree, so they're really smart too.

They walked me through the computer scenario, and a few others. From a math perspective, the method makes sense, at least on some levels. But you and I know that we are still paying $1,000, right? We feel it in our pocket book.

But the new measuring smoke & mirrors tool doesn't end with hedonics. Check this out.

Because of the Boskin Commission, when the government sees the price of steak go up it assumes that consumers replace steak with chicken, or some other meat-like substance (note: the "core CPI" actually excludes food & energy prices). What this means is that pesky price rises, according to the Boskin Commission, don't count if you don't really want them to count.

But, in the real world, you and I know the price of steak went up. We also know that we paid $1,000 for our computer.

The point here is that with hedonics, substitutions, and many other accounting tricks, the Boskin Commission helped reduce inflation in America to the trickle you now see today.

Like the little boy on the Twilight Zone segment who wished things he didn't like into the cornfield, the Boskin Commission's recommendations have allowed America's policymakers to wish inflation away.

And just like that, America's retirees, veterans, and middle-class wage earners have seen the size of their social security checks, and other raises, stagnate as real prices rose in America. And it's been going on for decades now - all because we needed to pay for tax cuts and our military build up.

This development, in many ways, is not just a massive redistribution of wealth, it's public theft.

So, yeah, Senator Elizabeth Warren isn't really doing our seniors and veterans any favors. She's simply doing what's right.

- Mark

Hat tip to Donna for the Warren link.

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