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(E) Con Artists

Washington is still intent on cutting middle-class entitlements. This time, they're trying a back-door approach, by changing a key economic rule about inflation.

December 15, 1996|Kevin Phillips | Kevin Phillips, publisher of the American Political Report, is the author of "The Politics of Rich and Poor" and "Arrogant Capital: Washington, Wall Street and the Frustration of American Politics" (Little Brown)

WASHINGTON — They're baaackk! Those pesky Washington eco-gremlins, parading for "smaller government" and "no more deficits," who want to put Middle America on a fiscal diet so that Upper America can continue to expand its already ample economic waistline. Their newest demand is, as always, bold and deceptive: Rewrite the federal Consumer Price Index to revise inflation downward.

Two years ago, the 104th Congress got into trouble, rightly, for trying to reduce projected Medicare spending by $270 billion, while earmarking $240 billion for a tax cut favoring the upper brackets. Public opinion curdled like 3-week-old milk.

The new game is more subtle. This time, Congress and the lobbies want to keep the tax cuts well up their sleeves until the funding is in hand. But the Senate Finance Committee let the strategic cat out of the fiscal bag when it released a new study contending that the U.S. inflation rate, currently about 3%, is overstated and should be reduced by roughly a point--and presto!

The money involved could be staggering. In the 1930s, John Dillinger said he robbed banks because that's where the money was. Today's politicians, economists and deficit fear-mongers attest to an updated version of this. They're after the middle class and its entitlement programs, like Medicare and Social Security, partly because that's where Middle America's grabbable dollars are; but also because the money of Upper America--the .5% who have almost a quarter of America's wealth and make about half of Washington's political contributions--seems to be off limits.

Thus, the enormous importance of a budget ploy thinly disguised as an inflation adjustment. It's a political back door--a second way to cut entitlement programs. If inflation can be reduced by a wink and the stroke of a pen, so can the money the government spends each year on tax indexing and cost-of-living increases for Social Security and federal pensions. At first, the savings would be $7 billion a year, but by 2002, the annual savings could be as much as $63 billion. Serious money. And a big hole in some Americans' future disposable income.

But certain cautions could stand in the way. First, it's a statistical flimflam, as well as a staggering example of what conservatives purport to deplore--bald-faced income redistribution by politicians and government bureaucrats. This new proposal is also part and parcel of a broad shift in Washington toward soaking ordinary folks or neglecting their interests in order to feed the fires of a speculative economy anxious for ever more budget cuts, tax breaks, monetary accommodation and regulatory permissiveness. Even Federal Reserve Chairman Alan Greenspan has finally begun to hint about the threat: a mega-bubble, a potential U.S. stock-market meltdown akin to the one that halved the value of Japan's Nikkei index over the last decade.

The irony is that the CPI does have a lot of flaws. But they go far beyond those singled out by the Senate report, which is principally interested in harvesting the fiscal savings from a 1.1% fix. Arguably, though, whatever the CPI measures in its own precise and limited ballpark, it almost certainly understates the more comprehensive negative impact of price and purchasing-power changes on most average Americans.

This month, Americans told a consumer polling firm that they estimate the annual U.S. inflation rate at 7%, up from 5%-6% this summer--far from the 3% that the government claims and the Senate would like to lower to 2%.

So a major political brouhaha may be taking shape. For these ordinary Americans, who keep seeing higher charges for health care, education, mass transit, shampoo, razor blades and cups of coffee, it's no big deal that computer prices are dropping, a major talking point of the Senate report. A majority of Americans don't even own computers, especially the elderly, whose pensions and Social Security would be clobbered by any downward CPI rejiggling.

The notion that the official U.S. inflation rate should be reduced because the improving quality of products means we're getting more for the same dollars--another argument of CPI cutters--is historical hogwash. Nobody adjusted the CPI of the 1950s for the greater "quality" and speed of transcontinental jets replacing DC-3s; or for 16-inch televisions retiring 11-inch boxes. And the same argument could have been made in the 1920s, when telephones, radios and Model-T Fords improved.

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